Tom Barkin, president of the Federal Reserve Bank of Richmond, is optimistic overall about the nation’s economic recovery. The housing market is strong. Job creation has resumed. Disposable incomes are up. And families are saving more and paying down their credit cards.
But he worries about “scarring” — a term that economists use to describe longer-term negative impacts that can hinder economic recovery. “Severe downturns can leave scars that, while not always permanent, take a long time to heal,” he said in a March 21st speech at the virtual Credit Suisse Asian Investment Conference.
COVID-19 lockdowns hit hit primary caregivers particularly hard by closing schools and child care facilities, putting pressure on at least one parent to stay home. Labor force participation for parents, said Barkin, is 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.”
The country also faces “potentially huge losses” in human capital from the COVID-driven shift from in-person learning to virtual learning, Barkin said.
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. 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.
Another concern: By accelerating automation, boosting demand for online retail, telemedicine and other technologies and business models that eliminate face-to-face interactions, the epidemic also could accelerate the decline in demand for low-skill, personal-contact jobs that still suffer from lingering high unemployment. (Barkin did not mention this, but the decline in demand for lower-wage high-contact job occurs at the same time Virginia is hiking its minimum wage.)
The pandemic also may have a lasting effect on the urban renaissance if people are afraid to get into crowded subways and elevators. “We risk scarring out urban platforms of collaboration and innovation.
Barkin alluded to another type of scarring — the record deficit spending that fueled a $4 trillion increase in federal debt last year.
That point bears some elaboration: The latest $1.9 trillion stimulus package will stoke another year of massive borrowing, plus the Biden administration has proposed spending another $3 trillion on infrastructure and climate change initiatives. Even without that $5 trillion in added national debt, the Congressional Budget Office’s latest forecast says that the structural budget deficit will bottom out around $900 billion yearly and then ratchet relentlessly higher to nearly $1.9 trillion yearly. Within another 10 years, the national debt will be $35 trillion. That’s the optimistic scenario.
“While there are no immediate signs of a U.S. debt crisis,” says Barkin, “we should be wary of diminishing our fiscal capacity to respond aggressively to the next crisis.”
That’s an understatement.
U.S. fiscal and monetary policy is beyond the control of elected officials in Richmond to address. But Barkin highlighted some areas where state/local policy can reduce the scarring of local labor markets and help Virginia’s economy return to its full potential for economic growth.
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.
Help displaced personal-contact service workers make the transition to new occupations. Reduce licensing restrictions and add instructors for in-demand occupations such as nursing or commercial trucking.
Invest further in education — in particular, provide tutoring and extra instruction, including summer sessions — to students who lost ground academically during the COVID classroom shutdowns.
“We will see scarring from this downturn, as always,” Barkin concluded. “But we have in our control the ability to limit the unique damage of this one.”
(Hat tip: Mary Trigiani’s Newsletter)