Since 2020, the United States has powered through a once-in-a-century pandemic, the highest inflation in 40 years and fallout from two foreign wars. Now, after posting faster annual growth last year than in 2022, the U.S. economy is quashing fears of a new recession while offering lessons for future crisis-fighting.
“The U.S. has really come out of this into a place of strength and is moving forward like covid never happened,” said Claudia Sahm, a former Federal Reserve economist who now runs an eponymous consulting firm. “We earned this; it wasn’t just a fluke.”
On Friday, President Biden hailed fresh government data showing that annual inflation over the second half of 2023 fell back to the Federal Reserve’s 2 percent target. Coupled with Thursday’s news that the economy grew by 3.1 percent over the past 12 months, the Commerce Department report showed that the United States appears to have achieved an economic soft landing.
The post-pandemic recovery challenged long-standing economic beliefs, such as the idea of an inverse relationship between unemployment and inflation. (As one rose, the other was expected to fall.) Expressed in what economists call the Phillips curve, this nostrum proved nearly useless in explaining the economy’s recent behavior.
Washington’s success in reviving the economy also suggests a new approach to future downturns, one that relies more on the government’s power of the purse and less on the Federal Reserve’s control of the cost of credit.
“Putting money in people’s hands vs. moving around interest rates, which is monetary policy, fiscal policy is going to be stronger,” Sahm said. “We cannot go into the next crisis being, like, ‘Oh, the Fed’s got this.’”
Consumer spending is driving the economy: Real consumption rose by 0.5 percent in December, its fastest pace since last January. Pending home sales jumped, too. Following the flurry of good news, JPMorgan Chase economists said they raised their first-quarter growth forecast.
IBM, Visa and General Electric last week each reported earnings that topped analysts’ expectations, another sign of the economy’s continued health.
The $28 trillion U.S. economy weathered multiple shocks over the past year and returned to the growth path it was on before the pandemic. The size of the economy, adjusted for inflation, regained its pre-pandemic peak in early 2021. Through the end of September, it was more than 7 percent larger than before the pandemic. That was more than twice Japan’s gain and far better than Germany’s anemic 0.3 percent increase, according to British Parliament data.
For most Americans, the growth paid off in the form of higher wages. Over the four years through September, the most recent comparison available, U.S. wages — after inflation — grew 2.8 percent.
Most other countries in the Group of Seven industrial democracies saw a decline, according to Treasury Department data. Italian wages sank by more than 9 percent over that period, while German workers earned 7.2 percent less than they had before the pandemic.
“The U.S. has seen a particularly strong GDP recovery and inflation has cooled sooner and more quickly than in other large, advanced economies. And the increase in real wages is unique to our country’s recovery,” Treasury Secretary Janet L. Yellen said in a Chicago speech last week.
The origins of this doom-defying performance can be traced to lawmakers’ swift response to the coronavirus pandemic in March 2020. Before the month had ended, Congress approved more than $2 trillion in help for the economy as businesses closed and 17 million Americans lost their jobs.
That was just the start of Washington’s spare-no-expense response to the worst economic crisis since the Great Depression. Congress eventually approved roughly $6 trillion to save the economy from the pandemic; Presidents Donald Trump and Biden both took administrative actions, such as a pause of student loan payments, that added another $875 billion to the rescue tab, according to the Committee for a Responsible Federal Budget.
The Fed helped by cutting borrowing costs for consumers and businesses and by buying trillions of dollars’ worth of government and mortgage-backed securities to goose the economy.
But the principal force behind today’s robust economy lies in fiscal policy, the use of government spending and taxation to boost growth. Under two presidents — one Republican and one Democrat — lawmakers opted to bathe the economy in cash to ward off the coronavirus.
All of that government spending — the stimulus checks, the loans to small businesses and the expanded unemployment benefits — added up to an astonishing 25.5 percent of gross domestic product, according to the International Monetary Fund.
