In class we have spent some time discussing the "shape" of the current (former?) recession. We see this discussion framed around letters like "L", "U", W", "V", "K" and shapes like "swoosh" (think Nike) and "reverse square root." This is somewhat summarized in a story here, and what I want to focus on here is the potential for a "K" shaped recovery and what that might mean for the long term (https://www.fastcompany.com/90549147/forget-u-or-v-or-w-we-may-be-headed-toward-a-k-shaped-recovery). The "K" shaped recovery merges with the idea that inequality has been rising in the U.S. in recent decades, and that rising inequality might have a relationship with economic growth. (There is a video embedded below talking about the "K" shaped recovery).
In class, we have been discussing growth models, and how that is related to the capacity of the economy. The relationship between inequality and economic growth is not well studied, since it was typically assumed that the level of inequality had no affect on the ability for an economy to grow--see for example the Solow or Romer model which have no role for inequality.
Recently though, there has been more interest from economists about the role of inequality on growth rates. The NY Times put together some graphics from work by Piketty, Saez, and Zucman a few years ago, and this might help explain what is meant here by rising inequality. https://www.nytimes.com/interactive/2016/12/16/business/economy/nine-new-findings-about-income-inequality-piketty.html. The work of Piketty, Saez, and Zucman is certainly not without controversy, but they are careful researchers who do a good job of at least documenting the facts.
If we link these ideas back to our productive capacity, we can see that short-run economic performance can be measured by capacity utilization rates. Today, capacity utilization is still far below our pre-virus level, and it does not appear to be headed back to normal right away. We should think about how capacity is tied back into our other short-run metrics.
So how might we do a better job at interpreting the "K" here if it does exist? Below are several figures, including unemployment, labor force participation, retail sales, industrial production, health care spending, and personal savings. Each of these exhibits a different shape. Take for example unemployment rate, which was recently updated on 10/2, with 661k new jobs added and the unemployment rate falling to 7.9% from 8.4% the previous month (https://www.bls.gov/news.release/pdf/empsit.pdf). While this was somewhat worse than expectations, it shows continued improvement, but still far from the 3.4% seen back in early 2020. Some other segments of the economy like retail sales have nearly completely recovered, while others like industrial production are still far below previous levels.
Much of this overall recovery--even though uneven--can be attributed to an improved understanding of the virus and how it transmits, fiscal policy responses, and the ebbs/flows of lockdown orders.
Questions you might consider
- Given the various data series you see above, what do you see as the potential impact of this crisis on inequality and how that may or may not impact growth in the long run. Provide evidence to support your claims and arguments.
- While the stock market is nearing all-time highs, unemployment in some states is still well over any recent measure (https://www.bls.gov/news.release/pdf/laus.pdf). The potential for further stimulus appears to be rising as we approach the election, but the job market still appears rather lousy (https://www.nytimes.com/2020/10/02/upshot/2020-terrible-job-market.html?rref=business&module=Ribbon&version=context®ion=Header&action=click&contentCollection=Business&pgtype=Multimedia). What are some economists or journalists saying about the issues of job growth now, and how might that weak job market now impact us in the long run? Provide evidence to support any and all claims.
- Focusing on financial markets, how has their stimulus been distributed among various groups of Americans. Do you see any evidence that this stimulus might impact long-run ability to produce? Remember, this must be linked back to the factors of production and the ability for the economy to produce. Provide evidence to support any and all claims.