Peering down the cliff-edge

Will the economic recovery survive the end of emergency stimulus?

Rich countries may soon find out if economic scars were avoided, or merely deferred



IN “GAME OF THRONES”, a fantasy drama, a duel takes place between Khal Drogo, a fearsome warrior, and a rival. 

Khal Drogo comes off unscathed from the brutal battle, suffering only a scratch to his chest. 

But the wound festers, gradually weakening the fighter. 

A few scenes later, Khal Drogo falls off his horse and eventually dies.

Many economists worry that economies in the rich world could face a similar fate.

The past 18 months of lockdowns have left surprisingly few economic scars. 

A brisk recovery is under way. But has the damage from covid-19 been avoided, or merely deferred? 

As government stimulus schemes put into place last year come to an end, the question may soon be answered.

When they first imposed lockdowns, governments in the rich world introduced a raft of measures to support firms and households, from doling out stimulus cheques and setting up furlough schemes to offering low-interest loans to businesses and announcing moratoriums on tax, interest and rent payments. 

Many of these are now coming to an end, or have done so already. 

In the euro area at least three-quarters of debt holidays have expired; in Germany an insolvency moratorium ended in April. 

In America half of states are abolishing a $300 weekly top-up to unemployment benefits in June and July; the rest follow in September. 

A federal moratorium on evictions ends on July 31st. 

Britain’s and Canada’s job-retention programmes end in the autumn.


Taken together, all these schemes have been remarkably successful in preventing much of the economic scarring usually seen after a recession. 

That is not to deny that many people have suffered deprivation; global extreme poverty, for instance, has risen sharply. 

Yet in the rich world overall family finances look surprisingly strong. 

Real disposable income per person rose by 3% in 2020 even as GDP tanked (see chart 1). 

Government spending on extra unemployment benefits and cash transfers, which came to 2.3% of rich countries’ GDP, undoubtedly helped. 

In America the poverty rate has risen only slightly from 10.7% in January 2020 to 11% in June this year, albeit with oscillations in-between.


Resilient household finances ensured robust demand for goods and services even in the depths of lockdown. 

That, plus a series of rescue measures, means that firms too look unscathed. 

In stark contrast to usual recessions, business bankruptcies did not soar but fell sharply in most rich countries last year (see chart 2).

The uncertainty now is how this picture will change once stimulus ends. 

In a recent report the Bank for International Settlements, a club for central bankers, identified a “wave of firms’ insolvencies” as a “big question-mark clouding the outlook”. 

There are three areas of concern: that reduced cash transfers cut household incomes and hit spending; that the end of job-protection schemes puts millions out of work; and that a host of deferred bills and debt repayments comes due, crimping spending or forcing bankruptcies.

Consider cash transfers first. 

Just as unemployment insurance is becoming stingier in America, Britain too is reducing its main welfare payment by £20 ($27) a week. 

Some people will surely reduce their outgoings as benefits are pared back.


Yet overall spending may not suffer much. 

Households in aggregate have saved far more than normal (see chart 3). 

Our analysis of OECD data puts the level of “excess” savings across the club of mostly rich countries at $3trn, worth a tenth of overall annual consumer spending. 

The big worry about consumers in 2021 is not that an already large cash pile is no longer being topped up, but that people choose not to spend their savings.

The second concern relates to job-protection schemes. 

Research by UBS, a bank, suggests that roughly 5% of employees in the four largest euro-area economies and Britain remain on these programmes. 

If they cannot find work once the schemes end, the average unemployment rate across the five countries will exceed the peak seen in the global financial crisis.

Whether or not this happens depends in part on how strong spending, and thus demand for labour, proves to be. 

In May the Bank of England expected joblessness in Britain to increase “only slightly” after furloughs end, in part because of a “stronger projection for output”. 

But the fate of unemployment also depends in part on how many people work in sectors that consumers no longer want to or cannot patronise.

Here Australia offers hope. 

