Interviewed Sunday on CBS News’s “60 Minutes,” Federal Reserve Chair Jerome H. Powell conceded that, despite 20 million Americans having lost their jobs and an unemployment rate of 14.7 percent, there will be more layoffs before there’s more hiring. “We’re not going to get back to where we were” — 3.5 percent unemployed in February — “quickly,” Powell said. It “could stretch through the end of next year.” That’s late 2021.
This economy seems to have a split personality. The stock market suggests things aren’t so bad. On Monday, the market had an explosive day. The Dow Jones Industrial rose 911 points, a gain of 3.9 percent. True, the Dow is off about 17 percent from its all-time high. However, considering all that has happened, this hardly seems a calamity. Good news on a possible vaccine for covid-19 was widely credited for stocks’ surge.
But economists paint a much bleaker picture. The latest outlook from IHS Markit, a forecasting firm, has the U.S. economy (gross domestic product) declining 7.3 percent in 2020. That’s the largest annual drop since World War II. Virtually all advanced countries are suffering severe slumps. The projected GDP decline for the Eurozone (the 19 countries using the euro) is 8.6 percent, while Japan’s drop is 5.5 percent. China’s economic growth, is so meager (one half of one percent) that it could easily slip into negative territory.
“The full recovery takes about two years,” says economist Sara Johnson of IHS. During most of that time, unemployment rates in the United States and elsewhere would remain relatively high, IHS predicts. The U.S. rate averages 13.5 percent in 2021 and 9.5 percent in 2022. Only in 2025 does the annual rate dip below 4 percent. Of course, this assumes that the U.S. and global economies continue to expand for this period — a possible, but optimistic, outcome.
What clearly worries Powell at the Fed is the likelihood that long stretches of unemployment will actually weaken the employability of many workers. Their skills, business contacts and self-confidence will erode, he says. Some discouraged workers will stop looking for a job altogether. The longer the slump lasts, the bigger the long-term effect, as more firms are forced out of business or have to cut back their payrolls.
Powell mentioned this problem on “60 Minutes,” as he has on a number of occasions. Until the coronavirus pandemic struck, the Fed seemed to be making progress on broadening the labor force. Low unemployment was opening up jobs for low-skilled workers and increasing their employability. Their skills, contacts and self-confidence were increasing. The economy slowly reduced unemployment to levels not experienced since the 1960s, with few signs of an incipient wage-price spiral.
But we are beyond that now, and Powell — as well as officials in most advanced countries — face a fundamental problem of governance. Can democratic societies tolerate today’s sky-high unemployment rates without questioning democracy itself?