Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is founder and president of MacroPolicy Perspectives and Clinical Associate Professor of Finance at University of Texas at Austin
The US economy’s outperformance has continued so far in 2024 despite the non-trivial uncertainties associated with a looming presidential election.
Part of the American story has been a better productivity performance than its peers. Conversations about the future drivers of productivity tend to be linked to the potentially transformative developments associated with generative artificial intelligence. But there is another reason the US is already experiencing a better growth path and is poised to reap the benefits of new technologies.
Early in the pandemic a choice was made by monetary and fiscal policymakers to “go big, go early” on policy support. As the pandemic itself was no one’s fault and time was of the essence, it was politically easy to provide support. But part of the decision reflected the zeitgeist in policy circles that the choices made after the financial crisis were tragically timid, resulting in a painful and unnecessarily slow recovery.
Research has documented what is known as hysteresis in the labour market, whereby long spells of unemployment result in reduced earnings, labour force engagement, investment and growth. More speculatively, US Treasury secretary Janet Yellen pondered in 2016 whether a “high-pressure economy” could prompt more labour force engagement, business investment, research and development, and generally greater dynamism — a sort of reverse hysteresis. The combination of the pandemic and the policy failures in the aftermath of the financial crisis effectively led the US to run the experiment of running a high-pressure economy.
The results are increasingly supportive of Yellen’s reverse hysteresis hypothesis. Pandemic frictions and generous policy support initially contributed to spiking global inflation and a hard turn towards restrictive monetary policy. But as inflation cools towards central bank targets, we have seen a stunning degree of economic and labour market resilience. A global comparison by US Federal Reserve researchers concluded that the combination of go big, go early macro policy support when combined with the more flexible US labour market contributed to the faster adjustment.
Another study by St Louis Fed economists examined company earnings reports and found that the tight post-pandemic labour market spurred significant increases in investment and productivity gains. The study concluded that since 2021, the tight labour market had been responsible for an additional $55bn in investment, worth about 6 per cent of total fixed investment between 2021 and 2023. Employers complained about labour shortages but went to work, investing and optimising operations to maintain profitability
Workers benefited, too. The US saw its fastest jobs recovery from the deepest hole in the postwar period. Demand was so strong we saw record amounts of job switching, and while some measures of consumer sentiment remain gloomy, a long-standing survey from the Conference Board going back to 1987 shows the highest level of job satisfaction on record in 2023. To attract workers in a hot job market employers offered better scheduling and hybrid work arrangements in addition to higher pay and benefits. Appreciative employees may very well be more productive.
The US has always been an experiment in creating an economic model based on expanding opportunity to ever-broader segments of the population. But there has also always been a battle between a scarcity mindset that favours erring on the side of less support against the push to expand avenues to prosperity. The battle rages on, and in many respects lies at the centre of the choice the US faces this election year.
Bond markets have been understandably nervous with budget deficits in the US projected at 6 per cent of gross domestic product for the foreseeable future and neither presidential candidate is particularly focused on fiscal sustainability. But the classic comparison of Japan (250 per cent debt to GDP) and Argentina (86 per cent debt to GDP) illustrates that fiscal space and sustainability are more about the viability and resiliency of the overall economic model than simple budget metrics. Stability and expanding prosperity begets more stability and favourable fiscal trade-offs.
History is on the side of the thinking that drove the go big, go early approach to the pandemic and the current US outperformance. A focus on maintaining the current soft landing to capitalise on and stimulate a rapid advance in technology provides the best path to a better productivity trend, longer-term fiscal sustainability, and prosperity.