Its job-retention scheme, which a year ago was supporting 3.5m people, ended in March. 

Since then the unemployment rate has dropped to its lowest in a decade. 

Nine out of ten people on the scheme have moved back into work. 

As in many rich countries the problem in Australia is not an abundance of labour but a shortage. 

The pandemic has created new demands and job vacancies, which are proving hard to fill.

The third concern is perhaps the most significant—and is also the hardest to judge. 

It relates to bills that are due but as yet unpaid, from taxes and interest to rents. 

These are extremely difficult to measure. 

Although companies rushed to borrow and issue debt early on in the pandemic, indebtedness has grown less rapidly since. 

But it is far from clear how company or national accounts treat bills that are overdue or deferred.

Game of loans

Debtors themselves may not know where they stand. 

Non-payment of rent by American businesses in 2020 “occurred privately and in a somewhat disorganised way”, according to a paper by Goldman Sachs, a bank, leaving “lingering disagreements about whether rents have been truly abated or merely deferred”. 

Estimates of the “back rent” owed by American households to their landlords vary by a factor of six.

In its financial-stability review the European Central Bank nods to the uncertainty, arguing that moratoriums on debt repayments “have likely masked some asset-quality risks”. 

The Bank of England’s financial-stability report notes that “businesses may face substantial repayments as VAT [valued-added tax] and rent deferrals begin to lapse.”

The scale of the problem may be manageable in aggregate. 

Take commercial rent in America. 

Estimates of unpaid rent vary, but a report by the city of San Francisco reckons that local businesses failed to pay up to $400m in the nine months to December. 

Scaling that up as an inevitably rough guide suggests missed rent of about $30bn in America as a whole—about 3% of annual commercial rents paid in a normal year.

So far the evidence suggests that bills are being largely repaid. 

In Britain over 80% of households taking out deferrals on mortgage payments have since returned to full repayments, suggesting many people may have made use of the scheme out of caution rather than need. 

In the eurozone loans emerging from moratoriums have performed only slightly worse than the rest of banks’ loan books thus far.

But as with so many things in the pandemic, the likeliest outcome is that withdrawing stimulus will hit people at the bottom hardest. 

Cutting welfare may push some people into poverty and in America, millions of renters could face eviction. 

The least productive firms might go bust. 

In 2020 governments were quick to introduce universal, generous stimulus schemes. 

The task now is to scale those back and enable creative destruction, while still protecting those in need.

America and the EU are stronger together

Fixing domestic weaknesses could be the basis of a new era of transatlantic co-operation

Rana Foroohar

© Matt Kenyon


The relationship between the EU and America these days puts me in mind of troubled celebrity couples on the red carpet — they smile for the camera, and act as though everything is fine, but in private, we all know, they are anything but content.

At the recent G7 summit, there were happy photo-ops and even some progress around trade conflicts, such as the Airbus-Boeing truce. 

But at bottom, Europeans remain deeply sceptical about whether the Biden administration is just a way station on route to another bout of toxic populism. 

Meanwhile, Americans are frustrated with Europeans for hedging their bets between a tighter transatlantic alliance or a closer relationship with China.

It doesn’t have to be this way. 

In fact, it must not be. 

If the EU really wants to protect liberal values in the age of surveillance capitalism, it needs America. 

And if the US truly wants to decouple from China economically in strategic areas such as semiconductors, green batteries and electric vehicles, it needs demand from more than just the domestic market. 

There is low hanging fruit to be plucked here. 

But it requires some real empathy and understanding on both sides.

First, Europeans shouldn’t mistake America’s new industrial strategy, outlined last week by the director of the president’s National Economic Council Brian Deese, for protectionism. 

It merely brings the US into line with what most other developed and many developing countries do as part of normal economic planning — making strategic investments in high-growth technologies and using the power of government procurement to support local workers and businesses.

