U.S. Department of the Treasury

I. Introduction 

I would like to start by expressing my gratitude to the New York Association for Business Economics for organizing today’s event, and to all of you for being here. It is an honor to receive the William F. Butler Award and to join many distinguished past recipients. 

I note that I am even the second “Janet L.” on the list. The first was Janet L. Norwood, whom I had the pleasure of inducting into the Department of Labor Hall of Honor in 2015 when I was Fed Chair. That Janet served as the Commissioner of the Bureau of Labor Statistics for over a decade, exemplifying the BLS’s reputation for accuracy and integrity and driving improvements in its work and thus in our understanding of the economy. She was responsible, for example, for the launch of the Consumer Expenditure Survey and improvements in the Consumer Price Index, among other innovations. 

I mention this not only to underscore that I am honored to be among prior Award recipients, but also because today I will speak to what has happened in the U.S. economy over the past four years, drawing heavily on key economic data and analytics. 

I will argue that the U.S. economy has done remarkably well in the aftermath of the pandemic. This fact becomes even more apparent when the recovery is placed in the proper context, namely by comparing U.S. economic outcomes to those in other advanced economies, to performance in past recessions, and to what economists forecasted. U.S. outperformance becomes clearer still if one considers an important counterfactual: what likely would have happened under an alternative approach that focused only on inflation and not on unemployment. All policy choices entail tradeoffs, but the Biden Administration made sound decisions that set the economy on a strong course.

It’s not my intention to paint an overly rosy picture of Americans’ economic well-being. All too many households have faced growing challenges over decades. These include rising costs of housing and childcare and high debt burdens.^[1] Young men in particular have seen their wages stagnate and they’re participating less in the labor force. ^[2] Such adverse, decades-long trends have left many Americans with the sense that it is difficult to sustain a middle-class life. To address this complex of longer-run structural problems, the Biden Administration has been pursuing a strategy I call modern supply-side economics, an approach that focuses on channeling public and private capital to boost America’s capacity to produce goods and services in an inclusive and sustainable manner. 

Unfortunately, these longer-term challenges cannot be solved overnight. So today, I will also look ahead and emphasize how critical it is for America to sustain recent investments in cutting-edge industries and research and development, while also addressing the significant challenge of fiscal sustainability. 

II. A Historic Economic Recovery

I’ll begin my evaluation of the recovery by going back four years. President Biden took office at a time of profound fear and uncertainty. Thousands of Americans were dying each day, and the unemployment rate exceeded six percent. America faced the tail risk of an economic crisis that could match that of the Great Depression. 

In response, the Biden Administration acted quickly and decisively, vaccinating millions to save lives and allow businesses to reopen safely. Pandemic disruptions to supply chains and large sectoral demand shifts led to shortages of many goods and services, pushing up prices. So the Administration worked to unsnarl supply chains by unclogging ports and rapidly increasing the production of some essential goods. These actions helped to restore supply. At the same time, the American Rescue Plan supported demand, including through stimulus checks, monthly child tax credits, and enhanced unemployment insurance. These measures also mitigated hardship and bolstered the financial positions of households and businesses, reducing downside risks.[3] The Administration subsequently navigated additional challenges, including the energy price shock resulting from Russia’s invasion of Ukraine, a regional banking stress that posed systemic risk, and two debt limit impasses. 

Over time, the supply of goods and services expanded significantly, enabling a combination of strong growth and cooling inflation—namely, a “soft landing.” Supply chains became untangled and the labor force grew, in part due to a significant increase in prime-age labor force participation, which reached historically high levels. Today, economic growth is robust, unemployment remains low, and, after peaking at rates that Americans had not experienced for decades, inflation has now receded to levels that are nearly consistent with the Federal Reserve’s price stability target, although important risks remain. 

