Three Ways the American Rescue Plan Changed Economic Policymaking
July 14, 2022
By Mike Konczal
Thank you for having me here to discuss the American Rescue Plan (ARP). While we’re discussing how the ARP’s initiatives created a stronger, more equitable recovery, it’s also worth reflecting on the difference it made in how we approach policy itself. If we were at a Washington, DC, economic policy conference like this in the mid-2010s, after the Great Recession but before the pandemic, people on a panel might have been saying one or more of the following three things:
First, recessions are going to be longer and costlier going forward, and it will be difficult to change this; second, our labor market has lost its energy—its dynamism—because of both cultural and long-term structural forces; and third, economic problems like poverty can’t simply be solved by straightforward action like giving people money.
I should clarify: I wouldn’t have been saying any of this. But these three ideas would have been the conventional wisdom of the period. However, over the last 18 months, this entire conventional wisdom was overturned by the success of the American Rescue Plan. All of these deeply inequitable ideas that people thought were entrenched features of our economy were disproven by doing policy better and with equity as a focus. It’s all a remarkable achievement, and worth going into detail.
The first idea that the ARP disproved is that recessions we face would be longer and more difficult to solve. The reasons for this varied; whether it was the aging of the population, inequality and concentration, or global savings, there were forces creating “secular stagnation,” driving down interest rates, and making recessions worse and self-sustaining, which would prevent us from being able to achieve full employment.
Yet, the most recent recovery has shown we are more than capable of fighting recessions. Gross Domestic Product has nearly returned to its pre-crisis trend, and another similar measure, Gross Domestic Income, has already surpassed it. This never happened after the Great Recession: That recovery was just as much driven by the lowering of our potential than any actual recovery to trends we had been on before that crisis.
It’s not just statistics, though; you see this difference everywhere. During the Great Recession, headlines were dominated by stories about fast food restaurants requiring noncompete agreements for their entry level staff; now, we see stories about hiring bonuses. Instead of lamenting how difficult it is to graduate into a recession, we see young people with more job opportunities than they’ve had in generations.
A Dynamic Labor Market
The second myth was that the American economy simply couldn’t sustain a dynamic labor market anymore. It’s funny if you follow this now, when commentary is fretting about high levels of job quits, but a central problem of the previous decade was whether it was even possible to get people to quit to switch jobs.
By way of example, a 2013 Wall Street Journal article, “Risk-Averse Culture Infects US Workers and Entrepreneurs,” was correctly worried that, “Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.” But the article said this was due to “broader, more permanent shifts” in markets and culture that would be difficult to overcome.
Or take a 2016 article from the New York Times, “Fewer Americans Strike Out for New Jobs, Crimping the Recovery,” that said, correctly, “economists have become increasingly worried that a slide in job turnover and relocation rates is undermining the economy’s dynamism, damping productivity and wages while making it more difficult for sidelined workers to find their way back into the labor force.”
This had a real impact, especially on equity—most wage increases come from job switching, and job switching opens up ladders for Black and brown workers, women, and others kept at the margins of the labor market by unemployment. And those metrics, already low in the 21st century, collapsed during the Great Recession.
However, the success of the ARP showed that you can, in fact, solve this problem. Job-to-job transitions are at all-time highs, a Great Upgrade for workers and their skills; new business formations are happening at a remarkable clip; and workers are getting better bargaining power. 2021 saw a record number of new business starts, and studies have found these businesses were disproportionately started by Black, Latino, and Asian entrepreneurs.
Finally, during the 2010s, even as the social and medical sciences documented the long-term, deeply inequitable costs of childhood poverty, there was still a fundamental caution in the political conversation. There existed a hesitation to just address the problem by simply giving people money or otherwise directly tackling social ills.
Though the long-term status of income support to families with children is in question, an important barrier has been breached, and the conversation will advance from that new starting place. It is clear that giving families direct support works. Advanced, fully refundable child tax credit payments lifted 2 million Black and Latino children out of poverty in 2021, leading to the lowest child poverty rate on record.
This new precedent established by the ARP will, in turn, create new ideas. After a decade of expanding demand-side policies, we’re already seeing a new emphasis on production and expanding out the supply-side of our economy, one addressing the challenges we’ve faced during the reopenings of the past year.
But it’s worth remembering the damages created by the old economic narrative. Hidden in that old conventional wisdom was a deep inequity—the assumption that Black unemployment could never go below 10 percent, that those at the margins of the labor force wouldn’t be able to find work, and that we couldn’t directly solve problems that have always been with us, like the poverty created by a market economy. Now, we see how, even for the deeper and more entrenched inequities we face, good policy can begin to make a difference. This is momentum worth building on.