Beyond that, the plan aims to create more domestic and global economic resilience, in part by creating more geographic redundancy in areas such as semiconductors, where 75 per cent of capacity is concentrated in China and East Asia, according to a recent BCG report. 

Nearly all of the world’s most advanced semiconductor making capacity — some 92 per cent — is located in Taiwan.

Does anyone actually think that’s a good idea given the geopolitics of the region? 

The Europeans certainly don’t, hence the EU’s “Digital Compass” plan to double their own share of chip output by 2030. 

The US Senate’s $52bn bill to boost domestic semiconductor production is a good complement to this. 

But the truth is that it will take a decade or more to rebuild America’s industrial base in chips, and even then, the US will need partners to create enough demand to make the economics of scale for an industry like semiconductors work.

Allies like Japan and South Korea, but also countries such as the Netherlands, could all play a crucial role in reconfigured semiconductor supply chains. 

Creating less concentration — both regionally and within specific companies — would be a good thing for global markets. 

In an ideal world, the US, EU and Asian allies would work together to create common industry standards so that incremental innovation and demand could spread across regions in areas like chips, green batteries, clean tech and AI.

Another way for the EU and the US to find agreement right now would be “to focus on common answers to existing challenges within their democracies”, rather than on China, where the Europeans don’t want to pick sides, says Renaud Lassus, minister counsellor for economic affairs at the French embassy in Washington, and author of The Revival of Democracy in America and the Better Angels of Your Nature, a Tocquevillian call for optimism about the future of the US.

Those challenges might include everything from Big Tech regulation to shared goals on climate change, perhaps even something as ambitious as putting a price on carbon. 

Despite opposition from some European countries, including Poland, it’s possible that by July, the EU could put out a draft proposal for a carbon adjustment mechanism. 

The US has an opportunity to respond in kind with a proposal of its own.

That’s a heavy lift for the administration; last week’s bipartisan infrastructure deal included little on clean energy. 

But it’s one that would fit the stated goal of putting climate at the centre of its own industrial strategy. 

It would also, by proxy, begin to address certain shared trade concerns about China. 

Chinese steel dumping, for example, would become impossible if there was a real price on carbon.

The Biden administration might use any upcoming “Summit for Democracy” that the White House convenes as a place to begin that work. 

Already, there is a virtuous circle of ideas sharing between the US and EU in areas such as digital privacy, with Europe’s General Data Protection Regulation (GDPR) inspiring even more aggressive Californian privacy laws that may one day be adopted nationally. 

Antitrust is another such area, where both sides have informed each other’s efforts to curb platform monopoly power.

One could imagine more co-operation on issues such as press freedom, the ways and means of creating a digital bill of rights, principles for how to regulate artificial intelligence and genomic research, and so on.

All this would go some way to creating a new basis for the transatlantic relationship, one focused more on fixing domestic weaknesses and bolstering regional strengths than on bashing China. 

Both sides have too much to lose by going it alone.

Jobs Are Hard to Fill, and Ideology Makes It Hard to Understand Why

There are millions of U.S. vacancies as the pandemic eases, but the reasons are more complicated than what those with a partisan agenda on the left or right claim

By Justin Lahart

One explanation for the worker shortage is the ongoing challenge of obtaining child care./ PHOTO: OCTAVIO JONES/REUTERS


Telling one story about why employers are struggling to hire workers doesn’t come close to explaining what is going on with the job market.

Economists expect Friday’s employment report to show that the economy added 706,000 jobs in June, a step up from May’s 559,000 and what would in normal times be a big number. 

These aren’t normal times, though. The U.S. is still 7.6 million jobs short of what it had before the Covid-19 pandemic struck, and earlier this year there were hopes that, as more Americans got vaccinated, the job market would be closing that gap far more quickly than it has.

The problem isn’t a dearth of jobs. 

As of the end of April there were 9.3 million job openings by the Labor Department’s count, and businesses all over are complaining about how hard it is to get workers. 

