Dispatches from the Potomac#41 | The Unpredictable Side Effects of Powerful Governmental Medicine:
Considering the Impacts of U.S. COVID-19 Policy

This is a translation of an article originally written in May 2022 for publication in the July 2022 edition of the Marubeni Group Magazine, M-SPIRIT.

Washington D.C. Office General Manager, Marubeni America Corporation    Yoichi Mineo

It is rare to walk the streets of Washington, D.C. today and see anyone wearing a mask. Even most restaurants and retailers have dropped their mask requirements. Thanks to COVID-19 vaccines, the number of COVID patients who become severely ill has decreased, and some decide not to get tested even if they have some symptoms after close contact with a positive case. The American public’s waning interest in COVID-related topics seems inversely related to what has captured their attention instead—ever-rising prices. This is significantly related to the policies adopted by the U.S. government in response to the pandemic, which I would like to consider here.

Shoring Up the Economy with a 6 Trillion-Dollar Price Tag

Let’s start with an overview of U.S. government COVID-19 policies. Though I am calling them “COVID-19 policies,” these policies did not include much in the way of directly addressing the illness itself, such as vaccine development or testing infrastructure, but rather were centered on shoring up the parts of the economy negatively affected by the pandemic. The U.S. government moved quickly to mitigate these economic effects, enacting the first pandemic relief bill (worth USD2.2 trillion) in March 2020, just as the initial outbreak was in full swing. The effect of this bill was so great that the recession caused by the pandemic ended after only two months, the shortest turnaround on record. The government continued its stimulus efforts to shore up the economy throughout the pandemic for a total government investment of USD6 trillion.

These stimulus packages included aid for both businesses and households. Businesses were granted loans with repayment forgiveness conditions. Thanks to this, large-scale corporate bankruptcies and the potential resulting financial contractions did not occur as they typically do during financial crises. The federal government’s other financial stabilization measures were also successful, and the financial market turmoil caused by the pandemic was resolved in an extremely short period of time. Households were also given substantial support in the form of COVID-19 stimulus payments, increased unemployment insurance payouts, suspended student loan payments, rent subsidies, child allowances, and more. As a result, many household incomes, including their amount of cash on hand, increased even in the midst of the pandemic. Large amounts of income acquired from sources other than wages went to consumer spending, which helped retailers hit by lockdowns recover.

This collection of policies succeeded in containing the COVID-induced recession in a short period of time, but there was one problem. That is, these policies helped businesses and households in entirely separate ways, which resulted in the connection between these two groups—jobs—not being retained. The government granted loans with repayment exemption conditions to businesses with the intent of enabling those business to retain employees. However, businesses began laying off their employees earlier than the loans were granted, and when all was said and done, 20 million people had lost their jobs. Meanwhile, households were exposed to a wave of unemployment, but even as the economy recovered and job openings returned with the help of generous government subsidies and increased liquidity on hand, many were reluctant to return to work. Furthermore, as asset values swelled due to excess liquidity, more people retired early and the workforce itself fell into a decline.

20 Million Job Losses Lead to Rising Prices

While 20 million people lost their jobs, these losses were not evenly distributed across the economy. Most were concentrated in the retail, food and beverage, and entertainment industries. Outside of these industries, many high-income and white-collar workers were not laid off, nor did their income decrease. Between this and reduced commuting costs, these workers had some extra money to spend. This spending money initially went toward goods and then, with the increased availability of COVID-19 vaccines, gradually shifted to services. As demand strengthened, manufacturing businesses as well as businesses that provided goods and services found it difficult to secure human capital to employ, which reduced their capacity to create supply. In the end, supply could not keep up with demand, and prices began to rise.

For the first few months of the pandemic, the shelves at smaller retailers were practically empty. Even two years on, though completely empty shelves are no longer a common sight, there are still cases where a particular product is missing, or even if it’s there, only in extremely small quantities. No one has forgotten the scenes of empty shelves from two years ago. If only a few of a certain item are left in a store, shoppers will buy all of them, even if the item’s price has gone up, for fear of not knowing when the next shipment will come in. This makes the shelves look even emptier, which in turn makes people even more fearful, which then prompts people to shop more even with price gouging. This cycle contributes to further inflation.

In response to this situation, the federal government has begun tightening monetary policy in earnest. But some of the existing economic stimulus measures, including those that are still available to businesses and the public, could reduce the effectiveness of doing so. Elements of tightening monetary policy could include resuming the currently suspended student loan payments or raising taxes, but it is not clear whether the government will be able to implement such policies, which would be unpopular with voters, before the midterm elections. To compensate for labor shortages, the government could also consider increasing immigration. The immediate effects of this, however, remain questionable, not to mention the risks involved in raising another hot-button issue right before election time. Given these factors, it is difficult to envision a successful path toward resolving the inflation issue anytime soon.

The U.S. has already weathered one crisis of earth-shattering proportions, the COVID-19 pandemic. The government introduced robust policies to contain the resulting recession, essentially dispensing an incredibly powerful medicine to the American economy. But, as with any medicine powerful enough to contain a crisis of this magnitude, these policies produced side effects that Americans are feeling now. The current tide of inflation will eventually subside, but how we will get there is still unknown—after all, this sort of medicine has never been used before, and how long its side effects will last remains a mystery.