New York – In the days before GPS was commercially available, I decided to hike Mount Jackson in New Hampshire. The guidebook said Tisdale Spring was close to the summit, so when I passed a small spring after a couple hours, I thought the hard part was almost over. After a while of heightened expectation, however, I passed another spring — and that process repeated itself several times before I reached the real Tisdale Spring and thereafter the summit.
The U.S. employment report released Friday, initially heralded as the end of the COVID-19 challenge, seems much more likely to be the economic equivalent of that first, misleading spring on Mount Jackson.
Yes, it was good news that the number employed rose by 2.5 million in May, after a decline of 22 million from January to April. But three factors suggest the economy remains fragile and in need of further government stimulus:
The job gains were concentrated in just eight sectors: restaurants, dentists, clothing stores, general merchandise stores, specialty contractors, auto dealers, personal and laundry services, and repair and maintenance services. In the other 85 percent of the economy, employment did not rise. The job gains appear to largely reflect simple reopening rather than any significant underlying economic strength. Whether these and other sectors add new jobs will depend on consumer demand, which will return to full strength only when the public health crisis subsides.
Much of the federal government’s massive support for the economy will soon expire. The Congressional Budget Office estimates that more than three-quarters of the fiscal impact of the CARES Act will occur before September. It would be foolish to celebrate positive jobs numbers without recognizing how much the colossal stimulus measures have blunted the effects of the economic crisis. It is likewise important to be cautious about what can happen if fiscal support is withdrawn.
As I have warned before, without continued support, the U.S. risks a wave of cascading bankruptcies. The first test will come at the end of July, when expanded unemployment benefits, now supporting many families, are scheduled to expire. These benefits should be lowered so that they don’t discourage people from returning to work, but they should without question be extended.
The first two points interact with each another and lead to a third: Beware of "zombie firms.” If job gains largely reflect a one-time reopening effect and occur only in the context of temporary fiscal support, then it’s crucial that we not just make the wound look better but also address the underlying infection. Propping up companies and jobs that have no viable future quickly becomes unsustainable.
A key question is: How much might the pandemic cause lasting changes in the economy? If there are permanent shifts, as some academic studies suggest there will be, then any future government fiscal support will need to take this into account, so that it can focus less on preserving the past and more on investing in the future. There are plenty of opportunities to do so, from stockpiling of key goods to hardening infrastructure, building out 5G networks and updating the U.S. military to better prepare it for future threats.
The key characteristic of this alternative approach is not its fiscal impact: Trillions of federal dollars would be spent either way. The challenge is to help position the economy for a brighter future, even at the cost of some dislocation as jobs shift. My bet: By the end of the summer, we will see that without enormous additional fiscal stimulus (whether or not it’s focused on building the future) or getting lucky on the virus (either because it mutates into a less potent form or because effective drugs become available sooner than anticipated), we still face a very long ordeal ahead.
Peter R. Orszag is a Bloomberg Opinion columnist and the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
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