The Past, Present, And Future Of Macroeconomic Policy

Overview

We originally launched Employ America to confront the policy failures that plagued the decade following the Global Financial Crisis of 2008 (GFC). The failure of our policymakers to support workers and sustain aggregate demand during and following recessions had been an enduring obstacle, not just during the GFC, but also during the 2001 and 1990 downturns. Deep labor market contractions, sluggish employment recoveries, weak bargaining power, and persistent, inequitable welfare losses were the norm—highlighting the importance of stronger anti-recessionary macroeconomic policy.

Fortunately, policymakers learned from some of these mistakes by the time of the COVID pandemic. The strong fiscal, monetary, and financial market stabilization response to the ensuing recession delivered a rapid labor market recovery and historically low levels of unemployment. However, the surging recovery in demand collided with a fragile and ill-prepared supply-side. The costs of chronic underinvestment emerged in the form of shortages, supply chain bottlenecks, and high inflation.

The last five years demonstrate that strong demand-side policy responses, while necessary, are simply not enough. A comprehensive approach to supply-side dynamics is also critical to achieving growth and macroeconomic stability. This entails (1) curbing commodity market volatility, (2) boosting economic capacity and insuring for resilience, and (3) bending the cost curves for basic needs like housing, healthcare, and education.

In 2025, the US economy faces elevated risks to both the demand and supply-side of the economy. As such, macroeconomic stabilization policy must adapt to support the economy on all fronts, from sustaining full employment, to ensuring supply-side resilience and maintaining financial market stability. This expanded economic policy toolkit can create the necessary conditions for a sustained boom in economic growth, productivity, and labor markets.

The 2010s: The Lingering Costs Of Recession

In response to the Great Recession, monetary and fiscal authorities alike failed to respond with sufficient speed and strength to support aggregate demand. In 2008 the Fed, relying on inflation targeting to guide its policies, was headfaked by spiking commodity prices and broadening inflation into ignoring a rapidly deteriorating labor market and a snowballing financial crisis. Fiscal policymakers, overly concerned about deficits, first enacted inadequate fiscal stimulus and then reverted to full-blown austerity amidst historically high unemployment.

The result was a decade of anemic growth, depressed employment, and the deterioration of the economy’s potential. Prime-age employment rates took over twelve years to return to their pre-crisis peaks, and millions of workers prematurely left the workforce. Business closures hollowed out key industries and regions, reducing productive capacity in ways still felt today. What started as a failure to stabilize and support demand evolved into weak capital formation, productivity, and growth. Contrary to conventional wisdom, short-run business cycle outcomes can also matter substantially to the longer run. 

The Pandemic And Rapid Recovery

Just as the labor market was finally recovering from the losses of the Great Recession, the pandemic sent unemployment rates to historic highs. This time, policymakers responded with fiscal and monetary policies that were greater in scale and speed than in previous recessions. Thanks to the lessons learned from past failures, a robust aggregate demand and financial market response prevented yet another jobless recovery and financial crisis. Instead, we experienced the fastest labor market recovery in US history.

This isn’t to say that the fiscal response to the pandemic was flawless. Weak state capacity in the form of outdated technology, excessive administrative burdens, and data collection issues meant the federal government had to settle for suboptimal solutions. Workers and businesses encountered roadblocks tapping into relief programs, fraudsters took advantage of programs such as the Employee Retention Tax Credit, and the allocation of funding for relief programs should have been better calibrated. These issues undermine the political prospects of providing appropriate assistance in future recessions. 

Post-Pandemic Shortages And Inflation

The pandemic revealed that inadequate aggregate demand and the alleged woes of “secular stagnation” were never the exclusive or permanent threats to macroeconomic stability. As the economy and labor market recovered, policymakers were caught flat-footed as inflation reemerged globally to historic rates. The roots of this problem lie in policy failures made long before the actual inflationary shocks. The failure to recover robustly from previous recessions hollowed out physical capacity, leaving the supply-side fragile, inelastic, and incapable of accommodating the rapid recovery in demand from the depths of the pandemic.

With decades of weak growth and low inflation in the rearview mirror, along with some historic price crashes and demand collapses in 2020 itself, lawmakers and policymakers devoted limited thinking to how future price spikes could emerge. When capacity constraints emerged across key sectors, everyone was caught flatfooted. For example, in failing to address the energy price collapse of the pandemic holistically, Congress passively watched as capacity eroded in both oil production and refining, both of which contributed to straining prices during the recovery. This problem was amplified by the Russian invasion of Ukraine, reminding us that geopolitical risks and shocks impose their own kind of macroeconomic instability. 

