 If we go back to the previous Great Recession, then one of the things that many of us think we see there is the fact that the nature of that recession, the fact that it was bound up with a financial crisis, it really sort of broke the model of demand formation, which prior to the Great Recession had depended to a substantial extent on household borrowing. And that behavior has been very different since the Great Recession, and it looks like then for any sort of potential output that the economy might have been capable of producing since 2009, the ability then to generate the demand to meet that potential has been impaired. My name is Mark Setterfield, and I'm Professor of Economics at the New School for Social Research. I do macroeconomics, and part of my interest in macroeconomics is in hysteresis. Hysteresis is essentially a type of path dependence, which really just says that events today can have lasting effects on outcomes in the future. And specifically what hysteresis claims is that even temporary effects today can have permanent effects potentially on future outcomes. There are a couple of qualifications to that. First of all, not every temporary effect matters. It tends to be the more extreme effects that are important. So for example, if I'm walking home this evening and I trip over my shoelace, that's unfortunate. But it probably won't change the route that I take to go home next week. Whereas if I'm walking home and I'm attacked, for example, then that would really give me pause for thought, and it might change my behavior permanently thereafter. The other thing I think that is important is that hysteresis is not fatalistic. So when we say that the future effects are permanent, we don't mean that there's nothing that can be done about them. And in fact, very often, subsequent interventions can undo any other hysteresis effects that we find. So the question becomes, what does hysteresis have to do with economics? And if we're looking at the whole economy, an obvious example of a temporary event is a recession. So then, well, recessions we know can be milder or deeper. For example, the recent COVID-19 recession was particularly deep. Even deeper, in fact, if we look at the rising unemployment and the drop in output than the previous great recession. So then the question becomes, can an event like the COVID-19 recession permanently scar the US economy? Do we see any evidence since the recovery began of adverse hysteresis effects that could permanently affect the level of activity in the US economy? So since we're looking at aggregate activity, I think a good place to start is by reminding ourselves of what I think Robert Solow once said, which is that economists are a bit like parrots because all they keep saying is supply and demand, supply and demand. But it turns out that's a good place to start here because if we're interested in aggregate activity, we could do worse than think in terms of aggregate supply conditions and aggregate demand conditions and look at each in turn and see if in fact there is evidence of adverse hysteresis effects. So if we start with aggregate demand, one of the things that we know that happened during the COVID-19 recession was that households dramatically increased their savings rates. And that's not surprising because of course, many households were fearful of what would come next, would there be another surge, would they lose their job, would their business be the next to sort of close down as a result of the lockdowns. So what households were doing was holding on to liquid assets and avoiding commitment to current expenditures on goods and services. So then the question becomes the pandemic goes away, but does that type of behavior go away? Or do households for example remain fearful of the pandemic? Will it come back? Will that interrupt their income? So should they continue to avoid spending? Or alternatively, are they just as a result of the pandemic now suddenly more aware of and averse to the uncertainty of the future? If we look at the evidence, it seems not. I mean what we've seen over the last couple of years is that households have dissaved very aggressively. They've re-entered credit markets. So if we think of that type of behavior as what we've seen in the last few years, it really doesn't add up to any sort of evidence that in the longer term we're going to find a permanent scarring effect on aggregate demand formation. So I did say that the parrot economist says supply and demand and okay, so we look at the demand side, that's one thing, but what about the supply side? Well, if we think of the U.S. economy it's capital abundant. It's potential to produce is going to be limited if anything by labor. So what we really might want to go looking for is any evidence that there's going to be a sort of permanent effect of the COVID recession on the total capacity of the U.S. economy to employ people. Well, we can break that down into three components. We can look at the employment rate, the labor force participation rate, and the total population. So let's start with the employment rate. What we're thinking about here is the possibility that the COVID recession has somehow damaged the labor market so that we can't get back to the type of employment rate that we saw before the COVID recession and that might have persisted in the absence of the pandemic. But if we look at the unemployment figures, in fact, unemployment by any measure, whether it's the narrow headline unemployment rate or even the broader U6 rate that includes discouraged workers and involuntary part-time workers, those measures of unemployment have dropped like a stone since the beginning of the recovery, much faster, in fact, than they dropped following the Great Recession or even the previous dot-com recession. So that doesn't look like evidence of sort of permanent structural damage to the labor market. So then we go on to labor force participation. And I think here one of the things that macroeconomists will wary of was that a lot of the unemployment during the COVID recession actually affected women. And the question was, would those women who became unemployed and then dropped out of the labor force, as many did, would they come back into the labor force? Why might they not? Well, women are, because of the gendered structure of work in the home, disproportionately involved in childcare. So one possibility