Thanks to the strength and speed of the overall recovery and the design of the fiscal policies that were implemented, the recovery has also been historically equitable. Unemployment rates fell rapidly, including for Black and Hispanic Americans.^[4] The gap between urban and rural unemployment rates narrowed significantly.^[5] And, since the onset of the pandemic, real wages have increased for most workers.^[6] In 2024, the median American worker could afford the same basket of goods and services as in 2019 with an additional $1,600 left over to spend or save.^[7] And it is lower-income workers who have seen the largest gains in real wages.^[8] Furthermore, from 2019 to 2022, real median household wealth saw a historic increase to reach its highest-ever level.^[9] And it rose more in percentage terms for Black and Hispanic families.^[10] 

The solid recovery in growth and improvement in labor productivity also fueled business dynamism, leading businesses and investors to deploy more capital into the American economy. The number of applications to start new businesses reached record levels,^[11] and business sales, adjusted for inflation, expanded by 10 percent above pre-pandemic levels.^[12] Small businesses have in fact played a disproportionate role in job creation, contributing more than 70 percent of net private job gains since the fourth quarter of 2019.^[13] 

Statistics like these depict the strength of the U.S. economic recovery. But its remarkable nature becomes even more apparent when put in proper context, which is what I will turn to now.

First, consider comparisons to other advanced economies. Virtually all advanced economies experienced a significant spike in inflation. But in the United States, inflation fell earlier than in other G7 economies.^[14] At the same time, America enjoyed strong growth. Real GDP now exceeds pre-pandemic levels in all G7 economies. But it grew by more in the United States: by 11.5 percent from the end of 2019 to the third quarter of 2024, followed by 7.3 percent in Canada and 5.6 percent in Italy.^[15] This is largely attributable to robust U.S. productivity growth, which far outstripped productivity gains in other G7 economies.^[16]

At the same time, America quickly achieved and has subsequently maintained a uniquely strong labor market with notable real wage gains. In the period from Q4 of 2019 to Q2 of 2024, the United Kingdom is the only other G7 country that also experienced substantial real wage growth. Real wages grew modestly in Canada, remained essentially unchanged in France, and declined in Germany, Japan, and Italy.^[17] The Economist magazine’s mid-October issue perhaps sums it up best, designating the U.S. economy the “envy of the world.”

Comparing this recovery to past ones further underscores the strength of our expansion. While the COVID recession entailed the largest spike in unemployment in living memory, the U.S. unemployment rate declined to its pre-pandemic level in just two years. This contrasts significantly with longer than four years in the 1990, 2001, and 2008 recessions.^[18] The historic 37 percent increase in real median household wealth from 2019 to 2022 also stands in marked contrast to the 2007 to 2010 period, when real median household wealth instead fell by 39 percent.^[19] And business investment fell less and recovered faster as a share of GDP than in prior recessions, with businesses investing an estimated $625 billion more during this expansion than if investment had followed historical patterns.^[20] This historically impressive investment performance reflects domestic and foreign investors’ confidence in the stability and productivity of our economy.

Comparisons to economic forecasts from various points during the past four years also demonstrate the strength of the U.S. recovery. In the fourth quarter of 2021, real GDP exceeded the Blue Chip consensus forecast from October 2020 by more than four percent.^[21] The economy then continued performing better than expected. Even in October of 2022, Blue Chip forecasters expected that a recession was more likely than not in 2023, with many prominent forecasters asserting that a recession was a near certainty.^[22] As we all know, that recession did not come to pass. In fact, the U.S. economy, remarkably, is expected to be more than 10 percent larger by the end of 2024 than the IMF forecasted in October 2019, before the onset of the pandemic.^[23]

Alongside these three comparisons, we should also consider a counterfactual: how inflation and labor market outcomes would have differed under alternative policy choices. With respect to inflation, it’s true that the prices of many everyday goods soared in the aftermath of the COVID-19 pandemic, placing a major strain on many American households. However, as the supply disruptions that drove much of this inflation abated and labor market disruptions subsided, the pace of inflation cooled dramatically. With respect to the labor market, support from the American Rescue Plan substantially offset the income gaps confronting roughly 10 million people^[24] who had become unemployed or had left the labor force by the end of 2020. That both averted significant hardship and supported demand, which allowed Americans to get back to work quickly. The rapid decline in unemployment enabled the United States to avoid labor market scarring—the erosion of skills and reduced employability that can result from long periods of unemployment—and thus avoid an associated reduction in future potential output. 