Major European and Asian nations spent significantly less. In Germany, the government devoted 15.3 percent of GDP to battling the pandemic. France spent 9.6 percent and Italy 10.9 percent. Even Britain, which comes closest to American economic views, lagged far behind the United States with 19.3 percent of GDP.
“The scale of fiscal support for the U.S. economy was an order of magnitude greater than in Europe,” said Neil Shearing, chief economist for Capital Economics in London.
To be sure, the American response to the crisis was not without blemishes. Determined to avoid the policy failures that led to the anemic recovery after the 2008 financial crisis, Biden may have overcompensated.
The final burst of coronavirus relief, the $1.9 trillion American Rescue Plan in early 2021, while boosting growth, is widely regarded as having contributed to the surge in prices that lifted inflation to a 40-year high of 9.1 percent.
The rescue plan included $1,400 stimulus checks for most Americans, enhanced unemployment benefits, and aid to state and local governments. Coming on top of a separate $900 billion program in December 2020, the American Rescue Plan was responsible for two to four percentage points of the inflationary surge, according to several studies by economists.
Emergency help for the battered economy also pushed the national debt to a new high of $34 trillion, or more than 120 percent of annual economic output, aggravating a long-term threat to the nation’s prosperity, some economists say.
As the pandemic eased, Biden secured other legislative wins on infrastructure, semiconductor industry subsidies and clean energy projects. These were not designed as stimulus programs, but by sending additional rivers of money into the economy, they had that effect, according to Dean Baker, an economist with the Center for Economic and Policy Research.
“These began to kick in last year as the effect of the initial stimulus was waning. I realize this was largely luck, but it was incredibly good timing,” he said.
The United States benefited from free-spending, fast-moving policy. But Europe suffered from being closer to the front lines of Russia’s war on Ukraine. Before the conflict erupted in February 2022, countries such as Germany depended on Russia for much of their natural gas needs. The war caused a huge spike in prices for food, fuel and fertilizer, causing inflation in the euro area to rocket.
Europe’s response to the economic crisis generally required businesses that received government help to keep their workers on the payroll. Whereas Americans were laid off, but then aided by unemployment and stimulus checks, Europeans were kept on the job.
That spared them the uncertainty of labor market limbo but often locked them into jobs that were not needed in the post-pandemic world.
For years after the 2008 crisis, President Barack Obama — under pressure from a Republican Congress — accepted a need to reduce federal spending. That left the Fed to fight economic weakness on its own. Next time, thanks to the pandemic experience, the nation’s eyes may turn to Capitol Hill.
One lesson from the pandemic recovery is the power of the government’s ability to tax and spend, economists said. Congressional actions can affect the economy faster than the lagged impact of a change in borrowing costs and are more certain than the results of other, less conventional Fed policies designed to spur growth.
“Government, through fiscal policy, really can affect the speed of recovering from a downturn,” said former Fed economist Michael Strain, now with the American Enterprise Institute. “Now, there are a million caveats to that.”
Every dip in the economy does not require massive government intervention, and whatever programs are implemented should be well-designed and carefully policed. In the rush to release covid aid, for example, the Small Business Administration disbursed more than $200 billion in potentially fraudulent business loans and related assistance, the agency’s inspector general reported last year.
That is more than the Transportation Department’s annual budget.
Some economists see more than government policy behind the U.S. recovery. As the pandemic made millions of Americans jobless almost overnight in the spring of 2020, many responded by launching new business ventures.
That trend has continued for four years. In December, 457,316 applications for tax identification numbers were lodged with the Internal Revenue Service, compared with 314,337 in December 2019.
“I think we’re seeing something about the American spirit and the kind of economic dynamism that — for whatever reason — doesn’t exist in other high-income countries to the extent that it exists here,” Strain said. “One of the most interesting things happening in the economy right now, and over the last few years, is the big boom in entrepreneurship.”