is that they might have stayed out of the labor force for fear of bringing COVID-19 home and affecting children. Another possibility was that if we think of many of the women who lost jobs in low-paid service sector industries, would it change the sort of calculus of their labor supply behavior? Why go to work in a low-paid occupation and then struggle to find childcare, which is costly and difficult? Maybe it would, fundamentally affect the labor force participation of women for that reason. Well, again, if we look at the evidence, it doesn't seem to have worked out that way. Labor force participation has come back more slowly over the last two to three years than the employment rate has recovered. But if we look more carefully at who seems to be hanging back, who hasn't come back into the labor force, the sort of representative suspect, as it were, is older white and male. And I think the reason for that is fairly easy to explain, right? Older white men, those are the folks who disproportionately own wealth in the economy. And because they're older, they're closer to retirement. So what this looks like is a certain group of the population bringing forward retirement decisions. So if you think about it, that's bunching retirement decisions that would otherwise have been spread out over a longer period of time. That really is a temporary effect. It might persist for a while, but it's not going to affect labor force participation relative to some sort of counterfactual trend where we would have been in the absence of the COVID recession in the longer term. So then the only other place to look on the supply side then is total population. And of course, here we face the tragedy of the pandemic itself, right? The actual deaths from COVID, which of course disproportionately affected older members of the population who weren't working. But of course, it also affected a lot of people of working age. And we did see during the pandemic a so-called excess mortality among people of working age. The other thing, of course, is that immigration was affected. COVID was a communicable disease. So you couldn't really have businesses as usual in terms of immigration because of the fear of people coming into the country and bringing COVID-19 with them. Since the end of the COVID recession, what we seem to see is that U.S. population growth has kind of reverted to trend. But that in itself won't make up for all of the sort of lost population, as it were, due to excess mortality. And of course, also the immigration policy during the pandemic. So then for any given labor force participation rate and any given employment rate, if we've got this kind of lost population, then what that adds up to is more or less permanently missing workers compared to where we would have been in the absence of the recession. And at the moment, that seems like that might add up to a permanent effect. But here, we have to remember what we mean by permanent, right? We only really mean permanent if we sit around and do nothing. And since part of the problem I've just identified is immigration, well, then of course, the obvious thing to do would be to think of acting on immigration policy and making up for lost population if that is going to be some kind of constraint on the supply side by admitting more immigrants just as we admitted fewer for health reasons during the pandemic. I've talked about demand and supply because certainly from a Keynesian perspective, we can't just look at supply and assume that demand will automatically adjust to fully utilize all of the resources that are capable of producing what we would call potential output as a result of the availability of sort of capital and labor on the supply side of the economy. And that's why I singled out initially demand formation as a potential source of hysteresis effects because of course, if we go back to the previous great recession, then one of the things that many of us think we see there is the fact that the nature of that recession, the fact that it was bound up with a financial crisis, it really sort of broke the model of demand formation, which prior to the great recession had depended to a substantial extent on household borrowing. And that behavior has been very different since the great recession. And it looks like then for any sort of potential output that the economy might have been capable of producing since 2009, the ability then to generate the demand to meet that potential has been impaired. And well, quite famously, what we know is that there has been this kind of steady process of revising downwards the sense of potential output in the US economy since 2009, which eventually, of course, inevitably makes actual and potential output look very close to each other and seems to solve the problem. But what that suggests is something more like a hysteresis effect that you had a big recession, you broke, in that case, the demand formation process. And then the supply side is somehow adjusted so that we end up with, by 2019, lower unemployment rates, but not in the way that we would have had the same lower unemployment rates in the absence of the great recession. Now, this time, however, with the COVID recession, it looks a little different. So that problem of demand formation doesn't seem to be well, even really persistent, much less permanent. As I was saying, using households as an example, households really have dissaved with almost giddy abandon since the end of the recession. They've re-entered credit markets. So it doesn't look, in that sense then, as if there's going to be anything that would cause the type of underutilization of resources, a more or less sort of permanent gap between potential output and actual output that might once again start dragging the potential output down to the actual level. And again, that is a very Keynesian perspective because the focus there is on how much demand can you generate? So how much of the potential output on the supply side can you actually buy up? What is going to be your unemployment rate, your capacity utilization rate? How many of the available resources are you actually going to utilize? That's an emphasis that I think is specific to a more Keynesian perspective. I think the conclusions that we can draw then about the question we started with, have there been or is there evidence of adverse hysteresis effects arising from the COVID-19 recession?