Graeme Sloan/Sipa USA via AP Images
People walk through the Georgetown neighborhood of Washington, D.C., August 17, 2021.
As my colleague Robert Kuttner points out today, President Biden was in political trouble before the fall of Kabul. Biden’s softer poll numbers can be traced pretty directly to the rise of the delta variant and spiking coronavirus cases. Just the anxiety-raising déjà vu has people depressed again and blaming their president.
I don’t know how much blame I’d place on the president for the stiff resistance to vaccinations largely generated from his political opposition. But Biden ought to be concerned about what happens after the outbreaks subside. Even if the country manages to raise vaccination levels so the coronavirus becomes a persistent but not catastrophic reality, the aftereffects now appear likely to linger, which is bad news for a White House hoping to ride economic boom times to midterm success.
The FDA’s Monday approval of the Pfizer vaccine, with Moderna’s likely to follow soon, will multiply vaccine mandates among both governments and businesses large and small. That’s the likely path to increasing vaccine uptake, and while that may not slow the rate of infections, it’s likely to blunt hospitalizations and deaths, making for a safer environment. There are even signs that the delta surge in the South has peaked.
But that doesn’t change the fact that consumer sentiment dropped in August to its lowest point in a decade. While retailers showed strong sales in the early part of the third quarter, they are likely declining now; most analysts have lowered their quarterly GDP forecasts.
Though many businesses were planning to move workers back to offices and resume travel and event schedules in the fall, now those plans have been largely scrapped. That could have a long-term impact. As I’ve written before, changing pandemic realities have disrupted the particular rhythms of the economy, particularly for clusters of shops in central business districts that cater to commuters picking up lunches and running errands during the workday. It will now be close to two years without a regular flow of customers to these businesses, which is simply too long a time for low-margin stores like these to survive. Business travel, which was finally starting to rise in midsummer, has also been put on hold, further entrenching Zoom meetings as a substitute for long-distance deal making.
You can only empty out the infrastructure that serves business workers and travelers for so long without consequences.
We’ve demonstrated over the past several months that the U.S. economy can soar without office drones and heavy travel. But you can only empty out the infrastructure that serves business workers and travelers for so long without consequences. Look at a city like New York, whose economy runs on workers in full office towers spilling out to nearby businesses. The delta surge blunts recovery there; unemployment in Manhattan sits at twice the national average. And sick cities in a country oriented around large metro areas could put the broader economy at a disadvantage.
Moreover, as people adapt to working from home, a number will be less inclined to return to the office; many will likely leave for opportunities that allow them to stay put. Already, worker quits are at a high, as people increasingly move to the suburbs and are disinclined to work dangerous jobs after the pandemic wake-up call. Add in remote workers quitting to stay remote and you have the makings of a bumpy transition with a lot of turnover.
There’s good and bad news in this adjustment. In the near term, you will see lots of businesses close down as new ones open up, and the timing might make for some economic setbacks. However, the strong demand for labor, and subsequent desperation from employers, should keep wages high.
So far, wage increases have been matched by high inflation, but wages are likely to prove stickier than prices, as inflation numbers had already tempered their growth by July. If you haven’t needed to buy or rent a car, you’ve probably sidestepped most of the inflationary pressure, and you’re taking home more pay.
My initial thinking was that transitory inflation would fade and leave higher wages in place. Yes, wages and prices do tend to move in tandem. Companies that shelled out to get enough workers might inch up their prices to compensate. But that’s less of a concern if businesses are able to continue productivity increases, which more than justify the wage gains. In other words, the hot economy produced by the government’s commitments on the fiscal and monetary sides could finally reverse the wage/productivity gap that began over 40 years ago. If workers actually can capture the value of what they produce again, the long-term economic prospects would be incredibly bright.
But delta has brought back the specter of further snarls in an already tangled supply chain. Business activity in August fell to its lowest level since last December, and analysts blamed shortages in labor and materials. While the labor shortages are more of a bump, the materials shortages reflect the continuing inability to get things from one side of the world to the other.
The biggest announcement for the global economy recently was China’s partial shutdown of the third-busiest port in the world because of one COVID case found there. It was still closed a week later, and if China keeps up its zero-COVID policy, more delays will surely ensue. That will make it challenging to gain any momentum in resolving supply chain problems. McDonald’s has a shortage of to-go bags for their food, to cite just one consequence. And while that may just be a short-term issue, manufacturing concentration in areas like computer chips will magnify any disruption. Shrunken supply will likely keep prices high.
We have a preview of what this will look like in the 22 states that already canceled expanded unemployment benefits in June.
Put this all together and it pushes economic uncertainty into next year. The problem is that the supports put under the economy to make it through the pandemic all mostly expire this year. We avoided one large hit when President Biden extended the payment pause for student loans into next year. But enhanced unemployment measures are going to expire in just a couple of weeks, damaging the pocketbooks of millions of workers. And the eviction moratorium will at best bow out on October 3, as the money intended to offset back rent remains slow in getting to its targets. Thankfully, we have an expanded monthly Child Tax Credit, but even that ends at the end of the year.
We have a preview of what this will look like in the 22 states that already canceled expanded unemployment benefits in June. Affected workers in these states saw significantly lower incomes as a result of the cutbacks. That cutoff expands to the entire country in September, and there are likely knock-on effects in how much discretionary income these millions of workers will have, eroding consumer spending at the margins.
So we’re looking at reduced travel, continued ghost towns in central business districts, more supply shortages that prevent manufacturing and services from getting on track, long-term unemployed without safety-net help, and a turbulent stew of job turnover. And there is almost no chance that Congress will plug what are now growing holes in our economy with more COVID relief.
There is the prospect of trillions of dollars in public investment, in both physical infrastructure and so-called human infrastructure, as part of the Build Back Better agenda. This is urgently needed and, if successful, will help lower costs on things like education and child care while also improving our built environment and economic productivity. But the investments will play out over a long time frame. Infrastructure build-outs and the benefits of a more educated workforce will take years to bear economic fruit. Getting an extension of the expanded Child Tax Credit, as slated for the reconciliation package, will be crucial, but many of the other benefits for families may not be set up in time for next November, when voters go to the polls.
Perhaps worst of all, there’s no indication that the global vaccine picture is going to look better anytime soon. The U.S. is moving toward allowing third shots even before many countries’ citizens get their first. That’s a recipe for more mutations that could trigger outbreaks like delta, if not worse, for who knows how long. It’s a global pandemic and a global economy, and when one country coughs, others can catch a cold.
It’s been clear for months that the path to economic salvation lies with ending the public-health crisis. Because we failed to do so, that path will be blocked for an indeterminate amount of time. And since the Biden administration’s 2022 strategy relies on a strong economy, they will need to think very hard about their next set of priorities.