Some of the more popular explanations are that enhanced and extended jobless benefits have reduced recipients’ incentives to look for work and that ongoing difficulties obtaining child care have dissuaded many women in particular from returning to work.


Arguments blaming one or the other fall along predictable ideological lines, but there is evidence that both are weighing on the job market. 

More than one thing can be true about the job market at once, and, considering the unusual set of circumstances the pandemic brought about, other factors could be contributing to hiring difficulties too.

A recent survey conducted by the job-search site Indeed found that, among unemployed job seekers who said they weren’t urgently looking for work, the biggest hurdle was continued worries about Covid-19. 

In addition to care responsibilities and unemployment benefits, they cited spousal employment and having financial cushions as reasons for their lack of urgency.

There are other factors that could be at play, said the Harvard University economist Lawrence Katz. 

One is that many employers might want things to go back to the way they were before the pandemic, while many workers might have something else in mind.

“It’s a mismatch of expectations and aspirations,” he said.

The pandemic was traumatic for some people, and they might need time to process things before going on the job hunt, while for others it was simply exhausting and if they are able they might want to enjoy the summer before looking for work. 

Moreover, just knowing that there are a lot of job openings out there could dissuade some people from searching too hard—the easy pickings seem likely to continue.

There also could be geographical mismatches between the places where businesses are hiring and places where the unemployed used to work. 

Some of these could even occur not just across state lines but within a metropolitan area. 

With many offices still closed, restaurants in business districts are suffering, for example, while those near more-residential areas are booming as people make up for lost meals. 

Reallocating downtown restaurant workers into those new jobs could take time.

There might be limits on how fast employers can hire, and these could be aggravated by the high level of people quitting their jobs for other opportunities lately. 

It is one thing to fill three open positions in a month and another to fill those plus the positions of three more employees who just gave notice. 

There could also be measurement issues since the pandemic threw a wrench into typical hiring patterns. 

Some economists think Friday’s report could be strong, for example, since the end-of-school-year declines in education employment could be smaller than usual.

The good news is that a lot of things that could be behind hiring strains should ease up in the months ahead. 

Most schools will be back to in-person learning this fall, which could alleviate child-care issues, while the expiration of enhanced unemployment benefits will end in September, and the summer vacation season will be over. 

When it came to things that would prompt them to step up their job search efforts, respondents to the Indeed survey ranked increased vaccinations highly.

But that might not solve everybody’s hiring problems.

The pandemic changed a lot of things about the job market. 

While it is fine to expect things to return to normal eventually, we still don’t know what normal is.

America’s False Imbalance Syndrome

US media often report that a particular policy is generally considered bad or unpopular, when in reality it seeks to achieve a reasonable trade-off between competing forces or goals. There have been three recent examples of this practice that highlight the problem.

Jeffrey Frankel


CAMBRIDGE – One obstacle to productive public debate in the United States is the media’s tendency to engage in “false imbalance” when reporting on economic policies. 

No, I don’t mean “false balance.” 

False imbalance refers instead to the temptation to disparage policies that are in fact reasonable attempts to balance competing objectives. 

We have recently seen examples of this in US health-care reform, as well as fiscal and monetary policy.

The problem of false balance is well known. 

For example, media reports on climate sometimes give the impression that skeptics who question the scientific case for anthropogenic climate change warrant comparable weight to experts who say global warming is a genuine problem that needs to be addressed. 

The net effect is to give a false impression of where the overwhelming preponderance of scientific evidence lies.

False imbalance, by contrast, is not a familiar concept – but it should be. 

It describes reporting that suggests that a particular policy is generally considered bad or unpopular, when in reality it appropriately seeks to reconcile rival forces or goals. 

Typically, news coverage misleadingly lumps together critics coming from different directions, leaving audiences with the impression that most people hate the policy.

A prime example of false imbalance arose in reporting on the 2010 Affordable Care Act (ACA, or “Obamacare”). 

