COVID Has Broken the Economy
Pandemic-related disruptions to the economy may well last for years, not months.
Since March 2020, the state of the economy has been tied inexorably to the state of the pandemic. And although many people in this country are leading their lives without regard to case numbers, that absolutely remains the reality. Specifically, the pandemic is contributing to the rising inflation rates that are causing the Biden administration such heartache.
The consumer price index rose 6.2 percent from October 2020 to October 2021, the most rapid 12-month increase in prices in more than 30 years. The possibility that the pandemic is to blame for this phenomenon may seem counterintuitive, because the initial COVID-19 wave had the opposite effect. The price of oil in April 2020 was briefly negative, and the CPI rose just 0.1 percent from May 2020 to May 2021.
But remember that inflation rates tend to rise, quite simply, when households want more goods and services than firms can easily supply. And note that both fear and COVID-related restrictions have shifted demand from services to goods. Some people still fear seeing a movie in a theater; others may dislike wearing a mask while seeing a movie. Both factors push consumers to buy home-entertainment equipment. Fear of public transportation increases demand for cars and bikes, and fear of eating in restaurants increases demand for kitchen renovations and equipment. Accordingly, from the fourth quarter of 2019 to the third quarter of 2021, inflation-adjusted household spending on services fell 2 percent, and spending on durable goods rose 20 percent. This shift in demand has contributed to overall inflation.
The pandemic also disrupts the supply of imported goods, raising their price. This happens directly, as infections and lockdowns abroad hamper production; a lockdown in Vietnam in August, for instance, disrupted the computer-chip supply. COVID-related border restrictions may also make coordinating production across countries more difficult.
Finally, COVID reduces the supply of workers in the United States, which means fewer goods and services produced and thus higher prices. Start with the direct effect of the disease itself. As I write this, roughly 95,000 people are testing positive for COVID every day in the U.S. Suppose 50,000 of these are employed individuals (the current employment-to-population ratio is 59 percent), and that on average each person who tests positive misses, conservatively, three days of work. (The CDC recommends isolation for 10 days after symptoms begin, but many people may not follow this recommendation, and some workers can work remotely while infected.) Add in other employees who must quarantine because they have had close contact with a positive case or who miss work to care for a sick relative, and it seems likely that at least 300,000 to 500,000 employees are absent from work every day as the direct result of COVID infections. That is 0.2 to 0.3 percent of all employees. But the effect is much worse than a simple 0.3 percent decline in employment, because it comes with uncertainty; these 300,000 to 500,000 daily absences are unplanned, so employers need to spend money to overstaff or otherwise prepare for worker absences.
Separate from the day-to-day toll of ongoing infections, COVID shrank the labor force, which was more than 2 million smaller in November than it was in February 2020. Some of this decline comes from workers who are (reasonably) afraid of catching COVID on the job and who therefore temporarily left the labor force or retired. As of the third quarter of 2021, 50.3 percent of the U.S. population age 55 and over was retired, a large increase from 48.1 percent two years earlier.
Women have also dropped out: The number of women ages 25 to 44 in the labor force fell 341,000 (1 percent) compared with just 6,000 men of the same age. This disparity may reflect the hardships of pandemic parenting—an ongoing problem. Although public schools are now open in-person across the country, school and day care are far from the 2019 status quo. Some districts continue to cancel classes because of staff shortages and demands for extensive cleaning. Detroit, for instance, has no in-person school on Fridays in December. CDC guidance says that any infant or toddler who is a close contact of a COVID case (meaning contact of more than 15 minutes, indoors or outdoors) must quarantine for seven to 14 days. CDC guidance also says that children with a wide range of (typically mild) symptoms must stay home, at least until they receive a negative test result.
If the Biden administration wants to get inflation under control, then, it can go beyond the usual Fed-driven remedy of raising interest rates. Better policy to manage COVID, meaning both better policy to control the disease and better policy to limit the economic effect of the disease, could increase the economy’s capacity to produce goods and services. Better policy most obviously means more vaccination, at home and abroad. It also means widely available and cheap rapid tests; testing allows infected individuals to isolate themselves, and it allows workplaces to do more to reassure workers that they are safe. In this regard, the administration’s recent announcement that the purchase of a rapid test would be reimbursed by insurance was disappointing. The country needs cheap, easily obtainable tests, not a cumbersome reimbursement process.
The administration should also discard policies that do much to disrupt society but little to control the disease. For instance, quarantines of asymptomatic children who repeatedly test negative don’t contribute much to public health. And such quarantines do disrupt the labor market, as parents miss work or leave the labor force.
Maybe the pace of inflation will diminish without the need for anything more than a small interest-rate increase, one consistent with continuing employment gains and high asset prices. But I doubt it. The Omicron variant—and the international response to its discovery—leads me to believe that COVID-related disruptions to the economy may well last for years, not months. This is still a pandemic economy, and it will be for quite a while.