Rosengren: Stimulus failure likely means chronic unemployment
Photo | Grant Welker
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The federal government's failure to approve another stimulus bill endangers economic recovery from the pandemic-inflicted recession, the head of the Federal Reserve Bank of Boston cautioned on Thursday, echoing a similar warning the Fed's top leader made days earlier.
In a virtual speech hosted by Marquette University, Boston Fed President and CEO Eric Rosengren described another round of emergency COVID-19 aid as "sorely needed" and said its absence could contribute to a "grinding recovery" from the national economic downturn.
Without more fiscal intervention by the federal government, Rosengren said, more job losses may become permanent and laid-off workers could increasingly struggle to find new positions.
"One of the reasons why it's so important to get the fiscal stimulus is because the longer this goes on, the more likely it becomes more permanent, the more likely it is that we find difficulty actually getting many of those people back into the labor market," Rosengren said. "The reason to do a lot of stimulus now is to avoid the outcome of more of these jobs becoming permanent job losses and for more people to fully pull out of the job market."
Despite improvements in both the national and state unemployment rate, Rosengren warned that the makeup of job losses is shifting in a worrisome direction. In April, most unemployed American workers had been jobless for less than five weeks, but in September, a majority had been out of work for 15 weeks or more.
The number of U.S. workers permanently laid off is approaching 4 million after starting the year above 1 million, he said.
A protracted pandemic will inflict greater harm on the economy, Rosengren said, pointing to rising transmission rates in Wisconsin -- where Marquette University is based -- as an indicator that the virus remains potent.
"Getting the economy to recover requires getting the public health crisis resolved," Rosengren said.
After agreeing to several stimulus packages earlier this year, including the $2.2 trillion CARES Act, congressional leaders and President Donald Trump have been unable to reach consensus on another round of aid.
The House approved a roughly $3 trillion bill in May that never gained traction in the Senate. In recent weeks, the House approved a scaled-back $2.2 trillion proposal, which Trump this week rejected.
Hours after saying Tuesday he would withdraw his team from negotiations over stimulus until after the Nov. 3 election, Trump voiced support for direct checks to Americans, an airline bailout, and an injection of funding into the Paycheck Protection Program.
Trump told Fox Business on Thursday that talks are "starting to work out," hours before House Speaker Nancy Pelosi said she would only agree to relief for airlines as part of a larger bill and not as a standalone proposal, according to a New York Times report.
Rosengren's analysis of the economic landscape came two days after Federal Reserve Chair Jerome Powell said in a speech that the country's recovery from pandemic-era lows is still "far from complete" and will require additional fiscal support from the federal government.
"Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses," Powell said in prepared remarks at a National Association for Business Economics virtual meeting. "Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste."
Massachusetts employers also remain generally pessimistic about the economic outlook as the highly infectious coronavirus continues to spread.
The Associated Industries of Massachusetts Business Confidence Index rose only three-tenths of a point in September to 46.6, lingering below the 50-point threshold that signals optimism. That measurement, calculated based on a survey of more than 140 Massachusetts employers, has improved from a low of 38.4 in April, but it remains more than 15 points below pre-pandemic levels.
While Rosengren said the public health crisis could not have been anticipated, much of his speech Thursday aimed a spotlight on pre-existing conditions that he said exacerbated the pandemic's economic fallout.
During the record period of growth after the Great Recession, he said, many entities -- including banks and real estate firms -- took on significant amounts of debt, pursuing a strategy that could yield high rewards but that also carries high risks.
That likely played a role in defaults from retail giants in 2020, such as JCPenny and Pier 1, and it could make additional closures more likely as the pandemic drags on, Rosengren said.
"Going into a pandemic, or going into any recession, with lots of debt becomes a real problem," he said. "It's not just a problem for the equity-holders. I want to emphasize this: if you're a firm like JCPenney, when you go bankrupt, you're laying off workers. Those workers are being impacted by the financial decisions you made to take on more leverage. So are all of your suppliers, the people that provide you inventory, the people that supply you services."
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