ICYMI: The Past, Present, And Future Of Macroeconomic Policy
Overview
Employ America was founded to advance the cause of full employment. In a full employment economy, jobs are plentiful, wage growth is strong, and opportunities expand to those typically left out of the workforce. Full employment is also critical to achieving broader macroeconomic success, because it is the foundation for inclusive economic growth and resilience.
The failure of the policy response to the Global Financial Crisis highlighted the importance of macroeconomic policy in stabilizing aggregate demand and supporting workers. Insufficient stimulus and austerity-driven policy resulted in a sluggish labor market recovery and lasting damage to the American economy and its workers. We launched to confront those failures, to prevent them from occurring again, and to cement full employment as a policy priority.
Despite its enormous scope and impact, macroeconomics was largely absent from the policy and advocacy landscape. To fill that void, we produced evidence-driven macroeconomic analysis built on a detailed, nuanced understanding of how economic and financial data is collected, constructed, and flawed. We combined this economic analysis with a robust understanding of legislative and regulatory processes to craft well-designed, implementable policy proposals with a focus on legal feasibility and political viability. This process allowed us to bring much-needed technical expertise to policymaking and effectively advocate for full employment.
The macroeconomic picture has changed dramatically since our founding. Policymakers largely learned from past mistakes and prevented another jobless recovery after the COVID pandemic shock, but chronic underinvestment began to show in the form of shortages and supply chain bottlenecks. The painfully persistent post-pandemic inflation has revealed supply constraints and risks that were previously hidden and neglected for far too long. Inflationary pressures will continue to re-emerge and our growth potential will be severely constrained if policymakers are not equipped—or willing—to invest in ensuring sufficient capacity, smoothing commodity market volatility, and bending the cost curves for essential needs.
The last five years have shown that aggregate demand management is not enough. We are now embarking on a broader journey, one that expands the economic policy toolkit so that policymakers are equipped to handle challenges to macroeconomic stability from all angles. By doing so, we can realize the broad benefits of sustaining a full employment economy, control inflation more effectively, and sustain strong investment and productivity outcomes.
As we deepen our commitment to full employment policy, our portfolio will also broaden to encompass a wider set of inflation-taming, growth-boosting strategies necessary to achieve and sustain long-term full employment and unlock the full potential of the American economy. The magnitude of the task ahead is great, but we are well-positioned to address these challenges and capitalize on the many opportunities ahead.
To reaffirm our commitment to achieving and sustaining full employment and truly maximize the benefits of a full employment economy, our work will be organized around four complementary themes:
- Achieving and Sustaining Full Employment: Defending and Building Upon the Labor Market Recovery
- Preventing Shortages and Inflation: Improving Supply Chain Resilience, Reducing Commodity Market Volatility, and Securing the Material Needs of People in a Cost-Effective Manner
- Accelerating Investment and Productivity: Promoting Capital Deepening and Labor Productivity Through Policies That Leverage Full Employment & Public Investment To Crowd-In Private Investment—More Equipment, Software, R&D, and Infrastructure
- Renewing State Capacity: Build the Government’s Capabilities to Design, Execute, and Iterate Policies that Promote and Sustain Full Employment and Macroeconomic Stability
Achieving and Sustaining Full Employment
Full employment is and will always be our north star. In a full employment economy, workers can secure jobs with higher pay and productivity. Sidelined and marginalized workers find pathways into the workforce. Robust wage growth supports consumer spending and demand for goods and services. A labor force of workers with continuous experience at jobs that match their skillsets are more likely to help scale revenue, output, and productivity for firms. Strong and stable labor income growth incentivizes business investment in capital and technological improvements, which also advance the frontier for productivity and efficiency.
Since our founding, we have advocated for robust policy responses to recessions, with the goal of rebounding back to full employment. Having shown that a full and rapid recovery is achievable, our goal is to make full employment outcomes the norm, not the exception. Post-pandemic catch-up dynamics in acyclical sectors are fading, restrictive monetary policy has been weighing on interest-rate sensitive investment, and hiring rates are near recessionary levels. Uncertainties in trade policy, an increasingly fragile labor market, restrictive monetary policy, and volatile technology-related investment dynamics all raise the risk of a recession in the short-term. Should recessionary risks and dynamics go insufficiently addressed, we may be left with diminished productive capacity over the longer run.
The present constellation of inflationary trade policy, a slowing labor market, and threats to growth poses a difficult challenge to the Federal Reserve. The current monetary policy framework (which is now undergoing formal review) is ill-suited to deal with shocks that pose simultaneous threats to both the price stability and the employment sides of the Fed’s dual mandate. One of our key goals going forward will be to urge the Federal Reserve to use its full range of tools judiciously when navigating these stormy seas.
