Restaurants Need a Bigger Menu of Government Aid
(Bloomberg Opinion) -- The restaurant and entertainment industry was hit hard by both the Covid recession and the federal government’s response to it. The pandemic kept customers away, and now employees are being kept away by the enhanced unemployment benefits included in President Joe Biden’s $1.9 trillion American Rescue Plan.
Or so some restauranteurs and economists say. Adam Ozimek happens to be both: He is chief economist at Upwork, a marketplace for gig-economy workers, and he owns Decades, a bar and grill (with an attached bowling alley and video arcade) in Lancaster, Pa.
I have known Adam for more than a decade. I started the blog Modeled Behavior in 2007 and Adam joined in 2009, just after the Great Recession. Back then we agreed that the government needed to stimulate demand to draw the millions of Americans on the sidelines back into the workforce. Now, however, Adam is concerned that the government’s pandemic-relief measures may be setting up another round of slow employment growth.
Adam has some thoughts about what the government might do differently — such as paying worker bonuses, an idea popular with several Republican governors. We discussed this and other matters one morning last month as we sat at the bar of his restaurant, a 15,000-square-foot space located in an old armory on North Queen Street. Opened in 2019, it has about 30 employees, several of whom were preparing for the day's late-afternoon opening as we talked. Our discussion has been edited for length and clarity.
Karl Smith: One the most contentious policies right now is enhanced unemployment insurance. Early on, I know, you favored erring on the side of doing too much rather than too little. Has your stance changed?
Adam Ozimek: I was a huge fan of the UI boost. I thought it made more sense for workers than PPP did. I didn’t think we should be focusing on employee retention, because you didn’t know how long this was going to go on. In addition, when you’re facing this type of never-seen-before crisis, the last thing you want to do is tie business’s hands. You want to offer as much relief and as much flexibility as you can.
So I was fully supportive of UI and I think the evidence on net is that it didn’t reduce hiring over the summer — and quite frankly if it did, that was totally fine, because at point that’s just another social-distancing policy.
So when did you become more concerned about stimulus policies potentially slowing down the recovery?
The first mistakes, policy-wise, started to come at the very beginning of 2021. Congress passed a round of direct relief checks in December, and then before those checks even hit people’s bank accounts, they began planning for the next round.
When I looked at the data I saw every indication that the initial round of checks had worked, and that the $600 boost would be sufficient. A lot of economists on Twitter expressed concern that household savings were being depleted. That was true, but savings were nonetheless higher than normal and we had checks in the mail.
Nonetheless, the decision was made to send out the next round of checks before they were needed. My problem with that isn’t that it’s too much spending or even adding debt per se. It’s simply that it’s a suboptimal way to get the economy back to full employment.
You can spend $1.9 trillion just fine. But I would have been more thoughtful about the timing.
At the same time, I think you’d agree that we don’t want the government micromanaging the economy. What’s wrong with just giving people cash and letting them spend it how they see fit?
The simple fact is that it doesn’t make sense to stimulate the economy when the service sector is still largely shut down. You know that much of that spending is going to go into durable goods, and the goods sector is already above capacity.
To get back to where we were, we don’t need to spend more money in the goods sectors. For example, suppose you’re a boutique bicycle manufacturer and you’ve just finished your best year ever. If stimulus checks come out in early 2021, you’re not going to open another shop and hire 50 workers who expect to work there for the next 10 to 20 years. You’re going to raise prices or else have this long queue, which will raise prices on the secondary market.
It does nothing to mitigate the reallocation challenge that we’re facing, and in fact it’s making it worse. After the Great Recession there was a huge knowledge problem. Construction and manufacturing were decimated. Where were those workers going to go?
Here we know. There is no reason to expect the economy to permanently shift away from personal services. That demand is coming back, those workers will need to come back, and I don’t think the stimulus took that into consideration.
So, what should we have done differently? What would you have done?
I would have waited to the send the checks, and I would have sent smaller checks. We see from past evidence that when send large checks that that spending is more likely to go into durables. So I would have spread out that spending over a year and half and started the spending mid-year — either May or June.
