How Many More Trillions Must We Pump into This Economy?

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Three months after the coronavirus hit the fan here in the U.S., two things are clear about Congress’s fiscal response: It worked about as well as anyone could reasonably have hoped, and we need something very different going forward.

The CARES Act, signed in late March, threw money at pretty much everyone: one-time checks of up to $1,200 for most American adults plus up to $500 per child, an extra $600 a week to the unemployed, forgivable loans to businesses. The usual concerns about government debt and bad incentives simply didn’t apply, because we were dealing with a severe health crisis and wanted to discourage people from working.

The lockdowns still caused plenty of pain, driving the unemployment rate up to about 15 percent in April. But the new benefits were enough to keep households afloat and then some. The $600 unemployment boost caused many people to earn more in quarantine than they’d earned while working. The $1,200 checks went to lots of people who didn’t even need them, contributing to record-high savings rates.

And two new studies from big-name poverty researchers suggest that — thanks to the stimulus checks and boosted unemployment benefits — the poverty rate changed only a little and may even have declined. Bruce D. Meyer, James X. Sullivan, and Jeehoon Han find, according to an early summary of their work, that “the poverty rate fell by 2.3 percentage points from 10.9 percent in the months leading up to the COVID-19 pandemic (January and February) to 8.6 percent in the two most recent months (April and May).” Meanwhile, a team from Columbia University estimates that the poverty rate would have risen from 12.5 to 16.3 percent without the CARES Act — and that, with the act, it will likely end up in a range of 11.3 to 13.8 percent.

Things are a little less clear on the business side of the rescue, to be sure. Some huge companies have been tipped over the edge during the pandemic, including JCPenney and J. Crew, and we could soon see a flood of small-business bankruptcies, especially if there are long-lasting changes to consumer behavior. But at minimum, Congress propped up a lot of businesses and added more money to its efforts as needed.

Going forward, the problem is that while we’re still in very rough economic times, we’re also rushing back to work while we still have an economy to reopen. We can’t keep bribing people to stay home, but we also can’t simply end all extra assistance while the unemployment rate is still in double digits. And unfortunately, Congress seems set on waiting until the last minute to decide on a new course.

The Democrats in the House have passed a ridiculous $3 trillion bill that would (among much else) continue the $600 unemployment boost through the end of the year, while the Republicans in the Senate and the White House seem content to toss out random ideas every so often until they finally get down to business sometime next month, just before the existing $600 boost expires. Payroll-tax cuts! Subsidized vacations! Back-to-work bonuses! Hazard pay for essential workers! Another round of free money for everyone!

Lord only knows where all this will end up. But for a serious proposal, lawmakers should take a hard look at a recent Aspen Institute report from a bipartisan team of economists. (The group includes both Jason Furman, who headed the Council of Economic Advisers under President Obama, and Glenn Hubbard, who headed it under George W. Bush.) The proposal is a good attempt to balance continued government help with phasing out all this extra spending.

Take, for instance, the approach to unemployment: Rather than a $600 boost that often makes staying home more remunerative than a job, the authors would have the federal government add “up to 40 percent of covered wages with a maximum federal UI benefit of $400,” which, combined with state benefits, would replace about 80 to 90 percent of wages for workers who earn below the median. (If states were unable to implement this plan on short notice for technical reasons, they could opt for a simpler formula that tops out at $200 per week.) Importantly, this boost would automatically phase out as a state’s unemployment rate fell, ending entirely when that rate hit 7 percent. And, since even 80 or 90 percent wage replacement can be attractive if it means you don’t have to work, the authors suggest that lawmakers consider bonuses for people who work, too.

As a penny-pinching right-winger, I squirm a bit at all that. But something like this — a gradual phase-out of the boost, coupled with incentives to get back to work, rather than yanking the rug out all at once or continuing the full boost through the end of the year — makes a lot of sense.

For businesses, the authors propose keeping government assistance to loans. As they note, some businesses may simply not be able to survive in a post-pandemic economy, and keeping them afloat at taxpayer expense only delays the necessary adjustments. The goal should be to avoid losing viable businesses in particular.

The authors estimate that their plan — which also includes aid to state and local governments — would cost $900 billion to $2 trillion, depending on how quickly the economy recovers and the various spending measures phase out. As it happens, that’s roughly the range that Republicans seem to be talking about, if far less coherently.

Everyone seems set on letting another trillion or two loose, and that’s not necessarily crazy given the size and scope of the economic problem we confront. But let’s do it in a way that gets the economy back on track.