U.S. Economy Might Be Condemned to Relive the ‘70s

(Bloomberg Opinion) -- A Joe Biden presidential administration, which is becoming more probable as his lead in the polls grows, probably will try to avoid the mistakes that held back the economic recovery after the 2007-09 Great Recession. His fiscal agenda is getting bolder. The Federal Reserve is also pledging to keep monetary policy loose until inflation actually emerges.

But potential supply bottlenecks loom if the U.S. breaks out of the slow-growth trap that has plagued the economy during the past decade. That suggests the economy will need reforms that increase supply in housing, the labor market, and in health care and child care.

We got an unwelcome preview of how this can play out in coastal urban housing markets -- at least before the coronavirus pandemic. Jobs and incomes for knowledge workers surged in cities such as San Francisco and New York, but the increase in employment outstripped the housing supply in those metro areas. Even with an increase in high-end residential construction, soaring rents often outpaced rising wages. An economy-wide version of this could unfold in the next few years if the U.S. achieves more robust growth.

Consider the impact on the housing market of an economic agenda that sought to return and keep the labor market close to full employment, particularly outside the coastal knowledge hubs. This probably would reduce housing affordability in inland and smaller metro areas. Although it's true that it's easier to build housing in smaller, lower density metro areas than on the coasts, zoning codes and community opposition are still obstacles to housing construction almost everywhere. And with fewer workers in the homebuilding industry than before the financial crisis, construction would be plagued by rising costs and delays. Any plan that seeks to increase economic growth, in part through more demand for labor, also needs a plan that ensures growth in the supply of housing to keep up.

Labor supply is another element that needs addressing if the U.S. is going to achieve faster economic growth. Birth rates and immigration are in decline, limiting growth in the supply of new workers. It's likely that the economic disruption brought about by the pandemic, and health concerns among older workers, will lead to accelerated retirements for hundreds of thousands if not millions of older workers this year. Since February, the number of people in the labor force older than 55 has fallen by 1 million. Climbing out of the hole we're in because of the pandemic is something that can be fixed with fiscal policy alone, but growth beyond that will require some mix of more immigration, keeping older workers in the labor force and bringing more young people into the labor force.

The pandemic has also delivered a devastating lesson on shortages in health care and child care. A shortage of beds in intensive-care units and ventilators might not be an issue a year or two from now, but a Biden administration is going to seek to increase health-care coverage, meaning an increase in demand. Rural communities have struggled for years with hospital closures, limiting the ability of residents of those communities to get care. The U.S. needs to ensure that there's an ample supply of health-care workers across the country to meet the demand generated by expanded coverage.

And without child care, there's a limit to how many parents will be able to return to work. Increasing the supply of day care and child care workers will be essential to raising the low levels of labor force participation that hold back economic growth.

Without these sorts of supply-side reforms -- having policies and incentives that ensure an adequate supply of housing, labor, health care and child care -- fiscal and monetary policy that fosters faster economic growth will lead to shortages and higher prices. That, in turn, could create the kind of inflationary pressures that undermine public support for pro-growth policies. If gas lines and frustrated motorists waiting in line burned the memory of stagflation into the national psyche in the 1970s, the equivalent version in the 2020s might be angry parents showing up at local government meetings about being forced out of work because of day-care centers closing. Oil shortages and the pessimism experienced two generations ago may be a thing of the past, but if the nation is going to shift to faster growth we need to plan for the kinds of shortages that are likely to emerge.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.

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