Rapid Inflation, Lower Employment: How the U.S. Pandemic Response Measures Up

Rapid Inflation, Lower Employment: How the U.S. Pandemic Response Measures Up

The United States spent more aggressively to protect its economy from the pandemic than many global peers, a strategy that has helped to foment more rapid inflation — but also a faster economic rebound and brisk job gains.

Now, though, America is grappling with what many economists see as an unsustainable worker shortage that threatens to keep inflation high and may necessitate a firm response by the Federal Reserve. Yet U.S. employment has not recovered as fully as in Europe and some other advanced economies. That reality is prodding some economists to ask: Was America’s spending spree worth it?

As the Fed raises interest rates and economists increasingly warn that it may take at least a mild recession to bring inflation to heel, risks are mounting that America’s ambitious spending will end up with a checkered legacy. Rapid growth and a strong labor market rebound have been big wins, and economists across the ideological spectrum agree that some amount of spending was necessary to avoid a repeat of the painfully slow recovery that followed the previous recession. But the benefits of that faster recovery could be diminished as rising prices eat away at paychecks — and even more so if high inflation prods central bank policymakers set policy in a way that pushes up unemployment down the road.

“I’m worried that we traded a temporary growth gain for permanently higher inflation,” said Jason Furman, an economist at Harvard University and a former economic official in the Obama administration. His concern, he said, is that “inflation could stay higher, or the Fed could control it by lowering output in the future.”

The Biden administration has repeatedly argued that, to the extent the United States is seeing more inflation, the policy response to the pandemic also created a stronger economy.

“We got a lot more growth, we got less child poverty, we got better household balance sheets, we have the strongest labor market by some metrics I’ve ever seen,” Jared Bernstein, an economic adviser to President Biden, said in an interview. “Were all of those accomplishments accompanied by heat on the price side? Yes, but some degree of that heat showed up in every advanced economy, and we wouldn’t trade that back for the historic recovery we helped to generate.”

Inflation has picked up around the world, but price increases have been quicker in America than in many other wealthy nations.

Consumer prices were up 9.8 percent in March from a year earlier, according to a measure of inflation that strips out owner-occupied housing to make it comparable across countries. That was faster than in Germany, where prices rose 7.6 percent in the same period; the United Kingdom, where they rose 7 percent; and other European countries. Other measures similarly show U.S. inflation outpacing that of its global peers.

The comparatively large jump in prices in America owes at least partly to the nation’s ambitious spending. Research from the Federal Reserve Bank of San Francisco attributed about half of the nation’s 2021 annual price increase to the government’s spending response. The researchers estimated the number, which is imprecise, by measuring America’s inflation outcome compared with what happened in countries that spent less.

“The size of the package was very large compared to any other country,” said Òscar Jordà, a co-author on the study.

The Trump and then Biden administrations spent about $5 trillion on pandemic relief in 2020 and 2021 — far more as a share of the nation’s economy than what other advanced economies spent, based on a database compiled by the International Monetary Fund. Much of that money went directly to households in the form of stimulus checks, expanded unemployment insurance and tax credits for parents.

Payments to households helped to fuel rapid consumer demand and quick economic growth — progress that has continued into 2022. A global economic outlook released by the International Monetary Fund last week showed that America’s economy is expected to expand by 3.7 percent this year, faster than the roughly 2 percent trend that prevailed before the pandemic and the 3.3 percent average expected across advanced economies this year.

That comes on the heels of even more rapid 2021 growth. And as the U.S. economy has expanded so quickly, unemployment has plummeted. After spiking to 14.7 percent in early 2020, joblessness is now roughly back to the 50-year lows that prevailed prior the pandemic.

That’s a victory that politicians have celebrated. “Our economy roared back faster than most predicted,” Mr. Biden said in his State of the Union address last month. A major report from the White House on April 14 noted that the United States has experienced a faster recovery than other advanced economies, as measured by gross domestic product, consumer spending and other indicators.

But increasingly, at least when it comes to the job market, America’s achievement looks less unique.

Unemployment in the United States jumped much higher at the outset of the pandemic in part because America’s policies did less to discourage layoffs than those in Europe. While many European governments paid companies to keep workers on their payrolls, the U.S. focused more on providing money directly to those who lost their jobs.

