Job Shifts Ahead Argue for Large Stimulus
(Bloomberg Opinion) -- The debate in Congress over pandemic relief is overlooking something crucial: the shifting of jobs from one sector to another that is to be expected after the health crisis ends. This coming reallocation in the economy adds to the arguments in favor of spending $1.9 trillion on pandemic relief.
So far, traditional views of aggregate supply and demand have dominated the fiscal policy discussion. Some people argue, for example, that $1.9 trillion could boost demand too much — risking “inflationary pressures of a kind we have not seen in a generation.” This conclusion is drawn primarily from calculations about aggregate trends in potential economic output or income. Even on these terms, the skeptics are not particularly convincing, especially since we still don’t know how persistent the pandemic will be in 2021.
But neither side in this debate has paid much attention to the ways in which the pandemic stands to cause significant and lasting shifts in the economy. That should influence how we evaluate the government relief legislation.
How much job shifting should we expect once the pandemic is in the rearview mirror? No one knows for sure, but the economists Jose Barrero, Nicholas Bloom, Steven Davis and Brent Meyer provide a useful guide. They examined questions and answers in the Atlanta Fed/Chicago Booth/Stanford Survey of Business Uncertainty, which includes responses from some 450 senior executives about their businesses and what they expect for the year ahead.
The Barrero team concludes that Covid-19 will be “a persistent reallocation shock” for three reasons. First, the shift in sales revenue from one company to another (for a given level of total sales) is now running two to three times what it was before the pandemic. Employment shifts across firms are also higher now. “The upward trajectories in both series indicate that the reallocative effects of the pandemic are continuing to unfold and even accelerate,” the researchers note.
Second, companies are not expecting these trends to reverse over the coming year. Firms that have been growing strongly since the beginning of the pandemic have rosy expectations for 2021, while those that have been contracting foresee a dark future.
Third, one driver of these shifts has been the switch to working from home. A separate analysis by Barrero, Bloom and Davis suggests that work from home will persist where it is feasible — that after the pandemic, 22% percent of full workdays will be WFH, up from less than 5% before. This has been a boon for industries with high WFH capacity. “Although we cannot measure it using our data,” the researchers say, “this effect almost certainly operates within our broad industry groups as well. Evidence … that working from home will stick after the pandemic ends, coupled with differences in WFH capacity across firms and industries, is another reason to think that Covid-19 is a persistent reallocation shock.”
A further indicator not considered by Barrero and his coauthors also suggests significant reallocation is likely to continue: today’s abnormally low level of corporate defaults and restructurings. In January 2021, for the first time since August 2018, there was not a single corporate default on high-yield bonds or institutional loans. With elevated liquidity in financial markets, it seems odd that corporate defaults are so low — and that in turn may be a warning of significant turbulence at the firm level still ahead.
So how should all this influence thinking about the $1.9 trillion pandemic relief package?
At this point, policy makers should avoid big government payments to companies that are unlikely to survive once the pandemic ends. It is hard to know now, however, precisely which firms will thrive and which will shrink after this year. In any case, direct payments to companies figure dramatically less prominently in the proposed package than they did in earlier relief legislation.
At least a third of this bill’s spending would involve assistance to households — including the proposed $1,400 checks and the expanded child tax credit. Whether people end up spending that money now or later, they probably will spend it disproportionately on the things that will thrive when the pandemic is past.
So the additional payments to households might reveal and accelerate the spending shift ahead. It’s hard to move workers and capital across sectors and subsectors; an extra pull from the companies that experience greater consumer demand can help.
It’s also possible that the effects of economic reallocation will slow economic growth and keep unemployment higher than a traditional model would suggest. That’s an additional argument for tilting toward a larger, rather than smaller, relief package (and for including triggers to make sure the spending continues as long as the economy remains weak).
Basically, when economic turmoil is rising under the surface — as some companies contract sharply and others expand quickly — a larger relief package is helpful, as long as its provisions don’t freeze-frame the past. As lawmakers debate the size of the legislation in the coming days and weeks, they should keep in mind the reallocation shock that’s embodied in the pandemic.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
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