When inflation proved larger, broader, and more durable than initially anticipated, the labor market came to shoulder an inordinate portion of the blame. Macroeconomic commentators and academics tried to understand inflation primarily through the lens of the Phillips curve, which focused on labor market tightness as the primary driving force behind inflation. For the most part, policymakers left inflation-fighting to the Federal Reserve, which initially believed that a significant rise in the unemployment rate would be necessary to get inflation back down to the target.

We have seen soft signs of progress in addressing supply vulnerabilities and shocks. While it took too long to implement, the Department of Energy ultimately embraced a more flexible and dynamic approach to buying crude oil back for the Strategic Petroleum Reserve and supporting domestic production against the risk of price crashes. After semiconductor bottlenecks led to precipitous and persistent declines in motor vehicle production and a swarm of auto-related goods and services inflation, Congress began taking action. The CHIPS Act addressed key leading- and lagging-edge production vulnerabilities in semiconductor manufacturing. The Inflation Reduction Act (IRA) helped diversify the energy system at a time when natural gas and electricity prices were spiking in response to the Ukraine crisis. The IRA also advanced the capacity for the federal government to shape how its purchasing power can be used to lower inflation in sectors like healthcare.

Welcome examples from the past few years do not make for a strategy. It is paramount that policymakers be better equipped to prevent and prepare for potential supply shocks, acting with urgency when they occur. However long it might take to deliver a stimulus or unemployment insurance check, it takes far longer to unsnarl a supply chain, build a new factory, or restart a shuttered refinery. This will not just require policymakers to be attuned to these challenges, but will also require renewed institutions and an expanded economic policy toolkit to address the broad range of shocks and uncertainties that are likely to dominate the next several years. 

Past Lessons, Future Policy

While the recovery has been bumpy, it has left the American economy with the seeds for another period of macroeconomic success.

After initially seeing a recessionary rise in unemployment as necessary to reduce inflation, the Federal Reserve pivoted in December 2023 and delivered preemptive rate reductions in 2024 to safeguard the labor market. While the labor market has slowed, the employment gains of the labor market recovery have thus far remained fully intact and outperformed expectations of the grim conventional wisdom. Workers currently enjoy relatively high rates of employment and recovering real wage gains. 

At the same time, healing supply chains and fiscal support for investment and employment helped yield productivity outcomes that meaningfully outperformed pre-pandemic trends. The American economy was finally making the investments needed in high-quality manufacturing sectors, capitalizing on a trained and experienced workforce, and inflation moving back towards target.

In 2025, we are past the soft landing debates and are in the midst of a bigger shift. The American economy faces challenges to both supply and demand. Fully realizing the potential of the post-pandemic economy over the next decade will require an agile and flexible playbook for policy that promotes economic stability from all angles.

The Fed faces one of its most difficult challenges as it weighs how to respond to major shifts in tariff, tax, and energy policy. Its traditional tools and gauges—interest rates and inflation targeting—are not well-suited to handle changes in productivity trends, commodity price shocks, and the new trade policy regime. The Fed must address these new realities by adapting its framework to a world of more frequent and varied supply shocks.

Finally, many of the policy supports for investment in resilience and innovation are being directly undermined by the current administration, underscoring the need to forge a new political consensus. Critical macroeconomic stabilization programs need to be able to endure through political and electoral cycles. Reduced state capacity, heightened policy uncertainty, and the capricious implementation of major policies all threaten productivity and economic growth going forward.

Conclusion

Since our founding in 2019, the range of the challenges confronting macroeconomic policymakers has broadened. In order to deliver widespread macroeconomic success, policymakers must learn from the past, but also go beyond fighting the last war and expand the macroeconomic policy toolkit on all fronts. This will entail (1) supporting aggregate demand to maintain full employment, (2) ensuring that the supply-side is robust, resilient, and responsive, and (3) promoting capital formation, productivity, and economic growth. In addition, government capabilities must be renewed in order to utilize this toolkit to its full potential and with broad political legitimacy.

The coming years are sure to come with a wide range of threats to macroeconomic stability. With the right policy tools and state capacity to address these challenges, we can create the conditions needed for sustained economic prosperity and unleash the full potential of the American economy. At Employ America, we are committed to turning that potential into reality.