Now, consider the likely consequences of an alternative fiscal response, one solely aimed at preventing the post-pandemic surge in prices without considering the consequences for unemployment. To prevent that inflation surge, fiscal policy would have had to be much tighter. Indeed, a contractionary fiscal policy would likely have been needed to offset the inflationary impact of the pandemic-induced contraction in supply. Such a policy would have withheld critical aid from households and businesses and would likely have led to far lower output and employment. That could have meant millions more people out of work, households without the income to meet their financial obligations, and lackluster consumer spending. 

An important “what-if” exercise would ask: how much more unemployment would have resulted from a fiscal contraction sufficient to keep inflation at the Fed’s 2 percent target? The answer is “a lot,” although the exact magnitude depends importantly on some key parameter values, particularly the Phillips curve slope, which measures the sensitivity of inflation to a demand-induced contraction in output. Most estimates of the Phillips curve find it to be quite flat. That implies that the employment and output cost of suppressing inflation would have been very substantial. But researchers debate whether such an estimate applied during the pandemic, which was an unusual period characterized by shortages of production capacity in critical sectors and some significant labor market bottlenecks that restrained supply. Some researchers argue for a higher estimate of the Phillips curve slope, and consequently a lower employment and output cost. Such differences notwithstanding, it is widely accepted that some increase in unemployment would have been required to offset the pandemic-induced inflation. Estimates from representative models find that the unemployment rate would have had to rise to 10 to 14 percent to keep inflation at 2 percent throughout 2021 and 2022. That would have meant an additional 9 to 15 million people out of work.^[25]

Such estimates showcase the critical tradeoff between inflation and jobs that policymakers faced during the pandemic. Strategies designed to fully suppress the post-pandemic inflationary surge would have required an exceptionally, and to my mind an unacceptably, high level of unemployment. The Biden Administration’s fiscal policy choices saved millions of jobs. Even so, inflation fell earlier than in other advanced economies. Over time, supply expanded, helping us achieve a soft landing.

III. Looking Forward

Sustaining Productivity-Enhancing Investments 

The U.S. economy now enjoys solid growth, low inflation, and a strong labor market. But much work is still needed to address the adverse structural trends that make it difficult for so many families to achieve or maintain a middle-class life. Traditional supply-side approaches wrongly assume that policies such as deregulation and tax cuts for the rich will fuel broader economic growth and prosperity. Modern supply-side economics, in contrast, rejects this trickle-down approach. Instead, it aims to expand our economy’s capacity to produce in a manner that is both inclusive and environmentally sound. It seeks to reverse decades-long underinvestment in infrastructure, the labor force, and research and development that have held back productivity growth. And it embraces collaboration between the public and private sectors, including through market-based incentives for critical investments. 

Over the past four years, the Biden Administration, acting on this approach, has made significant investments in infrastructure, R&D, and strategic industries, including semiconductor manufacturing and clean energy. Support to state and local governments during the pandemic has enabled their capital investments as a share of state and local spending to grow more over the past two and a half years than in any period since 1980.[26] This approach is also mobilizing private capital. Since the beginning of the Biden Administration, announced private sector investments in clean energy and manufacturing in the United States have surpassed $1 trillion.^[27] Following the passage of the Inflation Reduction Act and the CHIPS and Science Act, the pace of factory construction of computer, electronic, and electrical facilities more than doubled, with the increase concentrated in high-tech manufacturing facilities, including those producing semiconductors and electric vehicles.^[28] I am glad to have traveled as Treasury Secretary to see these investments firsthand, from a facility producing parts for electric vehicle batteries in Kentucky to a solar cell manufacturing factory in Georgia.

Consistent with the objectives of modern supply-side economics, such investments are also helping revitalize communities that had not historically benefitted from investment or had been left behind. Almost three-quarters of investments in clean energy since the IRA was passed have been announced in counties with median household incomes below the national average.^[29] Eighty-four percent have been announced in counties with college graduation rates below the national average.^[30] And Bipartisan Infrastructure Law funding is disproportionately going to states with lower household incomes.^[31] 

This is a very powerful start, but it is only a start. Economic policymakers must remain focused on driving strong and inclusive long-term growth and addressing climate change, which in turn requires sustaining critical investments in cutting-edge industries, such as the tax credits we have provided to American families and businesses to invest in clean energy. If these incentives are scaled back, it is American communities across the country that will suffer, along with our country’s progress in addressing climate change and in increasing our energy independence in the face of geopolitical risks. We also need to further expand our economy’s capacity to produce through additional supply-side investments, including in housing, childcare, and vocational training.