Although the COVID recession has passed, there are still lessons to be learned from that experience. Subpar policy responses stemming from weak state capacity damaged the credibility of recession response programs. To prepare for future downturns, we will craft recession responses that address those flaws and shortcomings while still providing adequate stabilization measures, both on the demand- and the supply-side.
Preventing Shortages and Inflation
A key lesson from the most recent inflationary episode is that we cannot take supply-side stability for granted. One of the consequences of the sluggish recovery in the 2010s was the lack of investment in key sectors such as energy production, housing, and critical manufacturing inputs. The cost of the hollowing out of these sectors became evident during the pandemic as the supply-side of the economy was unable to keep up with the rebound in aggregate demand. Going forward, it will be critical to promote investment both to advance productivity and to protect against future supply shocks.
The tools of the past are not well-equipped to handle today’s challenges. The Fed is currently facing risks and uncertainties to both sides of its mandate from the energy transition, geopolitical tensions, and trade-induced supply shocks all interacting with a restrictive monetary policy environment. Dealing with these threats will require new, thoughtful policy measures and stewardship.
A key part of our new agenda is to develop a policy toolkit to ensure that the supply-side is robust, resilient, and responsive. This will require a multi-faceted approach: (1) expanding economic capacity, (2) reducing commodity price volatility, and (3) bending the cost curves of the essential needs (e.g. food, energy, education, healthcare, and housing). We must also preempt and prepare to address shocks in a timely manner. To unlock greater economic capacity, we will expand and deepen our already-ambitious approach to industrial strategy.
Our track record here is strong, with proposals focused on industrial capacity, energy production, and critical minerals markets. One of our key policy achievements was crafting a policy (and advising the Biden administration) to pair a release of oil from the Strategic Petroleum Reserve (SPR) to stabilize prices immediately with a commitment to refill the SPR following Russia’s invasion of Ukraine. This policy helped stabilize oil prices, promoted domestic production, and insured domestic producers against downside price risk. However, there is more work to be done; the Department of Energy (DOE) could and should test new tools like options to further advance oil production and price stability. Instead, they are in the process of gutting their own toolkit.
Oil is not the only commodity where price volatility poses a macroeconomic threat; we are also expanding our industrial strategy approach by advocating for a Strategic Resilience Reserve to safeguard the economy against a broader set of commodity shocks. Building this resilience will be crucial as we navigate heightened geopolitical and trade tensions and the energy transition in coming years.
The federal government has substantial authority and pricing power that can be brought to bear to bend cost curves for essential needs. We have already begun developing the case for using these authorities to reduce inflation in healthcare, and will develop similar strategies for reducing costs in higher education and housing, in addition to developing approaches for expanding capacity in those sectors.
Accelerating Investment and Productivity
Productivity growth provides the foundation for sustainable wage growth and long-term improvements in living standards. While conventional thinking around productivity growth focuses solely on specific technological developments like AI as the source of productivity improvements, we take the view that macroeconomic conditions are fundamental to creating sustained productivity growth.
A full employment economy with robust, dynamic labor markets is also one in which workers can find higher-productivity jobs that better utilize their skill sets. Robust labor income growth, supportive financial conditions for investment, and rational regulatory and fiscal policy supports promote investment in capital and technological improvements in key sectors for economic growth.
The importance of macroeconomics to productivity growth means that the path of future productivity gains is not simply the result of luck, but also a product of macroeconomic policy choices. It is no coincidence that productivity growth was tepid during the slow recovery from the Global Financial Crisis, but outperformed after the rapid recovery from the pandemic and when labor markets were at full employment in the late 1990s. While the right policy supports led to a strong recovery and began to lay the foundations for another era of sustained productivity growth, new policies threaten that potential renaissance. The future of productivity growth during the coming years is uncertain, and at least substantially contingent on policy choices.
The Inflation Reduction Act (IRA), CHIPS and Science Act (CHIPS), and Infrastructure Investment and Jobs Act (IIJA) provided public backing for investment in energy, infrastructure, and semiconductors and led to a boom in fixed-investment. They likely played an important role in supporting the brief but notable post-pandemic productivity boom. Unfortunately, this success may be short-lived, in part due to political threats and in part due to the inability to implement them rapidly enough to crowd in more private investment. Given the shifts in tariff and tax policy and restrictive monetary policy, business and residential fixed investment may also be vulnerable to greater underperformance in the coming years.
