Charles Dickens wrote in the famous opening line of "A Tale of Two Cities": "It was the best of times, it was the worst of times." In looking back at 2020, a comparison certainly applies.
The U.S. started 2020 with low inflation, low interest rates, low unemployment, and good economic growth. By April, we were headed for a second Great Depression as a result of the covid lockdown. In the second quarter of the year, the economy contracted at a 31.4 percent annual rate. We were in real trouble.
The government-prescribed lockdowns grabbed trillions of dollars of economic activity out of the economy. It was then up to the government to put trillions back in. This came in the form of the $2.2 trillion CARES Act. This act included direct payments, extra unemployment benefits, direct help for businesses, billions for states, schools and universities, and airports. This infusion of cash helped turn the economic decline into a 33.4 percent economic expansion in the third quarter.
The Department of the Treasury and the Federal Reserve System did what they needed to do: provide plenty of cash and credit to the reeling economy. The result was a recovery as quick as the decline, and a fourth-quarter GDP that grew at a 4 percent rate. By the end of 2020, most of the economic loss had been recovered.
"Recession insurance" came in the form of a last-minute $900 billion stimulus package signed by the president in December 2020. This stimulus was similar to but smaller than the package passed in March. By itself, it should prove adequate to keep the economy growing during 2021 and to prevent any hint of a double-dip recession. This package included direct payments, extra unemployment benefits, more help for business, and extra billions for the national vaccine effort.
The new administration has now proposed a $1.9 trillion additional stimulus package, and it appears it may have the ability to get it passed. However, at this point it would likely "over-stimulate" an economy that is just now absorbing the December stimulus package and is growing at a reasonable rate. At the current rate, the U.S. is already projected to recover to pre-pandemic GDP this year.
The stimulus plan includes $1,400 direct payments, a $400 instead of $300 per week unemployment supplement, and $350 billion to state and local governments. If we dump another $1.9 trillion on top of an already growing economy, we may hasten the return of inflation and reduce the length of the new expansion. This is not to mention the increase in debt that this magnitude of spending will require.
May I suggest an alternative idea? Turn the stimulus proposal into an infrastructure program. Such a program is much needed and would spread the fiscal impact over a number of years, thereby reducing the inflation threat. It is worth remembering that the Eisenhower interstate initiative still benefits the U.S. economy today.
Just what got us into this economic calamity in the first place? Shutdowns! We started with a 15-day national shutdown, and here we are today with some states and cities still largely closed. We must completely open and get our children and grandchildren back in school.
Here in Arkansas, Gov. Asa Hutchinson asked us to use common-sense precautions but otherwise allowed the Arkansas economy and our schools to continue to operate. Result: Our unemployment rate of 4.2 percent is significantly below the national average and nearing the pre-pandemic level of 3.5 percent. In addition, the state is running a $421.8 million year-to-date surplus. This makes Arkansas a great example of how to handle a pandemic such as covid-19.
By the end of March, well over 100 million Americans will have been vaccinated. Some medical experts project that as many as 75 million may have already had the virus. Added to these totals are over 110 million Americans under the age of 24 who are in little danger. I know there is some double-counting, but there is no question that the number of citizens in real danger from the virus is shrinking rapidly.
Economists love numbers, and these numbers present a very positive picture. It is past time to get the nation open and keep it open. We cannot afford to do this again; it could break even the big bank in Washington.
We must continue to use precautions, ensure everyone over 65 or with pre-existing conditions is vaccinated, and put the economy back in high gear. If the rest of the nation needs a good example of how to handle a pandemic, look to Arkansas.
David F. Rankin, Ph.D., CFA, is an economist, educator, and president emeritus at Southern Arkansas University.