In the years after the ACA was passed, many journalists, citing opinion polls, reported that a majority of Americans opposed it. 

But their reports tended to combine respondents who thought Obamacare went too far and gave government too big a role in people’s lives with respondents who believed the ACA should have extended health insurance coverage further than it did.

For example, the media reported that 62% of respondents in a 2013 CNN poll opposed the ACA. 

But that included 15% of Americans – 24% of the 62% classified as opposed – who thought the law did not go far enough.

After Donald Trump was elected president, the percentage of Americans who wanted to extend the ACA rose sharply, and the share favoring its repeal declined. 

In a November 2017 Kaiser poll, for example, 62% of respondents favored a “Medicare for All” single-payer system.

Most of the time, the best economic policies lie somewhere in the middle of a public-private spectrum. 

Relatively few Americans want all health care to be administered by a government agency like the United Kingdom’s National Health Service. 

But probably even fewer are so obsessed with individual responsibility that they want to prohibit ambulance drivers from picking up an accident victim lying on the side of a highway until they have established whether he or she has health insurance. 

The key is to find the right balance.

And Americans have come to support a balanced health-care policy. 

They recognize that Republicans failed for ten years to propose a viable alternative with which to replace Obamacare.

At the same time, more voters have become aware that “Medicare for All” would take away people’s existing private health insurance.

By March 2020, a whopping 73% of voters had come to favor a sensible way of further increasing the number of Americans with health-insurance coverage: allowing them to participate in a public option. 

Barack Obama himself wanted this feature as part of the ACA, but judged it politically unviable, and Joe Biden supported it in his 2020 presidential campaign. 

The media’s earlier false imbalance did not help the public deliberative process.

Biden’s fiscal policy represents another balance between extremes. 

His $1.9 trillion American Rescue Plan, enacted in March, included large increases in social spending for priorities such as fighting COVID-19 and providing relief for affected workers. 

And he is currently seeking congressional approval for a major infrastructure spending package.

Traditional fiscal conservatives regard these as excessive expenditures. 

But Biden has consistently opposed some left-wing Democrats’ unaffordable proposals, such as forgiving all student debt or introducing a universal basic income. 

And opinion polls suggest that his fiscal stance is popular.

To help pay for the increased spending, Biden proposes to collect more of the taxes owed to the federal government under current law, and to increase taxes substantially on Americans earning more than $400,000 a year and those with billion-dollar estates. 

But he has avoided less practical proposals such as an annual wealth tax. 

Although tax increases seldom poll well in isolation, Biden’s combined package of infrastructure spending and tax proposals strikes an intelligent balance.

Then there is the case of monetary policy. 

Like most central banks, the US Federal Reserve has long sought to strike a Goldilocks balance between excessively loose monetary policy, which could fuel inflation, and too much tightening, which threatens to slow growth and increase unemployment.

Over the last decade or so, some have accused the Fed and other central banks of making inequality worse. 

But a careful reading of reports reveals that the critics follow two opposing lines of logic. 

Some argue that easy money exacerbates inequality because low interest rates and quantitative easing help to push up prices of stocks and other assets, largely benefiting the rich.

But others think that monetary easing reduces inequality, and complain that central banks have often worsened income disparities by tightening policy earlier than necessary. 

On this view, a “high-pressure economy” brings into employment not only the conventionally unemployed, but also people on the margins of the labor force – including the long-term unemployed, minorities, and the disabled, as well as those who have a criminal record or lack a persuasive employment history. 

Also, inflation is clearly good for debtors, who tend to have lower incomes on average than creditors.

These hypothesized effects, though they run in opposite directions, are both genuine. 

For most countries, it is not clear which effect dominates. 

To accuse a central bank of exacerbating inequality without recognizing this tension is to fall prey to false imbalance.

These three examples are revealing, but they are hardly exhaustive.

False imbalance is everywhere. 

It’s time we recognize it for what it is.


Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research.