Is part of the concern here that people will spend the checks too fast, and then when restaurants reopen, they won’t have anything left? Or is it that overall the spending is going to end up being more than was required?
No one thinks service sector will be fully recovered by the end of 2021. So you want to have stimulus in that period when the recovery is going on.
Tell me about your timeline here at Decades. When were you able to reopen?
Following the Pennsylvania guidelines, we were able to begin opening inside in September.
Yet even throughout this period, you’ve been constrained. Has that been by distancing requirements or demand?
The distancing requirements mean that even if every spot is occupied, we’re still well below our pre-pandemic capacity levels. Even now, what we are seeing is primarily demand constraint during the week. During the weekend is when we become constrained by the distancing requirements.
Has employment been a constraint for you?
If it’s been tough to recruit. We are staffed where we need to be but it has been a challenge getting to this point. Our concern is that as demand continues to rise, we’ll have trouble keeping up. I really think that’s where the labor market overall is. I don’t think the UI problem is as big of a problem as it’s going to be.
The closer we get to full demand, the more this going to bite. Recruiting right now is a headache but it’s not an emergency yet. My concern is that we’re so far below regular levels of capacity utilization and we’re already seeing problems. The thing I have been trying to say is that the Biden administration should try to get ahead of this. The tightness is just getting started.
A lot of people argue, however, that this is precisely what we need right now. The balance of power in the labor market has been in favor of employers like yourself for too long, and what we need is a period of extreme tightness. Indeed, you’ve made something like that argument yourself.
Tightness in the labor market is the most important thing, I think. What has made the last few months frustrating is that this is not real labor-market tightness. We are still down millions of jobs. The economy can’t stop here and call it done.
When I say that UI is potentially causing these problems, however, people accuse me of being against full employment. That’s absurd. You and I have spent the last decade fighting for full employment.
A journalist recently asked me what my ideology is, and I said, “full employment.” Full employment is what matters. This just isn’t it. There is no inconsistency in seeing short-run labor-supply problems caused by policy as bad, and seeing full employment as good.
A lot of people argue that there can’t be a supply-shortage problem, only a wages-are-too-low problem. Have you considered raising wages?
Yeah, there has been a really large forgetting of some things we know in economics around wage-setting. It’s been frustrating to see. We know wages are downwardly rigid. This is not only something we know, but something we appeal to all of the time when we make Keynesian arguments. It’s just obviously true that you can’t just cut wages.
When I talk to my partners they all agree that the problem is you can’t take pay raises back. So you are left doing it through a hiring bonus. Then, however, you have a retention problem. If you recruit someone away from another restaurant because you’ve offered a hiring bonus, then they are going to retaliate by offering bonuses.
Effectively, that means that you have to offer bonuses across the board — at a time when demand, again, is still not at full capacity. It’s a lot to ask of a sector that’s still in recession. I find it pretty crazy that a lot of people are waving their hands at that.
This is where the recession happened. We are climbing our way out, and it’s just a fantasy to think that we can implement these massive structural changes at the same time.
From the worker’s perspective, however, what is the downside of the bonus? I get that it makes life hard for employers, but workers can take UI now and still get a job later.
The problem is that you won’t have the type of growth you need in the sector to employ everyone later if you raise wages now. Precisely because the administration has front-loaded the stimulus, by the time UI comes off we’re are going to be facing a weaker job market overall. Instead of a V-shaped recovery like we have now, it’s going to be the more typical slow, grinding recovery that we’ve had time and time again.
At this point, though, what can be done about it? The stimulus decisions have already been made. Should governors be cutting off UI?
I wouldn’t cut it off, but I would offer back-to-work bonuses, and I would pay for them at the federal level. It’s a lot to ask the restaurant industry to carry the brunt of bonuses designed to overcome a federal policy at precisely the time when they are recovering from the pandemic. If the administration really wants to see a healthy recovery, they will provide funding for bonuses.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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