The tectonic shifts in the American labor market continued during the week ending March 28 as first-time jobless claims increased by a record 6.64 million, which implies a real-time unemployment rate of 10.1% at a minimum.
Over the past two weeks, the pace of firings in the economy has surged as the impact of the coronavirus has deepened. Anecdotal evidence from around the country of difficulties in processing the volume of claims and their overall surge strongly suggest that policymakers and investors should anticipate a period of elevated claims over the next two months.
The aftershocks that follow any tectonic shift can be as deadly as the original earthquakes. State and local budgets absorbing the shock waves that will follow are the exact targets policymakers should focus on during the next round of fiscal and monetary triage.
It is imperative that any “Phase 4” fiscal aid package target the holes that are being blown in state and local budgets, in addition to Federal Reserve purchases of state and municipal debt.
Arguments in favor of austerity programs or cries of “moral hazard” are out of time and out of luck. Austerity is exactly the wrong policy at the wrong time and will intensify the increase in first-time claims and unemployment as the shock to the real economy spills over into the public sector.
Holding the line on public employment is vital. Automatic stabilizers are necessary but not sufficient in this most unusual of crises. Medical and educational employment are a critical component of mitigating the impact of the disease, but will be even more so in the aftermath of the first wave and in preparations for any possible second wave.
Moreover, in the 20 major metropolitan areas of the country, outlays on “meds and eds” provide an important countercyclical fiscal buffer in offsetting private sector spending declines, which are clearly decreasing.
Proposals to engage in 20% across-the-board public spending cuts at the state level is simply a policy non-starter at this time. Those kinds of cuts will only create the conditions for a deeper crisis with a greater duration than would have been the case otherwise.
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