Experts call for a quick, big deal
Economists warn not to follow same path as in Great Recession
Congress is moving quickly to pass another coronavirus relief plan, racing through a debate over the size of the federal spending package and the speed at which it should be delivered.
The consensus among economists: Go big, go fast.
The House and Senate on Friday approved budget resolutions on party-line votes that would allow Democrats, who hold narrow majorities in Congress, to approve a $1.9 trillion stimulus plan without Republican support by next month. A group of 10 Republican senators has proposed a scaledback package of about $600 billion.
The debate over the third round of relief spending in a year is shaped by the searing experiences of the previous recession. Economists are calling on lawmakers and policymakers not to repeat the mistake of the Great Recession of more than a decade ago, when inadequate stimulus spending led to a slow, grinding recovery that kept millions unemployed and forced millions from the labor force.
Warning signs are already beginning to appear. Job growth was anemic in January, with employers nationally adding just 49,000 jobs after slashing more than 200,000 in December, the Labor Department reported Friday. Long-term unemployment, defined as being out of work for more than six months, has nearly tripled since July to more than 4 million.
Waiting in a food distribution line at Heights Interfaith Ministries in Houston, Ruben Rivera, a welder who has been out of work since March, implored Congress to act.
“Everything is getting more expensive, and there are so many people with no jobs,” he said. “Nobody knows how long this is going
Economists are calling on policymakers not to repeat the mistake of the Great Recession of more than a decade ago, when inadequate stimulus spending led to a slow, grinding recovery that kept millions unemployed.
to last.”
The difference between the Biden and Republican packages is scale, said Mark Zandi, chief economist at Moody’s Analytics, the research unit of the bond rating agency. Both plans, Zandi said, have the components to support low-income families disproportionately hurt by the pandemic, only less so in the Republican plan.
The goal of Biden’s massive $1.9 trillion plan, which would follow a $900 billion deal approved in December and a $2 trillion package in March, is to quickly rev up the economy to bring unemployed workers back into the workforce. A forecast by Moody’s Analytics predicts that Biden’s plan would return employment to prepandemic levels about a year faster than the Senate Republicans’.
The nation, which has nearly 10 million fewer jobs than before the pandemic began, would add more than 7 million jobs by the end of the year under Biden’s plan, compared with about 4 million under the Senate Republicans’ plan and just 3 million if Congress does nothing. The projected unemployment rate, if Biden’s plan is enacted, would fall to 4.8 percent at the end of 2021, nearly a point below the 5.7 percent forecast under the Republican proposal, according to Moody’s.
“It’s better to err on the side of providing too much help rather than too little,” Zandi said. “Policymakers tend to make that mistake. So hopefully, they don’t this time around.”
Republicans — some who support a smaller stimulus package, others who favor a pause after recently pumping nearly $1 trillion into the economy — argue that doing too much, too fast risks exploding the deficit and igniting inflation. Republicans employed similar arguments as they blocked additional stimulus spending after the Great Recession.
Economists’ views about the deficits and inflation have changed in recent years, in part because of the experiences during the Trump administration. In the past, economists feared that increased borrowing by the federal government would drive interest rates higher and that policies to drive faster growth would spark runaway inflation.
Under the Trump administration, however, deficits ballooned as the federal government pumped hundreds of billions of dollars in tax cuts into an already strongly expanding economy. Longterm borrowing rates, however, remained low — now about 1 percent — and inflation ran about 2 percent a year. Inflation fell to 1.4 percent in 2020, according to the Labor Department.
Federal Reserve policymakers, in fact, have spent the past decade worrying that inflation is too low, concluding the economy can run hotter to lower unemployment — without spurring a surge in prices. They have pledged to keep interest rates extremely low for the foreseeable future to bring the nation back to full employment.
They also are calling on Congress to pass additional stimulus. Robert Kaplan, president of the Federal Reserve Bank of Dallas, said in the recent interview with CNBC that additional federal spending is needed to speed vaccinations, extend emergency unemployment benefit programs and support the reopening of schools and child care so that women, who have been disproportionately hurt by the pandemic, can return to work.
Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters this week that he favored the bigger spending package.
“If it’s too much, I think we can live with that. If it’s too little, it’s going to be extremely bad for so many people,” Evans said, according to the news agency Reuters. “I think doing more is better than doing less in the current situation.”
Spend or save?
The question of more or less is at the center of the debate in Congress. Democrats would send $1,400 payments to individuals earning $50,000 or less and $2,800 to married couples earning $100,000 or less at an estimated cost of $465 billion.
The Republican senators proposed $1,000 for individuals making $40,000 or less per year and for married couples earning $80,000 or less at a cost of about $220 billion, according to the Committee for a Responsible Federal Budget, a nonpartisan think tank.
Gus Faucher, chief economist of PNC Financial Services Group, said the money from the stimulus checks would have a bigger impact if it targeted lower income families, who are likely to spend it quickly and provide a bigger economic boost.
“For those households that are better off, they’re more likely to save their money rather than spend it,” Faucher said. “So that doesn’t do as much good for the economy.”
Other economists argue, however, that banking the stimulus checks is not necessarily a bad thing, since economic damage from the pandemic will last for months, if not years.
“The fact that people still have that in their savings or their checking account, so that they can spend it later, that’s going to provide help down the line, too,” said Michael Sadler, senior lecturer for economics and finance at the University of Texas at Austin.
Elizabeth Weeden, who lost her teaching job at La Porte Independent School District in March, said any stimulus payment would likely get spent — quickly. She has pieced together two jobs, doing administrative work in a chiropractor’s office by day and customer service by night, but is still earning 20 percent less than her teaching salary.
Her fiancé, who lost his construction job, has worked a string of temporary jobs, separated by bouts of unemployment. His truck was repossessed twice.
“It’s been hard, I’m not going to lie,” Weeder said. “It’s just overwhelming.”
State of the states
Perhaps the biggest gap between the Democratic and Republican plans is aid to state and local governments. Biden’s package would provide $350 billion to state, local and territorial governments to keep frontline workers employed, distribute the vaccine, increase COVID-19 testing, reopen schools and maintain other services.
Republicans oppose additional state and local aid. Without it, economists say, the federal government risks repeating another mistake from the Great Recession. Republicans blocked funding to state and local governments, which, just as the private sector started adding jobs, began laying off workers and slowing the recovery.
“State, local governments across the country have big budget holes,” Zandi said. “If they don’t get help, they have to cut jobs and programs and services, and that’s very hard on the economy.”
The federal government, of course, has its own budget shortfalls. The federal deficit topped $3 trillion in 2020 and was projected to exceed $2 trillion this year — not including the additional debt that would come from more stimulus spending.
Over the long term, economists say, the nation must address the debt, which now exceeds that nation’s annual economic output of about $21 trillion. But for now, economists said, the federal government must spend to strengthen the economy, especially since it can borrow at historically low rates.
Once the crisis passes, Faucher, PNC’s chief economist, said attention should return to budgetary pressures such as keeping Social Security and Medicare solvent as baby boomers retire. “But it’s easier to do that with a strong economy than with a weak economy,” Faucher said.
How long?
Another question facing policymakers is how long the economy will need help. Biden would boost enhanced unemployment benefits to $400 a week from $300 and extend the program through September. The Republican plan would maintain $300 through June.
Arquella Hargrove, chief executive of Epic Collaborative Advisors, a human relations consulting firm in Houston, said Congress should act for the longer term, avoiding the stops and starts in programs that left both small businesses and workers wondering how — or if — they would get by.
A $1,200 stimulus payment last year paid utilities and helped Tania Alejandra keep her Houston leather goods shop in business. If she gets another one, she said, that, too, will go to keeping her doors open.
Hargrove’s company was rescued by a low-interest loan from the Paycheck Protection Program, she said, but small businesses and workers continue to struggle with both economic conditions and uncertainty.
“It’s not a question of this month. But what are we going to do to help people for an extended period of time?” she said. “If it’s six months, if it’s a year, because it is still unknown.”