Black Joblessness Shows Fed Must Look at Inequality

We're gonna have to look at these lumbers. Hello, and welcome to Stephanomics, the podcast that brings the COVID global economy to you. And what you've just heard was a big surprise that happened last week when the US job numbers came out. Everyone expected US unemployment to go up again, but instead, as you heard, it fell. Unemployment rose by two and a half million, when the forecast has been for it to fall by seven and a half million.

That's a big forecast era even for economists. But stunned, though he was the very experienced reporter you heard there, Mike McKee was quick to spot something else in those figures that sadly was not so surprising. Though the unemployment rate for white Americans had fallen, the rate for Black Americans had continued to rise to a decade high of

nearly seventeen percent. We've spoken in the past on Stephanomics about the way that minorities have been hit first and hardest by the COVID recession, losing their jobs more quickly as well as dying at much higher rates from the virus itself, and African Americans have a lot fewer savings to fall back on when they lose their job or get sick. In Minneapolis, where George Floyd was killed, the latest figures show the average African American household had a

net worth of just over seventeen thousand dollars. That's one tenth the net worth of the median white household, one tenth. In a little while, I'm going to play you part of a conversation about the future for US jobs and the economy with the former chairman of President Obama's Council

of Economic Advisors, now a Harvard professor, Jason Furman. I'm also going to talk to our sub Saharan Africa economist b Hassi Lawe in Johannesburg about the financing gap facing African economies as a result of COVID nineteen but first, the protests in US streets and those jobs figures have put inequality high on the agenda, and given that the Federal Reserve is meeting this week, it seemed especially timely to consider the challenge that these stark economic disparities pose

to the US Central Bank as it sets policy in theory for the whole economy. Matthew Bosler is a U S economy reporter based in New York. Matt, You've taken a look at this, and it is not a new issue for the Federal Reserve, is it. No, it's not. It's something that they've been really looking at more and more over the last few years, and in the last year or so, they've actually launched a formal reviewer their

entire policy making framework. That's really overturning assumptions and practices that go back many decades at the Central Bank in terms of the way that they set interest rates um and so part of that involves looking at the way

that their policy actually affects different groups. And for a long time they sort of set policy based on this notion of how it affects the overall economy the economic aggregates, without paying much attention to those disparities that exists within the economy, and something that they're really trying to do lately is take a finer look at how uh these different groups are being affected and their different experiences in the labor market and trying to incorporate that into their

decision making process a little bit more explicitly. So let's some just tease out what that means in practice for policy. I mean, when they started raising interest rates after the global financial crisis in twin fifteen, that was when supposedly they'd reached full employment. But what was the black unemployment rate at that point. The black unemployment rate was eight point five percent and the white unemployment rate was four

point four percent. And this kind of speaks to the whole issue of looking only at the economic aggregates when they set policy. So for many years, they've used the overall unemployment rate as a guide to inflationary pressures, and the theory goes that when the overall unemployment rate declines, then you start to see more inflationary pressures building in

the economy. But the problem with that is if you're using the overall unemployment rate, that's obscuring these really wide disparities between groups like white Americans and Black Americans, for example, And so you get into this situation where you're raising interest rates and trying to slow down the economy even when unemployment for a group I Black Americans is still very high at levels that we would consider recessionary levels

if we were talking about the overall unemployment rate. So this picture of two America's is really is really start there. And I was struck you had in the piece you wrote for Bloomberg about it, you had gone back to previous times where the fed's policy had been had had actually spurred some of the same kind of demonstrations that we've seen recently, or it helped to contribute to that.

I think even in the even in the fifties, there was a sense that some of those interest rate right hikes then had helped trigger some of the March on Washington and pressure for the civil rights legislation in the sixties. That was news to me, That's right, And I think that is sort of lost in memory at this point for a lot of us observers of the modern FED, because we don't really think of the FED over the last few expansions as having raised rates really aggressively and

sort of purpose put the economy into a downturn. But back in the fifties UH, sixties, seventies, and eighties, that was definitely more the case. You know, FED officials were more explicit about trying to you know, break the backs of unions and make it so that they would not be able to demand higher wages of the type that might cause a wage price spiral. And so back then this was a much more explicit part of the conversation.

And as today, when the FED moved to Titan it would of course disproportionately affect black workers who were struggling to close the kinds of gaps that have existed in the labor market really going all the way back throughout the nation's history. And the other piece of this is the wealth side. I mean I mentioned that the typical African American household in Minneapolis UH had a tenth of the net worth the savings that it could fall back on was a new ten per cent of the average

net worth of white households. And of course it's it's people with assets who have tended to benefit from quantitive easing, from the fact that asset prices are going up even now in the last few months, you've seen the stock markets come roaring back even as main street and the

Black Americans are facing still a deep, deep recession. I mean, is that part of their thinking as well, that the wealth inequality is also especially in the age of quantitative easing, where the central bank is seen to be propping up asset prices. You know, that's another difficult area for them.

