It feels like eons ago, but as recently as March the Democrats took major action to address the ongoing Covid-19 recession with the American Rescue Plan. Yet ever since Congress passed the legislation, there have been critics, both conservative and centrist, who have attacked the plan for being too big and doing too much. Over the spring and summer, these naysayers made two dire predictions. Both proved wrong, but instead of pausing to reevaluate the policies they’d attacked, the critics continued at the same volume, moving the goalposts with brand-new claims.
The first prediction was that expanded unemployment insurance would prevent people from seeking jobs. The CARES Act and the American Rescue Plan made unemployment insurance more generous through a lump-sum grant and by expanding it to include independent contractors and the self-employed. In the late spring, as job numbers lagged behind some expectations, the media ran seemingly endless interviews with fast-food employers who said people weren’t willing to come back to work while they were receiving the expanded UI benefits.
This was never plausible. During this period, the highest job growth was in service-sector industries like hospitality and leisure. The missing jobs were largely in middle-income occupations unlikely to be affected by the expanded UI. But the most convincing evidence emerged after several Republican-controlled states ended their expanded benefits early. It’s rare that we see a real-life public policy experiment in which the consequences of a specific change are so clear. Yet sure enough, the economists crunched the numbers and showed that ending the program did not increase job growth. It did, however, increase hardship, as new wages didn’t make up for the lost benefits.
Something similar happened with inflation. Economist Larry Summers described the American Rescue Plan and Jerome Powell’s dovish policy at the Federal Reserve as the “least responsible fiscal macroeconomic policy we have had for the last 40 years.” The critics worried that inflation would build on itself. In this scenario, people would expect inflation, which would drive up prices, creating a self-fulfilling prophecy of inflation cascading across the economy. Instead, we saw a summer in which inflation was contained to a handful of sectors that had been disrupted by the pandemic. Inflation increased as the economy came online but then decreased with time. There will be bumps in inflation in the future, likely driven by disinvested supply chains and housing costs, but each will be the story of a specific sector—not the beginning of runaway inflation that will tank the economy.
Yet instead of celebrating the fact that these worries turned out to be unfounded, the critics have shifted their claims, and the media covers them as if they warrant the same level of concern. Instead of focusing on extending unemployment insurance, the media has moved on to stories about weak wage growth. Instead of applauding the fact that inflation is contained, full-employment detractors are now warning that it might stay above 2 percent and not return to the previous rate until 2022 or ’23. These are issues that demand serious research, but they are an order of magnitude less worrying than the alarmists’ previous divinations. Yet the speed at which the media simply moves from one critique to the next, without pausing to examine them, should worry us.
We saw the same thing during the Great Recession, when the debate over why the recovery was slow kept hopping from one explanation to another—be it the vague concept of uncertainty or the idea that workers lacked skills or the notion of a permanent unemployable class that would never find work again. All these excuses dissolved when unemployment, after nearly a decade of slow recovery, dropped to 3.5 percent before the pandemic thanks to the patience of the Federal Reserve. And it’s why this time we need to keep the threats to the recovery in perspective.
Already, the failure to extend unemployment insurance, based on false assumptions that were disproved by subsequent evidence, is a loss for those advocating for a full-employment recovery. Next year, as the federal government reduces the spending that was in the American Rescue Plan, the recovery will slow. These same critics who have repeatedly been wrong will make up a new line to try to convince policy-makers that we can’t get the unemployment rate lower than it was before the pandemic. If we let them continue to invent excuses, both workers and the economy will be left behind.