The U.S. economy appears to be improving, but the pandemic will have a lasting macroeconomic impact, according to an expert from Rice's Baker Institute for Public Policy.
Policymakers can prepare for the “impending macroeconomic shortfalls” by improving education, prioritizing immigration and resolving the national debt, said Jorge Barro, fellow in public finance at the Baker Institute, in a policy brief.
In the years leading up to the pandemic, the macroeconomic effects of declining birth rates were dampened by immigration and sustained growth in educational attainment. But setbacks in each of these sectors as well as a surge in government debt indicate Americans will feel the economic impact of the pandemic long after it ends, Barro argues.
He explains that macroeconomists consider both short-term cycles and long-term trends.
“In discussions of the economy, these short-term fluctuations are generally called business cycles, and they are usually characterized by sudden changes in the unemployment rate and gross domestic output (GDP). These fluctuations can be caused by disruptions in the economy — such as oil price swings, terrorist attacks and pandemics — or they can even be caused by changes in business sentiment or consumer confidence,” Barro wrote.
“Although (Treasury) Secretary (Janet) Yellen likely described the economic scars of the pandemic in reference to the possibility of a prolonged business cycle recovery, the early evidence points to much deeper disruptions in the fabric of the U.S. economy,” he continued.
Steadily declining fertility rates over decades combined with an increasing life expectancy for Americans has resulted in a low population growth and an aging population. A corresponding decline in labor force growth has contributed — and will continue contributing — to slowing economic growth, Barro explains.
Historically, immigration has helped the population growth rate. According to Barro, the U.S. Census Bureau’s 2017 population projections, its most recent, highlight the “precarious demographic outlook.”
“The results show an extensive dependence on immigration; without it, the U.S. population will decline in the coming decades,” he wrote.
The economy will be affected by remote learning as well, Barro argues. With nearly all forms of schooling moving online at the start of the pandemic, the decline in access to education has set students back — which could reduce their future earnings by as much as 3% on average.
“Estimates suggest that countries that reopened schools in the fall of 2020 could experience as much as 1.5% lower annual GDP for the remainder of this century, resulting from the shock to educational attainment,” Barro wrote. “At a time when many economists look to improvements in educational attainment as a mechanism for resurgent economic growth and declining economic inequality, the outlook dampened with the disruption to the education system.”
Before the pandemic, federal debt as a share of the economy was projected to eclipse its historic peak of 106% in 2033. A Congressional Budget Office update in 2020 projected pandemic-related spending would cause the debt to reach that peak a full decade sooner, Barro explains.
“Although growing debt may not cause near-term harm to the economy, the risk of adverse macroeconomic outcomes will increase over time,” he wrote.
There are some reasons to remain hopeful about the future, he argues.
“Social distancing standards accelerated a transition to remote work, which could ultimately lead to improvements in productivity and employment opportunities. Remote work also reduced the reliance on residency in densely populated areas, resulting in migration to suburban and rural areas,” Barro wrote. He added that lower cost of living in more sparsely populated areas "improves the financial and logistical feasibility of having larger families, which could improve demographic imbalances.”
However, policymakers should not count on such factors to resolve the fiscal and macroeconomic issues, he said.