I think that's a huge part of the story. And when you start talking about things like the racial wealth gap, the data on that front really look even a lot worse than the disparities that exist in the labor market. And I think that's one reason why this conversation has really grown louder in more recent years, because as what we saw in the Great Recession is that that was just extremely devastating for the Black community in terms of household wealth um and overall wealth, and that really hit

them a lot harder than it did White Americans. And so, uh, those are the types of data points that economists are looking at more and more now, and the numbers are just so hard to ignore at this point that it's really become a lot more central part of the conversation. I guess what what many activists in this area was say is, well, it's all very well talking about it more um, but in practice, how is it going to

change FED policy do you think going forward? Yes, So this is really about the Fed's attitude toward inflation and

being reactive toward inflation versus being proactive toward inflation. And what we've really seen over the last thirty years or so since Paul Boker's tenure is that the FED tries to be pro active against scarding against inflation because they saw what could happen when you let inflation get out of control like it did in the nineties seventies, and so they've kind of had that mindset for many decades where they need to start raising rates ahead of time

to get out of ahead of that and and squash it before it happens. But what we saw in the last ten years or so is that that playbook UH did not really serve lower income communities so well because it ended up foreclosing on you know, further job gains before it needed to UH and the inflation never materialized.

And so that's a big part of the framework review that the FETE is undertaking now trying to figure out how can we do this in a way that does not prevent more people from getting jobs, more people from building wealth in the type of economy that we would normally think of as a hot economy, uh, one that is not necessarily spurring the types of inflationary pressures that

demand an immediate response. And so I think for the FED, it really comes down to this idea of being more reactive and taking their time to really wait and see those inflationary pressures materialize before moving to slow things down. It seems so a million years ago that we were

talking about running the economy hot. But you know, it was not so long ago at all that the even the white unemployment rate was three point four percent in the US compared to over um now, but do you think or nearly thirteen, But do you think just going back to the immediate prospects for jobs, I mean, have you changed your view of the way the labor market's going to work over the next few months as a result of that those surprising job numbers, because even even

with the disconnect with the story for black Americans, it was pretty surprising to see the overall number of jobs go up. Does that do you think in the end, it look like the US the flexible US will come

out of this better than others. So the tough thing about the jobs numbers that we just got when we're talking about these racial disparities, is that, yes, the job numbers were better than expected, and the unemployment rate for white Americans actually went down, but for Black Americans that went up further, and so it kind of speaks these

disparities that exist. Typically, what you see in economic downturns is the gap between white and black unemployment rates tends to narrow in terms of the multiple uh that the black community faces. But then what happens is as we go into the recovery phase. In the early phase of recoveries, that gap starts to widen again, as white Americans are

typically hired back into the workforce more quickly. And so that is going to be the real challenge for the FED and other policy makers going forward is trying to find a way to make the recovery more inclusive for all Americans in a way that typically has not been the case in the past, and prevent that dynamic from playing out again where it takes many years before black Americans can share in that recovery that white Americans experience well we will carry on watching. But in the meantime,

Matthew Bosler, thank you very much. Thank you. Now that question of what happens next for US jobs came up recently in a discussion I had with some very distinguished economists as part of an event organized by the European Leadership Network to Think Thanks, focused on improving relations between Europe and Israel. I can't play the whole thing. The sound wasn't good apart from anything else, but I thought

you'd be interested in this exchange with Jason Furman. So, the US has seen a lot more job losses than Europe in the last few months. We talked about that in the past. He thought America might still come out ahead, assuming Congress doesn't mess things up. Two ways you can grow. One is people can go back to their old jobs. Businesses that were shuttered can reopen. That type of growth can happen very very quickly, and that's why you'll see fast growth in the third quarter. That's why you'll see

tremendous job growth, um and the like. I think, though I'm underlying all of this, there will be parts of the economy that continue to be affected by the virus, whether it's travel or restaurants and the like. There also will be a lot of reallocation companies that decided they don't need to rehire everyone, or a company that was already having troubles before this, say department store, that goes

bankrupt as a result to it. So you might get halfway back very quickly, but then you'll still be halfway um from where you started. In the United States, that would mean you're still you know, ten million jobs in the whole the equivalent of the financial crisis, and that next phase where you need to find jobs at new employers, maybe even worse, you need to find a job in a new industry, is a process that's never been very quick,

and so I view that more as a slog. Don't expect us to get back to our per capita incomes that we had before the crisis until maybe three huge amount of uncertainty around that, but I think it could be many years before we even begin to get back to where we were before all of this. When you look to the next phase, what are the risks in the US? I guess, particularly around the election, the US fiscal response was huge. It's hard to compare across countries.

