The economy grew by 5.7% in 2021 from 2020. This was the highest annual growth rate since 1984. Much of this impressive growth was due to the American Rescue Plan Act (ARPA) enacted in March 2021. But, the data also show that Congress needs to enact progressive supply side policies to maintain this momentum. These additional investments should make it easier for people to participate in the economy, reduce massive inequality and create more economic certainty for people and businesses. Without such interventions, many of those families that are typically left behind – those without a college degree, people of color, single women, and disabled workers, for instance – will continue to struggle and not experience meaningful financial security.
So, what did ARPA do for the economy? It is important to understand the effect of this policy intervention to see what work remains to be done. Most notably, it helped consumers with a series of direct payments — stimulus checks (officially called Economic Impact Payments (EIP), added unemployment insurance benefits and expanded child tax credit payments (CTC) – in addition to financial support for state and local governments, among a number of other measures.
The extra money had several clearly visible benefits. First, consumption went up a lot in the first half of 2021. Personal consumption spending increased by 11.4% (on an annual basis) in the first quarter of 2021 and by 12.0% in the second quarter last year. The added spending helped to spur a remarkable recovery in economic growth from 4.5% in the fourth quarter of 2020 to well over six percent in the first two quarters of 2021.
Second, households could put some money away for the future. For example, the average inflation-adjusted amount of liquid savings in checking, savings and money market funds among others for the bottom half of the wealth distribution grew from $3,565 to over $4,000 (in 2021 dollars) by the second half of 2021. These additional savings allowed consumers to increase their spending again in the fall of 2021 after the delta surge of the pandemic subsided. Consumption increased from 2.0% in the third quarter of 2021 to 3.3% in the fourth quarter. This helped to boost overall economic growth to its best quarter of the year with an annualized growth rate of 6.9%.
Third, faster consumer spending led to more hiring and thus more spending and growth. In the three months before Congress enacted ARPA – December 2020, January and February 2021 – the average monthly job growth was 154,333 new jobs per month. In comparison, the average shot up to 556,000 from March to May 2021, according to data from the Bureau of Labor Statistics. ARPA rescued a sagging economy from slowing into another recession as it was intended and eventually millions more got a job in 2021 as a result.
Fourth, businesses built up inventories to meet the higher demand amid supply chain challenges. The changes in business inventories alone added 4.9 percentage points to the 6.9% growth in the fourth quarter of 2021. The added inventories boost demand for people to go back to work. After all, somebody needs to make those things that businesses store in their warehouses. And, expanded inventories make it easier for businesses to meet the additional demand. People then can actually spend their income and savings on things that they need, further supporting demand.
But, the work of rebuilding a strong, equitable economy is not done. Much of the economic momentum of the past year needs to stay to bring back more workers, especially in groups that are often left behind. For instance, the unemployment rate for Black men was 7.0% in December 2021, that for Black women was 6.2%, the rate for Latino men was 4.2% and that for Latina women was 4.9%, compared to an unemployment rate of only 3.0% for White men and 3.1% for White women. Disabled workers also had an unemployment rate of 7.9% that was more than twice as large as that of non-disabled workers. And, those without a high school degree had an unemployment rate of 5.2% compared to 2.1% for people with a college degree. Those who are financially most vulnerable struggle the most to find a new job. A weakening economy and labor market recovery will further cement these persistent differences.
A stronger recovery will come from a broader economic base. But, two key areas – business investment and real estate spending – that typically contribute to more broadly based and stronger growth are lagging. Housing spending on new construction and renovations has now declined for three quarters in a row. Business investment overall has slowed to about two percent (on an annual basis) in the second half of 2021, driven mainly by a sharp decline — -11.4% in the fourth quarter alone – in spending on structures. Businesses spent less on offices, hospitals, warehouses and manufacturing plants in the fourth quarter of 2021 than in the third quarter. Businesses are not increasing their spending, even in the face of supply chain shortages that could be addressed by expanded warehousing and manufacturing capacity, for example. The bottom line then is that economic growth is not yet broadening to expand the country’s productive capacity.
Policymakers have two choices. They can cross their fingers and hope that a few things will turn out just right. The decline in housing spending may be leveling off and people may start to buy or build more new houses again, but mortgage rates are also moving higher, which raises the costs of owning real estate. Public infrastructure spending will eventually go up thanks to the recently passed Infrastructure Investment and Jobs Act. This could boost demand for manufacturing and construction, both by increasing demand for these goods and services and by creating more economic momentum and thus more economic predictability. But, getting this money to move from the U.S. treasury to state and local governments is a slow moving, even halting process.
Rather than hoping for the best, Congress could take action. President Biden’s Building Back Better Act includes many of the ingredients of a progressive supply side policy. Investing in expanded child care and other care infrastructure will make it easier for all people to bring their talents and skills to the economy, thus boosting productivity over time. The additional spending will also create more economic certainty. More momentum, greater certainty, more labor supply and more skills will provide incentives for more business investment while also expanding economic capacity. Rather than settling in for modest economic growth, we could see a boom in innovation and productivity.
Passing the currently stalled BBB is just what the economy needs. It would end up in faster productivity growth that will make it easier to address many of the known challenges that the country faces: climate change, an aging society, massive inequalities, and others. The latest growth numbers are welcome news, but they should be the beginning of the story of policy-driven growth, not the end of it.
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