Joblessness fell fast in the United States, too, but that was also true elsewhere. Many European countries, Canada and Australia are now back to or below their prepandemic unemployment rates, data reported by the Organization for Economic Co-operation and Development showed.

And when it comes to the share of people who are actually working, the United States is lagging some of its global peers. The nation’s employment rate is hovering around 71.4 percent, still down slightly from nearly 71.8 percent before the pandemic began.

By comparison, the eurozone countries, Canada and Australia have a higher employment rates than before the pandemic, and Japan’s employment rate has fully recovered.

Europe’s more complete employment recovery may partly reflect its different regulations and different approach to supporting workers during the pandemic, said Nick Bennenbroek, international economist at Wells Fargo. European aid programs effectively paid companies to keep people on the payroll even when they couldn’t go to work, while the United States supported workers directly through the unemployment insurance system.

That relatively subtle difference had a major consequence: Because fewer Europeans were separated from employers, many flowed right back into their old jobs as the economy reopened. Meanwhile, pandemic layoffs touched off an era of soul-searching and job shuffling in the United States.

“You didn’t have as much motivation to reconsider your assessment of your work-life situation,” Mr. Bennenbroek said. “What we initially saw in the U.S. was much more disruptive.”

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Disruption has had its upsides. America now has a record 1.8 jobs open for every unemployed worker, which has in some ways given employees more power to demand more flexible schedules, better benefits and higher pay.

Wages in the United States are rising at the fastest pace in four decades, while pay growth in Europe has been more subdued. Mr. Bernstein, the White House adviser, called America’s situation now “the strongest job market in generations.”

But the red-hot labor market carries its own risks. For one thing, wage growth is not keeping up with rapid inflation for many people, leaving some households behind even as their paychecks get bigger. And the ratcheting up in wages could prompt companies to try to cover their costs by raising prices even more.

Higher wages can be a “feeder for inflation,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, told reporters on Wednesday.

“It’s unsustainably hot,” Jerome H. Powell, the Fed chair, said of the job market during an event on April 21. “It’s our job to get it to a better place where supply and demand are closer together.”

America’s heady pay gains could mean that the Fed has to react more aggressively to slow down the economy. The central bank is trying to tame inflation by lifting interest rates in a bid to make money more expensive to borrow, which can slow spending and cool off economic conditions.

But if the Fed has to raise rates to high levels to restore economic calm, it could touch off a recession that pushes the unemployment rate higher. Mr. Powell and his colleagues have said they hope they can manage to land the economy softly without inducing that kind of pain — but they acknowledge that a downturn is a risk.

Ultimately, the legacy of America’s big relief programs may depend on what happens in the months ahead. If inflation moderates without painful action by the Fed — something some economists still believe is at least possible if the pandemic fades, supply chains normalize and workers return to the job market — then the brief period of rapid price gains may end up looking like a relatively small price to pay for a strong economic recovery that in some ways outstripped those staged abroad.

But if central bankers decide they need to take more drastic steps, resulting in a recession, it could reverse some of the recent progress — and the consequences are likely to be worse for low-wage workers who have experienced the strongest job and wage gains.

The war in Ukraine could complicate attempts to judge America’s performance against its global peers. Economic growth in Europe had been accelerating late last year, but the Russian invasion — and the spike in fuel costs that came with it — is threatening to derail the recovery there. The United States could also face consequences, but is comparatively insulated from the Russian and Ukrainian economies.

“Europe was doing well and I was very optimistic prior to the war,” said Gian Maria Milesi-Ferretti, an economist at the Brookings Institution who has studied the recoveries in the United States and Europe. “But now the war shock is completely asymmetric between the U.S. and Europe.”

Central banks around the world are responding as prices climb rapidly. Rate increases are underway in Britain, and European policymakers have become more wary as inflation has jumped higher. That could mean that those economies, having accelerated through a recovery together, now slow in tandem.

“For a while, inflation started to move up and central banks remained very tranquil about that — but that time has passed,” said Carlos Viana de Carvalho, an economist at the Brazilian asset manager Kapitalo Investimentos and a former Fed economist. “The attitude has changed.”