It appears to be the the largest of any country. UM. One success of that, as you noted in the question you're asking Stephanie, is that in the month of April, households actually saw their disposable personal incomes rise even though there was massive job loss, and that's because of the transfers they got through unemployment insurance and UM through checks.

I'm I think it's a real open question as to whether the US system, where an employer can furlow you and then you get a check from the government, or the European system where you continue to get a check from your employer and your employer gets a check from the government UM as to which of those will be better UM in the long term, I think to a first approximation, they might be more similar than everyone thinks. If Macy's reopens its stores, it's going to call back

the employees that it furloughed. It won't not reopen a store because it can't find the people that work in that store and have to do a fresh new hiring process. So if you can reopen in the United States, I think you will bring UM your employees back. I think it gives you a little bit of an extra option

on flexibility to handle the reallocations shock. The tricky thing over the next couple of months is that everything I've just talked that I think has been to some degree successful ends at the end of July, and you know, Congress came together quickly for the first round. UM. There's much more acrimony, much more polarization right now as people are talking about UM and debating re upping that round. States governments are cutting, which is counter productive to the

overall for the recovery. Unemployment insurance I don't think should be extended exactly as it is, but I think if it comes to an end entirely UM, that would mean you know, some downward pressure on the economy going into the fall, and you know, for that reason alone, my guesses Republicans and Democrats will come together to agree on something another round. So now I wanted to talk about Africa.

Something different we've seen in this crisis in the advanced economies is that though that output of the economy has shrunk further and faster than we've ever seen before, government spending has also come in and expanded by an unprecedented amount to support businesses and households, to the point where when you look at total incomes across the economy, they've

barely fallen at all. In many cases, the government support has matched the decline in the economy, at least on paper, and that gives us some hope about the potential for a quick recovery out of this, at least for for many parts of the economy. But that's in the rich countries. The story in large parts of the developing world is very different, and we heard the economist Jeffreys talk about his worries on that score a few weeks ago. So our sub Saharan Africa economists b Haslawe has done the

numbers for a number of African economies. Um. She's sitting in Johannesburg. B great to have you on. Stephanomics. Explained to us the calculation you've done and what the results were. Thank you, Stephanie. And I looked at six African economies, the sixth largest in terms of their presence in the commercial dead markets, private capital markets, and what I did there was I looked at the growth forecast that we

had for them in October last year. I am a growth badcast, and then I compare them to the deterioration and that growth forecast that we have now in April twenty and then I used that difference to get a sense of what the last income or last output might be in those economies, and then to determine how much of that gap has been filled. I looked at three numbers.

The first was sort of automatic stabilizers in those countries, and that's just to get a sense of, by virtue of the fact that output has fallen, UM, what are the safety nets embedded in the system that will make up for that gap. Now, unfortunately, Africa, unlike most of unlike a lot of advanced economies, and we have very little safety nets and taxes as a share of revenue account for a very small share of GDP, so that

number was quite small. Then the next number that I looked at was discretionary fiscal measures, and that is over and above UM, what will automatically take place, What have government's done or announced um in order to supplement that

or to try and cushion the fallen output. And then the last number was then to look at, Okay, on top of these two fiscal measures that have been announced, what is the I M have done to try and help cushion or bolster that response, um, I guess a broad conclu usion is just the funding gap or the income loss is massive. The stimulus in Africa has been less than a tenth of what developing countries have been

able to do. And the obvious conclusion is then that, well, the recovery is going to be quite delayed, but also the falling output this year will be quite massive. We like you to see probably the largest contraction um on record this year as a result of cod And of course I guess that I mentioned at the start the differences that you're also seeing the largest ever decline and output at least ever short period for the advanced economies.

