What have you always wondered about the economy? Tell Us
COVID-19

When it comes to relief, think of the economy as a car tire

Kai Ryssdal and Andie Corban Feb 10, 2021
Heard on:
HTML EMBED:
COPY
Vladimir Rys/Getty Images
COVID-19

When it comes to relief, think of the economy as a car tire

Kai Ryssdal and Andie Corban Feb 10, 2021
Heard on:
Vladimir Rys/Getty Images
HTML EMBED:
COPY

While the Senate runs its impeachment trial, members of the House of Representatives are working out the details of President Joe Biden’s coronavirus relief package in an effort to make up for the economic damage caused by the pandemic. One way to measure that damage is the output gap, the difference between the economy’s actual and potential gross domestic product.

Marketplace host Kai Ryssdal spoke with Wendy Edelberg, director of The Hamilton Project and senior fellow at the Brookings Institution, about her analysis of how different relief proposals would affect the output gap. The following is an edited transcript of their conversation.

Kai Ryssdal: So things are messy now in this economy, and I don’t want to talk output gap now. I want to talk about the output gap in terms of where we might be when some of this relief money that’s being talked about starts getting out into the economy. And I first of all want to, you know, cross-check my methodology. Is that fair?

Wendy Edelberg: That is totally fair. And it’s an excellent question and certainly on a lot of people’s minds. So economists try to estimate the sustainable level of economic activity. And then we can think about how the economy is doing relative to that level. And the difference between those two is an output gap. So think of a car tire. There’s some optimal way to inflate the tire so that the car runs well and the tire lasts. If it’s under inflated, the car runs, but not well. And so you can imagine, that’s an example when the economy is below its sustainable level, and you’ll get things like a high unemployment rate. All right, so you can also have a tire that’s overinflated. Again, the car runs, but the tire’s thin and fragile. All right, so in that case, the unemployment rate would be low. And now let’s fast forward to 2021, which is, of course, what we really care about. What is the output gap gonna look like in 2021? We might —

Ryssdal: Right, so let me stop you there, though. And let’s diverge here, because there are two plans on the table, right? There is the Republican plan of $618 billion. And then there is President Joe Biden’s plan of $1.9 trillion. So let’s choose path A, the Republicans at $618 billion. What does that do to the output gap in mid-2021, when we’re all hoping things will be better?

Edelberg: So my estimate from some analysis I did with a colleague of mine, Louise Sheiner, is that it would just about close that output gap, it would get us a modest positive gap [above the sustainable level]. I do want to back up and say there is enormous uncertainty around these estimates, both what the economy would do and what that sustainable level is. But our estimate is that it would basically close the gap.

Ryssdal: Fair enough. And the uncertainty, of course, is because the virus is still in charge of this economy. So plan B now, the president’s plan, $1.9 trillion, three times as big as the Republican plan. Where does that get us?

Edelberg: Our estimate is that the economy would be about two and a half percent above its potential level, or its sustainable level, you know, around the end of 2021, the beginning of 2022.

Ryssdal: So look, $1.9 trillion is a whole lot of money. Why don’t we just take option A, which gets us, you know, close to where we would be anyway, and do that?

Edelberg: Well, this partly gets us back to the whole thing around uncertainty, that we’re not really sure both what we think the economy will do and what its sustainable level is. So the $1.9 trillion gives us a lot of insurance that we are not undershooting. But the other thing is that running the economy hot for a little while and getting the unemployment rate down and getting wages up — those are all positive things. The monetary policymakers have said that they would really welcome an increase in inflation over and above their target. So overshooting may well be just what the doctor ordered.

COVID-19 Economy FAQs

What’s the outlook for vaccine supply?

Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.

How has the pandemic changed scientific research?

Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

Read More

Collapse

News and information you need, from a source you trust.

In a world where it’s easier to find disinformation than real information, trustworthy journalism is critical to our democracy and our everyday lives. And you rely on Marketplace to be that objective, credible source, each and every day.

This vital work isn’t possible without you. Marketplace is sustained by our community of Investors—listeners, readers, and donors like you who believe that a free press is essential – and worth supporting.

Stand up for independent news—become a Marketplace Investor today with a donation in any amount.