Part of our renewed mission will be to provide a robust vision for public investment programs that appeals to policymakers across the political spectrum. Even in the current political environment, there is bipartisan support for programs that would develop and commercialize scalable, next-generation energy technologies that are essential for firm power and long-term electricity price stability. Public policy choices for how best to support advanced manufacturing in other critical sectors may also prove pivotal to American economic performance in the coming years.
The Federal Reserve's thinking around the interaction of monetary policy and investment must also shift. While restrictive monetary policy may reduce aggregate demand and inflation in the short-run, it also comes with long-term costs to investment, growth, and productivity. A key part of our monetary policy advocacy will involve highlighting this dynamic and arguing for a framework that recognizes this issue.
Renewing State Capacity And Forging A New Political Consensus
For economic policy to succeed, it must be credible—both in its execution and its durability. That requires state capacity: the authority to act, the capabilities to deliver, and the institutional stability to persist beyond electoral turnover. Agencies must operate with transparency and competence to earn trust and credibility with businesses, workers, and markets. That trust ultimately depends on a political consensus that outlasts election cycles, as investment horizons often do. State capacity is what turns policy ambition into lasting economic outcomes.
The costs of weak state capacity became evident during the pandemic. Workers and businesses struggled to access relief programs due to excessive administrative burdens and outdated IT systems, while fraudsters exploited hastily designed programs. These failures not only impacted the response to the pandemic recession; they also undermined confidence in government and harmed the political prospects of future recession relief programs.
Sustained economic success depends on policymakers having access to timely, high-quality data to gauge the state of the economy and labor market. Unfortunately, declining response rates and years of underfunding threaten the ability of our statistical agencies to deliver the information policymakers need to govern well.
In response to the pandemic’s disruptions, Congress passed landmark legislation—the IRA, CHIPS, and IIJA—to support investment in critical sectors. But passing laws is only the first step. Effective implementation requires clear administrative rules, competent leadership, continuous knowledge-building, and credible institutions. We’ve advocated for rule changes for key tax credits, SPR acquisition contracting, and equity investments because it is this kind of minutiae that can often prove to be most pivotal to maximizing the private-sector impact of these programs.
The old playbook for bipartisan insulation may no longer be sufficient. CHIPS originated under the Trump administration and passed with broad bipartisan support. Although it passed on party lines, the IRA largely benefited Republican districts across the country. Still, the long-term survival of these programs is far from assured as Congress has repealed large parts of the IRA while the CHIPs office is being dismantled. Durable policy frameworks and institutions are essential for the viability of advanced technologies like geothermal and next-generation nuclear.
As was the case with our current economic challenges, the erosion of state capacity has been decades in the making. In the late 1990s, Congress slashed its own staffing and eliminated offices that once provided important technical expertise. Chronic underfunding of our statistical agencies left vital data sources fragile and outdated. Where decisions used to be formed through an autonomous Congress and durable political consensus, the Supreme Court has drifted to enabling higher personnel and policy volatility within the administrative state. As we get more guidance on the kinds of independent agency structures the Supreme Court may yet still tolerate, it will be essential to reform and enhance institutions that build stronger political consensus and more effective state capacity.
This moment presents an opportunity. Congress can reclaim its institutional strength and rebuild state capacity—across both legislative and executive branches—by modernizing laws, restoring agency funding, and reestablishing rigorous oversight. Modernizing antiquated IT systems and providing funding for critical data collection programs will give policymakers the timely data they need to react to shocks with speed and precision. Precision in legislative drafting will be essential to ensure that laws are interpreted faithfully, implemented effectively, and built to last through political change.
We now plan to expand this work by modernizing federal agencies to execute policies in a turbulent economy. We also plan to develop legislative proposals that respond to new judicial and presidential constraints on agency authority, ensuring that critical federal programs are designed to withstand political uncertainty.
Conclusion
The American economy is at a pivotal moment. The spectrum of potential outcomes for employment, inflation, and growth is wide. The ultimate trajectory will not simply be the product of chance. Policy choices will decide whether or not we can create a new era of American prosperity with full employment, low inflation, and strong economic growth.
The macroeconomic and political environment has and will continue to shift substantially. Navigating the cloudy skies and choppy waters ahead will require a dynamic toolkit for macroeconomic stabilization on all dimensions.
At Employ America, we are prepared to support policymakers with rigorous research and financial market analysis, robust scenario planning, and thoughtful policy proposals and implementation details. We have tackled a variety of macroeconomic challenges in the past and our team is prepared to confront the many risks and uncertainties ahead. We invite you to support and join us on this journey.