But they, as you say, what the difference is that you've not had the capacity for government to really jump in the way they have in most of these economies. If we just want to put it in perspective, how does the potential economic impact of COVID compared to say, the global financial crisis of two thousand and eight nine for Africa. Sure, definitely the impact is a lot more

devastating one just because of how quick it's been. The impact has been quite immediate, whereas so the impact of a financial crisis on Africa is a bit more of a slow burner, but also in terms of how the countries were positioned to respond or even absorb the shock, there are a lot weaker or more vulnerable this time around. Going into the financial crisis, we'd literally just come off

the high of the commodity um price boom. A lot of countries had a lot more fiscal space and dead levels were a lot lower, so there was a lot more fiscal space to respond to the crisis this time around,

not as much. You had growth pre the global financial crisis in the region averaging about six percent overall, and then after the crisis about three percent growth and debt levels then around and that's almost doubled now to about six The profile of it as well is also a lot more risky, which means um that there's a lot less scope to increase borrowing to make up for that short form. We've talked on the podcast before about this sort of big change in the attitude to government in

a time of crisis. You know, we've had years of saying that the private sector should be left to do things, but when you have an emergency, the government has stepped right back in and people have been reminded of that

core government sort of safety net function. But in Africa, as you say, has also been We've been told that private investment was the solution to Africa and there was lots of exciting talk about frontier markets and growth coming out of that for some of the more successful economies.

Rwanda has been touted in some cases a lot of places, but they haven't got that safety net that that core government is just not there in the same way, and it it doesn't seem like there's an international replacement for that. What's also yeah, I don't think there's going to be a little there's gonna be any more support. And then even the support that has been given, um, if we just think about it, it's been mostly or let me split it one. Africa was completely unprepared from a health

perspective coming into the crisis. So whatever money there was or whatever space there was, a lot of those resources have been diverted to preparing the health sector as opposed to bolstering the economy as what you've seen in advanced economies. That's the one thing. The second thing, um, in terms of the additional international support that you might see. UM, the debate so far has centered around dead relief UM or you know, UM stalling dead payments for this year.

That has helped a lot, but that still falls short given the fact that a lot of countries actually didn't have dead payments do this year. UM So that's still not wanting. And then in terms of the loans and the external support that I've spoken about that hasn't really come through and what that has done, I think, UM in terms of affecting Africa's response to the crisis is that you've been forced to choose between containing the virus and allowing livelihoods UM and people to just go out

and continue by themselves. UM. So in Africa, I think one thing that's been different is well, one we were quite quick to respond to lockdown or to we were quite quick to respond to the virus. But we've also been very quick to lift the lockdowns that we had, and I think that's been necessitated by the fact that governments actually don't have much to offer. And so then you then I guess I have to allow people to

go out and continue to fend for themselves. Um. A lot of the population UM is engaged in informal activity, and in that sense, even if you did have some kind of safety in it, it's difficult to deploy it. So I think we've been lived in a position where governments have just how don't know, you just let people go out and try and mitigate however they can. It's such a stark trade off that these governments are facing and you're living with it, uh to some extent around

you in in Johannesburg. You just moved back there, um, having joined Bloomberg at the beginning of the year. I mean, how how have you found it the last few months during the COVID crisis. To some extent, I've been shielded from it. But one that highlights, I guess the gross inequality of how differently the virus has been impacting people. UM. But one thing I think that's been very clear to me is just the fact that government, how limited government

is in the ability to respond. UM. Government has been quite slow to you know, roll out or respond and with the stimulus package that they've that they've given, and I think it shows to you the additional headwinds I think that African countries have to contend with during UM, during I guess this pandemic, And how do you how do you feel about going out of your house, your friends. I don't leave my house at all, just one because um,

the virus is still ramping up. I would not like to find myself in hospital anyway, UM during this time UM And I think that's generally been the approach of a lot of my friends. But again, that speaks somehow to a level of privilege. There are some people who don't have, um, the privilege of making the choice. They do have to go out again, because you either go out to make a living or you stay home and you have absolutely nothing. And so that's been tough, but overall,

from the comfort of my home, comfortable and scary. But I think concerning UM, given who bears or who's most impacted UM, and that government is unable to mitigate the impact of that, I think that's perhaps in the starkest thing for me to contend with, and your numbers make it very stark as well. A tenth of the response that governments have been able to do relative to the shop compared with advanced economies, UM be hassi lawa, we

will come back to you. I fear this is one part of the COVID story that's going to be with us for a long time. But thank you very much. It's it's a pleasure. Thank you very much for having me, Thanks for listening to Stephanomics. We'll be back next week with more on how COVID nineteen is transforming the global economy.

Remember you can always find us on the Bloomberg Terminal, website, app, or wherever you get your podcasts, and you can also get more news and analysis from Bloomberg Economics by following at Economics on Twitter. This episode was produced by Magnus Hendrickson, with special thanks to Matthew Bosler, Jason Furman, l Nett, Startup Nation Central, be Hassi Lawe, and Mike McKee. Lucy Meekin is the acting executive producer of Stephanomics and the head of Bloomberg podcast is francesco leag