By Mohamed A. El-Erian
March 15, 2021, 9:30 AM GMT
The recovery has been uneven.
A year has passed since the U.S. economy was the victim of a
dramatic sudden stop at the hands of the Covid-19 virus. What has transpired
since, especially when compared with early consensus expectations, tells us a
lot about both the inherent strength of the economy and its Achilles’ heel.
A virtual shutdown during the second quarter of 2020 caused
drastic dislocations to every aspect of American society. The impact on the
economy was astoundingly bad. Gross domestic product collapsed, contracting
31%; unemployment shot up to more than 14%; and retail sales also fell sharply,
by 15%, despite a huge shift from physical to online consumption.
Needless to say, the U.S. economy was not the only one
experiencing such a fierce downturn. Global GDP fell sharply and trade
contracted 19% around the world.
With such a shock to growth and trade, it is not surprising
that many analysts rushed to predict a really dire year as a whole for both the
U.S. and the global economies, even before the realization that there would be
multiple debilitating spikes in Covid infections, hospitalizations and deaths.
Yet, by the end of the year, the economies surprised most analysts to the
upside.
The contraction in U.S. economic growth in 2020 was limited
to 3.5%, almost half of what the World Bank and others projected in June. The
unemployment rate was halved from its peak. Retail sales surprised even more on
the upside, expanding almost 7%. The rebound in manufacturing activities also
helped, forming part of a global phenomenon that reduced the contraction in the
trade of goods to just 6%, well outperforming the trade in services, which
contracted 16%, and limiting the hit to overall trade to 9% and that to global
GDP to just more than 3%.
Three factors drove these better-than expected outcomes, the
relative importance of which varied among countries.
The first was a remarkable macroeconomic policy response
anchored by three powerful principles: whatever it takes, all in and whole of
government. It was particularly notable in the U.S. and U.K. where, working
together, governments and central banks provided a hitherto unthinkable amount
of liquidity to markets, businesses and individuals.
The second was success in overcoming the spread of Covid
infections and the dreadful threats to lives, livelihoods and health systems
that came with the virus. China was the positive outlier here among the
systemically important economies, contributing to its 2% positive growth for
2020 as a whole.
The third was highly responsive private sector ingenuity,
entrepreneurship and dynamism — both on a stand-alone basis and in highly
effective public-private partnerships, highlighted by the breathtaking speed by
which scientists came up with vaccines in the U.K. and U.S. in particular.
The encouraging positive surprises, though, fell short for
another early but persistent casualty of Covid: an inclusive recovery
underpinning a solid and mutually supportive social fabric.
The early consensus narrative about the virus was that it
respects no boundaries, be they geographic, socioeconomic, gender or racial.
Yet, as Michael Spence and I warned in June, Covid would prove to be the great
unequalizer — and not just for income and wealth but for opportunity as well.
Indeed, this has become an even more serious stand-alone problem whose negative
implications extend well beyond the economic outlook and require urgent focused
policy attention by both the government and corporations.
Data from the Bureau of Labor Statistics shows that white
and college-educated Americans experienced a disproportionately better recovery
in jobs. Needless to say, this was closely correlated to compensation levels as
well. For 2020, employment expanded for those defined as high-wage earners
(more than $60,000 a year) by 1.2% while that for middle earners
($27,000-$60,000) fell by 4% and that for low earners (less than $27,000)
declined by a distressing 19%.
Because they account for the vast majority of stock and
mutual fund holdings (90 percent and 83 percent, respectively, according to
Federal Reserve data), white and college-educated Americans also managed to
improve their relative and absolute wealth standing thanks in large part to
exceptional Fed policy support for financial markets. This also proved lopsided
within these two fortunate and overlapping groups as the richest 1% accounts
for more than 50% of overall holdings. Indeed, Forbes has estimated that the
total wealth of U.S. billionaires increased an eye-popping $1.3 trillion, or 44
percent. Compare that with the 24 million U.S. adults who reported during the
year that their household lacked enough food in the previous week.
It is not just income and wealth inequalities that worsened.
The opportunity gap also widened. This is vividly highlighted by many educators
noting, in the shift from in-class to remote education, both a worrisome
disengagement by too many students from disadvantaged backgrounds — because of
a lack of proper Wi-Fi, computers, working space, etc. — and a drop in
attainment among those still engaged.
Then there is the health angle. Covid has been particularly
destructive for the health and lives of minorities and other vulnerable
segments of society. This regrettable dispersion has been accentuated by what,
at least initially, is a notable difference in vaccination rates.
Looking back a year, we should draw comfort from what did
not happen, be it the beginning of an economic depression that would have
crippled the well-being of current and future generations or persistent high
joblessness that would have ushered in a lost decade of widespread long-term
unemployment, mental stress, and what Anne Case and Angus Deaton labeled
“deaths of despair.” We should also react to what did happen, which is a highly
concerning increase in the inequalities of income, wealth, opportunity and
health. The longer this problem remains unaddressed, the more likely it is to
interfere with the positive drivers that surprised many analysts.
The last thing we need as we recover from Covid, a
generation-defining shock, is to have the potential continuation of the
unanticipated good of a highly challenging 12 months further contaminated by
the worrisome ugly.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net
To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net
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