How to have a roaring 2020s without wild inflation

THE greatest boom in US history is the one we experienced during the mobilisation for World War II. In our popular memory, imagery of scarcity and household belt-tightening to help the war effort abounds. But in reality, at an aggregate level, there was no fall in household consumption during the war years. By historical standards, the era was "a carnival of consumption", as one historian put it.

The vast expansion of demand in the economy spurred by the military build-up led to an equally vast expansion of supply, with major spillover into the civilian economy. Millions of new workers got new jobs at better wages - including women entering the workplace for the first time and black people leaving the rural South. And under the pressure of increased demand, businesses achieved extraordinary productivity gains. By 1945, for example, the number of worker hours required to produce a typical aeroplane was one-sixth what it had been in 1942.

Something remarkable had happened: An enormous uptick in demand was almost entirely met by simply pumping up production. This wartime boom - and this major lesson from it - is one of the great events in US economic history. Yet unlike the Depression of the 1930s or the inflation of the 1970s, this era's lessons have disappeared from our memory.

We have forgotten the possibility of growing demand prompting increased supply. Instead, every new sign of a more vigorous recovery sets off a wave of fearful debates: Is demand already running ahead of the supply in place during normal levels of production? Is the economy running too hot?

The most recent inflation data that came out last week triggered a fresh round of this worrying within the economics profession and among market commentators, even though job gains remain steady, and inflation remains highly concentrated in sectors most affected by the pandemic and supply bottlenecks connected to it.

This anxiety leads to two failures of thinking: The primary solution it ends up elevating - having the Federal Reserve "pump the brakes" on the economy by raising interest rates - does little, if anything, to solve supply and demand dynamics outside of depressing demand via potentially sparking a recession. It also ignores the possibility of great news about economic potential: Demand running ahead of what we're used to could mean we're finally in the early innings of another boom.

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PLAY IT RIGHT

A boom, defined more precisely, is more than just faster growth: It's an extended period when spending pushes against the productive potential of the economy, which creates pressure on employers to increase wage gains and make capacity-boosting investments. An economy in such a healthy state feels like an unfamiliar, even uncomfortable, idea to many Americans because now we rarely experience it.

The past three recessions have been followed by jobless recoveries, with elevated unemployment for years after the recession officially ended.

Apart from a few years in the late 1990s, it's been half a century since Americans have seen an extended period where the economy was running at anything like full capacity.

This time, if we play it right, it could be different.

With the combination of a rapid bounce back from the pandemic (some financial analysts are anticipating annual economic growth as high as 7 per cent) and the need for expansive new spending to deal with the climate crisis, we have a unique chance to break America's recent pattern of living with limp economies and loose labour markets that benefit only the rich.

To pull off a roaring 2020s, we should prepare to manage a boom, not fight it.

There's a growing recognition that the narratives in dominant economic textbooks miss something critical: The economy's productive potential is not fixed. Strong demand also creates "tight" labour markets, in which employers are competing for workers instead of the other way around. This decreases racial discrimination (by making racist pick-and-choose hiring deeply inefficient) and raises labour force participation.

Booms also raise productivity, as higher wages, scarce labour and strong demand create both the incentive and the opportunity for innovation among business owners and executives.

They also create a more equitable and fair distribution of income, a welcome development after decades of increased inequality.

The World War II years illustrate this. Wage gains were especially large for workers in low-wage sectors like agriculture, despite their lack of direct involvement in the war effort. Relative gains for Black workers were also impressive, despite the near-complete lack of effective civil rights protections at the time.

We saw a hint of these dynamics in the year or two before the pandemic. During 2019, while unemployment was around 3.5 per cent, wage growth for those in the bottom 20 per cent was nearly 5 per cent, a full point faster than wage growth at the median. After shrinking earlier in the decade, the labour force was adding more than 1.5 million people a year in the run-up to the pandemic, confounding earlier predictions that the decline was all about an aging population. The gap between white and black unemployment fell to the lowest level in at least 70 years.

Many economists in the mid-2010s had said that unemployment couldn't fall below 4.5 per cent without sparking inflation. But by 2019, unemployment had been below 4 per cent for nearly two years and signs of real inflation were negligible. Wage growth was picking up, but had made up only a little of the lost ground of the previous 20 years.

With the worst of the pandemic behind us, there's no reason to not create policies that return us to these strong labour markets and look to maintain them indefinitely. But the logistics of doing so won't be easy, for two reasons.

First, there is a real political danger that policymakers will be pressured into seeing an economy with more worker power as something to be reined in, under the rationale of avoiding dangerous overheating. Welcome developments for society - higher wages, more employer-led on-the-job training - are not always welcomed by bosses, who have more political power (for several reasons with which we are all familiar).

SUSTAIN, DON'T SLOW

The other danger - and progressives need to pay close attention to this - is that we will get a boom, but won't update our tools to manage it.

The economic scars of the 1970s inflation scares have taken on an outsize role in economic policy discussions, but they are not imaginary. A sustained boom may well introduce inflationary pressures: Shortfalls and bottlenecks are always a possibility if a given supply chain goes haywire. Indeed, we are seeing some of that today.

Still, the most important thing is to not overreact by slamming on the brakes. One solution is not to pull back on growth, but to make sure growth is sustained long enough for companies to feel safe building up capacity again.

But we also do have to manage the pressures a boom creates. In many cases, sustained strong demand will itself lead to the investment that will overcome temporary shortages. In other cases, additional policies will be needed to increase capacity in areas where prices are rising.

Removing obstacles to new housing construction, for instance, will become more urgent in a boom. Preventing true labour shortages will be a much smoother effort if we boost childcare and other family-friendly policies that make parenting and working more symbiotic tasks. Strategic investment in the green economy can alleviate shortages that would otherwise push up prices.

Inflation can be a genuine problem - if not now, then perhaps soon. But it's a challenge that can be managed, not a terrifying monster to be avoided at all costs.

What we should be scared of is missing our greatest opportunity in a generation: To use both low-cost, debt-financed federal investments in our infrastructure and revenues from taxes on the wealthy to deal with our deepest and longstanding problems - economic stagnation, entrenched inequality and climate change.

The coming years could be remembered as the birth of a dynamic, more egalitarian US economy. We just have to avoid getting spooked by the bumps along the way.

Manage the boom, don't fight it. NYTIMES

• Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, is the recent author of Freedom From the Market: America's Fight to Liberate Itself from the Grip of the Invisible Hand. JW Mason is an economist at the Roosevelt Institute and a professor of economics at John Jay College, City University of New York.