Addressing Fiscal Sustainability 

America also needs to ensure that the federal government’s fiscal policy is on a sustainable course. Over the past decade, the federal fiscal outlook has worsened due to significantly higher interest rates and multiple rounds of tax cuts for the wealthiest Americans. Non-defense discretionary spending as a percentage of GDP remains historically low, but government revenues as a share of the economy are significantly lower than expected before the prior Administration’s tax cuts.^[32] As a result, the 2024 fiscal deficit as a percentage of GDP, at 6.4 percent,^[33] is historically high in an economy operating near full employment. And in the decades to come, increased non-discretionary spending for our aging population is poised to put further upward pressure on the deficit. 

The projected fiscal path under current budgetary policies is simply not sustainable, and the consequences of inaction, or action that exacerbates projected deficits, could be dire. The Congressional Budget Office estimates that extending the provisions of the Tax Cuts and Jobs Act that are scheduled to sunset next year would add around $4 trillion to deficits through 2034.^[34] And new Treasury analysis estimates that extending these provisions and reversing additional business raisers enacted in the TCJA, as some have called for, would cost more than $5 trillion through 2035.^[35] Such policies could undermine our country’s strength, from the resilience of the Treasury market to the value of the dollar, even provoking a debt crisis in the future. And such misguided economic policymaking would not just affect the economy over the next few years or the next decade. Rather, the burden would fall heavily on the next generation, saddling them with high tax rates and reduced services. 

To stabilize our fiscal path, President Biden signed deficit reduction laws, particularly the Inflation Reduction Act and the Fiscal Responsibility Act of 2023, that achieved roughly $1 trillion in savings over the next decade.^[36] The Administration’s 2025 Budget proposes roughly $3 trillion of additional deficit reduction over the next decade by asking the wealthiest Americans to pay their fair share and calls for paying for the extension of tax cuts for those making less than $400,000.^[37] Regrettably, Congress failed to act on these proposals. 

As we look ahead, the government must give more weight to fiscal sustainability concerns when determining both tax and spending priorities. Long-term interest rates are not within the government’s control, but the current, higher interest rate environment necessitates lower primary budget deficits than in the past to ensure fiscal sustainability. This does not mean that critical supply-side investments should be curtailed: given their significant returns, these investments pose little threat to long-term fiscal sustainability. Rather, they are necessary to keep our country on a favorable growth path.

And no country can claim to be serious about fiscal sustainability if it does not invest in a functioning tax collection agency. Achieving fiscal sustainability will require that the government raise additional revenue. The simplest way to boost revenues is by giving the Internal Revenue Service the resources it needs to enforce existing tax law. It is currently estimated that the tax gap—the amount by which actual tax collections fall short of those that are due—stands at more than $7 trillion over the next decade.^[38] Adequate funding for the IRS can reduce that gap by ensuring that the wealthiest individuals, large corporations, and complex partnerships pay the taxes they owe under current tax law. 

Such investments in enforcement more than pay for themselves. Treasury and IRS analysis shows that current investments in technology, data, and high-end enforcement, if extended as our Administration has proposed, could generate $851 billion in additional revenue over the next decade.^[39] Such investments also enhance fairness. Small businesses are losing out to big corporations that can avoid paying their tax bills. These businesses deserve a level playing field. 

IV. Conclusion

America is faced with exceptional challenges in the years ahead. These include climate change, the possibility of future pandemics, and continued global conflict and fragility, all of which threaten to undermine global economic growth. At the same time, rapid technological innovation, including through artificial intelligence, will create both costs and benefits and has the potential to profoundly reshape the economic landscape.

I believe that the strength of the U.S. economic recovery has put us on solid ground to navigate these challenges and to capture the benefits from the opportunities that are sure to unfold. This was far from inevitable. The U.S. economy is uniquely strong compared to what might have been. In the years to come, it is crucial that sound economic policymaking sustain this momentum to the benefit of millions of Americans. 

Thank you again for this honor.

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