Tom Barkin

This speech also was delivered March 22, 2021, to the 37th Annual NABE Economic Policy Conference of the National Association for Business Economics.

It has been quite a year. Had I been with you 12 months ago, we would have been in the midst of an unprecedented economic shutdown. Equity markets had just dropped 30 percent. Bond markets were in trouble. Even investment grade credits were struggling to roll over their commercial paper. More than 700,000 people lost their jobs last March, followed by another 20 million in April. Our economy was on the edge of a cliff, and no one knew what was on the other side.

Fiscal and monetary policy responded with overwhelming force. The Fed stepped up early and powerfully. We took our policy rates to zero in mid-March and worked to repair financial markets through our balance sheet, purchasing $1.7 trillion of Treasurys and mortgage-backed securities in March and April. We also relaunched a number of Great Recession-era emergency lending facilities to backstop specific bond markets. 

Congress acted decisively as well. Through multiple fiscal packages, it supported those who lost their jobs as well as small businesses and industries at risk. To put the magnitude of this fiscal response in perspective, the nearly $4 trillion in federal relief spending during this crisis is more than four times the size of the 2009 American Recovery and Reinvestment Act. And more is on the way. 

With this support, the economy has come most of the way back. GDP was down 2.4 percent in the fourth quarter compared to a year ago. Our recovery has outpaced the rest of the world with the exception of Asia. Despite 9.5 million job losses, the impact of policy on the economy is quite visible:

• Aggregate disposable income has gone up, not down.
• Households have increased their savings and paid down their credit cards.
• Bank portfolios have remained healthy, given all the support to individuals and businesses.
• The housing market has been strong, in part thanks to low interest rates.
• Increased savings have fueled a shift in spending from services to goods, which has helped manufacturers.
• And the worse off have benefitted from stimulus checks, enhanced unemployment benefits and forbearance.

That said, spending has come back faster than employment. Until recently, job losses on a percentage basis exceeded those seen at the depths of the Great Recession. The economy still has 6.2 percent fewer jobs than in February 2020. 

Still, I am hopeful that we are on the brink of completing the recovery. Vaccines are rolling out, and case rates and hospitalizations are falling. Excess savings and fiscal stimulus should help fund pent-up demand from consumers freed by vaccines and warmer weather. 

As we look toward better days, I want to talk about the potential for scarring. Before I say more, the views I express are my own and not necessarily those of my colleagues on the Federal Open Market Committee or in the Federal Reserve System.¹

The Question of Scarring

As my audience here knows, labor economists have something very specific in mind when they use the term “scarring.” They are typically assessing how workers are persistently impacted by a downturn. For example, those who graduate in a recession may start work at lower wages than cohorts who start their careers in an expansion, depressing their earnings for years. Those who lose their jobs during a recession can struggle to get rehired after a lengthy period of unemployment.

The idea of hysteresis is related to scarring. It proposes that temporary shocks can have permanent effects on economic growth. But it can be hard to see the lasting impact of demand shocks when looking at the economy as a whole. One of the Richmond Fed’s economists has documented that in a recent paper. He and his co-author find no evidence of permanent damage to U.S. GDP from demand shocks over the last 60 years.²

Still, I believe that severe downturns can leave scars that, while not always permanent, take a long time to heal. After the Great Recession, in regions that saw the biggest drop in housing prices, employment remained at 2009 trough levels as late as 2018 and only recovered because unemployed workers moved to seek opportunities elsewhere. Similarly, the decline in manufacturing employment during the 2000s also resulted in a long period of elevated market detachment for less-educated, prime-age workers, particularly in the Rust Belt.³ While we did ultimately build toward a robust labor market, it took a decade after the Great Recession ended to get there. 

Where Will We See Scars This Time?

This time, we’ve had a sharper drop but also a quicker recovery. Perhaps we will see less damage from long-term unemployment than during the Great Recession. Job losses this time have also been heavily concentrated in high turnover occupations, such as housekeepers and waiters. Even before the COVID-19 pandemic, these workers changed jobs regularly.⁴ Workers displaced in these jobs may be able to more quickly transition to jobs in similar industries, spending less time out of the labor market.

The increase in teleworking could also improve matching between workers and jobs relative to what we saw in the last recession. Instead of becoming isolated in towns with few opportunities, job seekers may be able to find new employment elsewhere, provided they have the right skills and a reliable broadband connection.

Despite these positives, I still worry we will see scarring, albeit in new places. COVID-19 has hit primary caregivers particularly hard. School and child care closures have put pressure on parents. The data suggest that this pressure initially fell disproportionately on women.⁵ Despite some recovery, labor force participation for parents remains about 6 percentage points below where it was prior to the pandemic. If parents who left the workforce don’t return, that would have long-term negative implications for our growth potential.

