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Economic lessons learned from the COVID-19 pandemic

Subtitle:
Three economists analyze the pitfalls, highlights and what we learned
Tuesday, March 16, 2021 - 9:32am
By:
Merritt Melancon
Image:
From left, Ian Schmutte, Jeff Humphreys and William Lastrapes.

It’s been a year since the COVID-19 pandemic turned the ways we work and play upside down. For many Georgians, it’s been a year of lost wages, working from home and remote learning.

But for all the change and anxiety there were bright spots too, said economists at the University of Georgia.

Three economic experts from the Terry College of Business (Ramsey Chair of Private Enterprise William Lastrapes, Selig Center for Economic Growth Director Jeff Humphreys and labor economist Ian Schmutte) share what went right, what went wrong and what we learned from a year of the COVID economy.

Highlights: What did we do right?

Across the nation:
Lastrapes: The economy showed a remarkable ability to adapt to the changing nature of economic activity under shutdowns and social distancing. Perhaps most remarkable of all was the generally smooth transition from office work to working from home by employees in many industries. While the trend toward such remote work has been underway for years, it surely accelerated — from 10% of the labor force a year ago to 50% today.

"Work-at-home schedules are likely here to stay and can have significant positive effects on productivity, with some economists claiming that productivity could rise by 2.5%.” — William Lastrapes

The move toward working at home also has profound implications for housing markets, labor mobility, commuting and traffic congestion, public transportation, and the overall design of cities. Some responses will be disruptive, but there will also be opportunities to boost productivity as well as the quality of life for workers and families.

In Georgia:
Humphreys: Despite COVID-19, Georgia landed more economic development projects in fiscal year 2020 than in fiscal year 2019. Due to the build-out of many economic development projects, Georgia’s total employment was only 2% below its pre-COVID-19 recession peak level by the end of 2020.  In comparison, the nation’s total employment was 7% below its pre-COVID-19 recession peak level.

In the labor market:
Schmutte: The CARES Act, which provided enhanced unemployment benefits and other forms of income support, was able to support the low-wage and high-exposure employees hit hardest by early public health lockdowns. During the early months of the pandemic, consumption increased and the poverty rate fell during the early months of the pandemic, even while unemployment was still at historic levels.

Lowlights: What did we get wrong?

Across the nation:
Lastrapes: The severe, albeit brief, pandemic recession of 2020 was certainly ugly in terms of high aggregate levels of unemployment and large aggregate declines in employment and production. Generally, recessions tend to have relatively uniform costs across all sectors of the economy. But, it quickly became apparent in the spring of 2020 that the economy’s response to the need for social distancing had unequal effects across industries workers.

The bulk of the cost of the shutdown was born by low-income workers in the restaurant, hospitality and travel industries, as well as by small business owners. These industries were already working on shoestring margins and unable to withstand persistent decreases in demand for their products. Those with higher incomes were able to adapt more easily through work-at-home and the ability to draw down savings to pay the bills. Policymakers were aware of and responded to these disparities, but probably not enough.

In Georgia:
Humphreys: Due to social distancing and contagion fears many of Georgia’s high-contact businesses continue to operate at greatly reduced capacity levels that may not be very profitable.  Some types of businesses, for example, live entertainment, remain mostly shut down. Also, the debt many Georgia companies have taken on to survive the pandemic may limit their growth once the pandemic is over.

In the labor market:
Schmutte: The pandemic has had many effects on the labor market that we will not fully understand for years. Research finds that young people who start their careers during a recession are disadvantaged and may never catch up in terms of lifetime earnings and career advancement. Similarly, because schools and child care centers have been closed for months, the careers of caregivers — primarily women — have suffered.

"Finally, the disruption of schooling has led to a reduction in education and socialization for a generation of children, the full costs of which are unclear, but possibly very large.” — Ian Schmutte

Insights: What did we learn?

Across the nation:
Lastrapes: The federal government acted like a nationwide insurance policy to lessen the economic shock of the pandemic through disaster relief checks, unemployment compensation and Federal Reserve lending facilities.

But the surest way to make the economy less sensitive to future pandemics is to have a strong and effective nationwide public health system that can promote a plan of action, reduce uncertainty and provide a sense of security when infectious diseases arise. This is naturally a role for the federal government, through agencies like the Centers for Disease Control and Prevention in Atlanta. However, private sector funding and cooperation are also necessary components of a strong public health structure. Beefing up public health in the U.S. might entail significant costs in the short run, but the payouts in terms of future economic security are likely to be well worth these costs.

In Georgia:
Humphreys: Putting top priority on a robust economic development strategy is a very effective way to prepare the state for a recession, regardless of the cause or nature of the recession.

"For decades, Georgia’s leaders and economic developers have championed a deliberate effort to innovate and adopt best practices in economic development.”  — Jeff Humphreys

Georgia’s public and private sectors put top priority on funding economic development. Leaders have passed economic development legislation that helped Georgia outcompete other states for new projects and expansions. There is a good working relationship between state and local governments and other major players. Those factors when combined with Georgia’s transportation infrastructure helped keep the economic development pipeline full during the steepest recession in modern U.S. economic history.

In the labor market:
Schmutte: Policies that fought the pandemic by paying businesses to stay closed and people to stay home seemed to work well. However, there was not always political will to keep them going. To better fight recessions in the future, we should consider using “automatic stabilizers” that would trigger expanded unemployment insurance benefits when unemployment rates exceed some set level. Doing so would avoid a political fight emerging every time a labor market crisis emerges.

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