August 27, 2021
Highlands professor of economics Ali Arshad is not a fortune teller, but his economic models in December of 2020 were accurate enough to predict how New Mexico’s economy would fare in the midst of the Covid-19 pandemic. As the pandemic rages on, Arshad’s assessment of the tight labor market, and back-to-work incentives suggest that long-term planning—rather than quick fixes—are the only way forward.
In December of 2020, Arshad published “The Impact of COVID-19 on the Economy of New Mexico: Three Scenarios” in the International Journal of Business and Economic Perspectives. In the article, Arshad developed a model to predict how the pandemic would affect the economy in New Mexico.
“When COVID started, experts were talking about shutting down the entire economy,” Arshad said. “So, I developed this model where I looked at the key sectors that would be directly affected—for example, the hospitality industry, hotels, restaurants, airline industries, all of those would be directly impacted. I looked at broad sectors and ran three different scenarios: What if the sector is shut down for a month? What if it is shut down for three months? And what if it’s shutdown for six months?”
Arshad describes his article as a “‘what if’ analysis” and his predictions turned out to be fairly accurate.
“In July our unemployment peaked to over 12 percent, which is what my model had predicted,” Arshad said.
Arshad specializes in the analysis of economic investment and has extensive experience working as a consultant for firms that invest in economically depressed areas under the federal Immigrant Investor Visa Program. Arshad’s research led him to analysis of the impacts of reduced household spending due to the loss of jobs, income, and spending.
On July 2, Arshad participated in a panel on KUNM, called Let’s Talk about Unemployment and the Labor Shortage, hosted by Kaveh Mowahed. In addition to Arshad, the conversation included Jacob Elliot, owner of The Farmacy restaurant in Nob Hill, Erica Gallegos, Policy Director at OLÉ, and Ricky Serna, Acting Secretary, New Mexico Department of Workforce Solutions. As New Mexico, like the entire country, continues to grapple with labor shortages, panelists discussed the issues and possible solutions.
While many people remain concerned that stimulus spending has slowed the return to the workforce, Arshad said the stimulus packages helped avert the worst-case scenario for the economy.
“The stimulus provided a cushion to the economy,” said Arshad. “If I am unemployed, I have zero income coming in, but if I get unemployment benefits, I have purchasing power and I’m going to spend that. Typically, when people are unemployed, they spend their money on essential goods. If the additional unemployment benefits were not forthcoming, we would have seen a much more disastrous effect to the economy.”
With the Delta variant driving cases up exponentially across New Mexico, Arshad said we may need another injection of stimulus money from the federal government.
“As soon as we see signs of businesses shutting down because people are afraid to eat out, we need to have another stimulus,” Arshad said. “Most of the stimulus has to come from the federal government because state governments are in dire straits, and they don’t have as much economic clout.”
Although his suggestion is backed by solid economic analysis, Arshad is aware of other perspectives that blame stimulus payments and extended unemployment benefits on the tight labor market. The studies conducted on these issues don’t support those theories, however.
“One serious study that was done by the Federal Reserve Banck found that very few workers turned down jobs because of extra supplemental benefits that they’ve received during the pandemic,” Arshad said. “They then extrapolated the effect of the additional $300 per week under the Federal Pandemic Unemployment Compensation and that also had an insignificant impact on disincentives to work. And for the states that have rejected the extended unemployment benefit from the federal government, there hasn’t been any difference in job vacancies compared to the states still receiving the benefit.”
While many hospitality jobs are short staffed, Arshad says that the country is not actually experiencing a true labor shortage. According to Arshad, rising wages and the continuous creation of jobs means the U.S. and the state of New Mexico are experiencing a tight labor market instead.
“In New Mexico, there has been 22 percent increased employment in the hospitality industry and retail sectors in a 4.4 percent growth,” Arshad said. “There will always be sectors where you have labor shortages because it takes time for the markets to adjust—and we’re in the middle of a very severe pandemic.”
New Mexico, like many other states across the country, is hoping to fill jobs by offering a one-time $1,000 back-to-work incentive to people who secure employment after having received unemployment benefits. But Arshad says there’s no evidence this kind of incentive is effective.
“Unfortunately, I don’t think there are any quick fixes. It’s a pandemic, so people are afraid,” Arshad said. “Sometimes money is not an incentive. People are looking for long-term employment; they’re not attracted by small amounts of incentives.”
Overall, Arshad believes strong federal programs are key to reviving the economy in New Mexico and in the U.S., but he says the private sector has a role to play, too.
“Women are almost always adversely affected because they’re usually the ones taking care of the kids, and with the pandemic they’ve also had to pay attention to online learning,” said Arshad. “The Biden administration is talking about free preschool under the American Families Plan announced in April of this year, and that is definitely going to help. We need coordination between the federal government and private sectors in this area where the private sector provides in-house childcare. That will go a long way.”
While there are plenty of arguments against government safety net programs, Arshad says the data supports their effectiveness.
“All you need to do is look at the history of all these programs. Since they were enacted, we have cut the poverty rates by more than 50 percent,” said Arshad. “Federal programs such as food stamps, Medicaid, unemployment benefits, and social security—these have really helped in cutting poverty. There’s no reason why we should have such a high poverty rate in the United States—and in New Mexico it’s even higher. These programs help and we have the data to support that.”
Although it is important to address the economic challenges so many Americans are currently facing, Arshad also stresses the importance of long-term economic planning.
“We are so far behind many European countries in terms of sick leave and other basic things that we are essentially trying to catch up,” Arshad said. “All of these things help families cushion themselves. A lot of epidemiologists are predicting that there are other pandemics in the offing, and if they happen, we’ll need to get serious about government intervention in some of these critical areas.”
As far as his own research goes, Arshad remains interested in the impacts of economic investment, and he says he plans to keep an eye on the two universal basic income pilot programs that will be launching in Santa Fe and Las Cruces.
“Very few people know that universal basic income is actually a conservative idea. Milton Friedman, the Nobel laureate in economics, proposed a negative income tax, which is giving a government stipend to people with no income,” said Arshad. “We have similar programs embedded in our tax system. There is scant evidence of any adverse effects and if it’s done well so that people who really need the money get it, then it can be a successful program.”
Ultimately, Arshad’s research points to the need for addressing economic needs now and establishing plans for the future.
“We have such a short-sighted approach to the economy. We look at what will happen in the next month,” said Arshad. “We have no long-term economic policies in the areas of health care, education, or infrastructure. We need to address that, because if we don’t, we’ll always have one disaster or another and we’ll be caught short.”