Speaking of schools, we also face potentially huge losses in human capital from the shift to remote education. The Richmond Fed has launched a six-part series on this topic, which you might want to view.⁶ We know from decades of research that learning builds on itself. That means that disruptions to schooling are likely to have lifelong consequences. In the Fifth District, students outside of the suburbs are less likely to have access to computers and fast broadband at home, greatly impeding their ability to learn remotely.⁷ Students in low-income neighborhoods are more likely to suffer persistent negative effects from the shift to remote learning, further widening the education gap that existed before the pandemic.⁸

The pandemic has also accelerated automation, boosting demand for contactless technology, online retail and telemedicine. As a result, we could see less demand for the low-skill, personal contact jobs that today have higher unemployment. A recent paper suggests that women may also be more exposed to this risk than men.⁹

On the business side, this recession, like most, hit small businesses hardest. Larger businesses generally had the resources to navigate the pandemic. With fewer small businesses, we risk missing out on the game-changing productivity gains they often deliver.¹⁰

Taking an even broader view of scarring, the pandemic has placed a unique strain on cities. Many people who used to work in downtown offices are home. City residents are afraid to get into crowded subways and elevators. City amenities (like theaters) are closed. History has shown us that cities are incredibly resilient, having survived countless wars and plagues. So they might well recover. But there are already signs of migration from downtowns to surrounding suburbs in the largest cities.¹¹ If this shifts commerce from downtown to the suburbs, what will that mean for the many service sector businesses and workers in city centers? We risk scarring our urban platforms of collaboration and innovation.

The pandemic also has strained our country’s finances. On the policy side, the aggressive fiscal response helped support a quicker recovery. But it has also fueled a record increase in federal debt: over $4 trillion last year. While there are no immediate signs of a U.S. debt crisis, we should be wary of diminishing our fiscal capacity to respond aggressively to the next crisis. Europe’s overall fiscal response to the current crisis has generally been smaller than the United States’, and one could argue that has held their economies back. 

What Can Policy Do?

The first, and obvious, step is to get the virus under control. Scarring—of workers, businesses and communities—should be much less in a world that is able to return to normal (or something resembling normal) quickly versus one in which we are still afraid to get into an elevator. The priority now is getting vaccines distributed and safely reopening the economy.  

It is also well worth exploring targeted support for workers affected by this crisis. We should pay special attention to programs that allow primary caregivers to return to work. This includes support for child care, elder care and safely reopening schools. Research also suggests that policies like the Earned Income Tax Credit can promote work and the accumulation of human capital. 

In addition, the large number of displaced personal contact service workers need help transitioning to new occupations. States can open up licensing and add instructors for in-demand occupations such as nursing or commercial trucking. Funding from Pell Grants and state lotteries could be freed for community college certificate programs. 

We have to invest further in education. We’ve heard from educators throughout our district that students are falling behind because of remote learning. And while schools are starting to reopen, many parents remain fearful of sending their children back. This is especially true for families of color, who have been so disproportionately harmed by the pandemic. Many students will need extra instruction and tutoring. Schools need the resources to safely teach in person, so that parents feel confident allowing their kids to return. Perhaps they need to find a way to leverage this summer to catch students up. Support for education could help prevent temporary disruptions from turning into permanent scars.

On the business side, we will undoubtedly see sectors shrink and sectors grow. That is natural. Now, on the other side of the pandemic, the objective may be less about support and more about letting market forces work. Preventing scarring may require taking special care not to hinder the creation of the companies of tomorrow when trying to protect the companies of today.

As someone focused on the rural-urban divide for years, I might call out that small towns and inner cities face a common challenge: the lack of affordable broadband. This crisis has crystallized the case for its universal deployment, and doing so may be the greatest lever for revitalizing the residential part of inner cities and making small towns competitive in the pursuit of jobs and talent. Our Bank has made this a research area of focus as well.

As I discussed at the beginning, fiscal support has been critical to getting us on the path to recovery. Once the economy is on stable footing again, it will be important to take steps to get our fiscal house in order so we have the capacity to limit scarring the next time we have a downturn. With the crisis behind us, we need to find the political will to bring our deficits to sustainable levels. At the moment, the United States still seems to have fiscal capacity. But that is always the case until it isn’t.  

The Fed is trying to do its part to limit scarring as well, through our new long-run policy framework. In our Fed Listens session, we heard from countless people who let us know the least fortunate benefited from the historically strong labor market in 2019. We hope to support bringing more people in from the sidelines by maintaining accommodative monetary policy so long as inflation stays moderated. 

To close, I would just reiterate that we will see scarring from this downturn, as always. But we have in our control the ability to limit the unique damage of this one. I hope we will. 

Thanks, and now I will open up to questions.