Alex Williams, a distinguished macroeconomist at Employ America, a renowned think-tank dedicated to achieving full employment and low inflation, has brought forth a metaphor that is gaining popularity among economists. This metaphor, commonly referred to as the “soft landing,” aims to navigate the global economy safely and minimize any detrimental impacts post-pandemic. Initially, this appeared to be a challenging feat, particularly with the rise of inflation and the conclusion of the pandemic. Many experts believed that strict and decisive action from the Federal Reserve was necessary to control inflation, even if it meant increasing unemployment and slowing economic growth. Any substantial rise in unemployment and significant slowdown in growth would be considered a “hard landing.”
However, it was unclear what exactly was being referred to as the landing. For some economists, like Fed President Goolsbee, the “soft landing” implies that the economy is akin to an airplane. Goolsbee’s advice on airplane landings has been sound thus far—avoid landing with a steep descent. However, when an airplane lands, it comes to a halt, and passengers disembark, continuing on with their lives. But does the economy truly come to a stop like that? The reality is that the economy never truly stops, which means that the airplane metaphor falls short. It is difficult to imagine any economy having enough metaphorical fuel for a complete stop.
Instead, I propose a better metaphor: the Dukes of Hazzard landing. Let me clarify that both Alphaville and Employ America explicitly disassociate themselves from the specific car design and ideology celebrated in the show. If it were up to me, we would be discussing the remarkable stunts performed by the General Sherman as its drivers confronted the remaining Redeemers and Lost Cause true believers. Unfortunately, we must work with the TV shows we have, and everyone enjoys a thrilling car jump. So, picture this: as you drive the economy forward, you suddenly come across a vast ravine. With too much momentum to halt in time and no alternative routes available, your only option is to attempt jumping over the ravine.
Now, how does one execute this jump successfully? First, you rev the engine to gain enough speed for the leap. Then, while the car is soaring over the ravine, there is little you can do until the tires touch the ground again. However, the moment they do, you must accelerate to maintain control of the momentum and steer the car. It is crucial to avoid landing with excessive force on the brakes, which would cause the car to flip and kick up a cloud of dust.
In this metaphor, the ravine represents the pandemic. It is virtually impossible to effectively manage an economy when a deadly and highly contagious disease is rampant, particularly without a vaccine. Thus, the primary objective of policymakers was never to ensure that the economy operated optimally during the pandemic. Instead, a more appropriate goal would be to guide the economy across the ravine and achieve a smooth landing on the other side. We must avoid crashing into the ravine, colliding with the cliff on the opposite side, or flipping the car upon arrival.
Fortunately, the fiscal policies implemented during the pandemic align well with this narrative. In 2020 and 2021, the United States revved the engine through demand-side stimulus while depleting the inventories of products that were stored in warehouses or in production at the start of the pandemic. It was critical to enable everyone to meet their financial obligations, leading to the implementation of various programs under the umbrella of “Big Fiscal” support. These programs, known as the CARES and ARP Acts, provided assistance to households, businesses, and state governments alike.
By 2022, the United States had largely depleted existing inventories and entered a precarious zero-G “hangtime” phase, where the economy was in the process of crossing the ravine. Inflation became a cause for concern, instilling fear among policymakers and commentators that inflation expectations would become uncontrolled, inviting a repetition of the inflationary spirals experienced in the 1970s. Additionally, supply shocks in global energy markets further exacerbated this concern. However, the underlying problem differed from the complex, sequential shocks of 1970s inflation. During the pandemic, various sectors of the economy sporadically switched on and off as different regions grappled with COVID-19 outbreaks. In other words, the engine no longer had to overcome tire resistance on the road.
Nevertheless, by the second quarter of 2023, the wheels had touched the ground, and fiscal policy was revving the engine on the supply side through initiatives such as the “Industrial Policy” encompassing CHIPS, IRA, and IIJA. These bills aimed to support clean technology manufacturing, semiconductors, electric vehicles (EVs), and other energy-related technologies, provided businesses complied with local content and labor laws. Simultaneously, the IIJA facilitated the construction of public infrastructure to ensure the success of these investments, such as grid infrastructure, roads, bridges, and EV chargers. Notably, the economy surged across the ravine with tremendous momentum, particularly in labor markets, with an unemployment rate of 3.5%, lower than pre-pandemic levels.
Moreover, we are witnessing that momentum can be directed effectively. Lay-offs remain minimal, and manufacturing investment is accelerating at an unprecedented rate since 1960, as indicated by recorded statistics. Industrial policy successfully stimulates significant private investments in the semiconductor, EV, and clean energy supply chains, consequently alleviating inflationary pressures.
To reiterate, the rubber is back on the road. The axles did not break, the shock absorbers performed admirably, and we managed to avoid flipping the car. Nonetheless, the road ahead may still pose challenges, making it difficult to predict how inflation and growth numbers will respond and over what period. However, one thing is certain: transforming today’s labor market momentum into substantial long-term productivity gains necessitates greater investment on the supply side. The duration of this investment remains uncertain, especially after years of disrupted supply chains. Hence, it is crucial for future economic policy discussions to focus on shortening the relevant time-to-build and ensuring that new capacity can be validated in a growing economy.
A crucial aspect of expanding economic capacity involves ensuring that by the time new plants and equipment are established, which can take anywhere from one to ten years or longer, there is still demand for the output. Successfully achieving a rubber-on-the-road scenario should mark the beginning of a growth process rather than its culmination. Although the hangtime phase was anxiety-inducing and the landing remains slightly bumpy, we have successfully surmounted the ravine. The shock absorbers managed to mitigate the most severe impacts, and industrial policy is already gaining traction. While it is uncertain whether we will experience a “soft landing” altogether, envisioning a Dukes of Hazzard landing seems more plausible.
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