2Q20 GDP 9.5% Drop Shocks

Update 460: 2Q20 GDP 9.5% Drop Shocks
As Congress Faces Macroeconomic Crisis

Today, the statistics. Tomorrow, the screams. The day after learning of the worst quarterly GDP contraction on record, Congressional Republicans made no effort to restore the lifeline Corona unemployment benefits to over 30 million Americans, expiring today. Instead, the GOP proposed cutting them by 70 percent. We need to save money, you see. 

Penny-wise, except it’s so pound-foolish that almost no one is counting the pennies. The worst of this policy response, aside from the heartlessness, is that it is contractionary. In this macroeconomic moment, that’s serious malpractice.  Below, we argue for a different approach, one focusing on the macroeconomic crisis bearing down on us.

Good weekends, all…




Yesterday, the U.S. Bureau of Economic Analysis reported that GDP declined by 9.5 percent from the last quarter (32.9 percent annualized), the worst ever recorded. And last week saw over 1.4 million new unemployment claims, an increase over last, an indication of backsliding. The U.S. economy is in dire straits, the need for stimulus greater than ever.

Real GDP: Percent change from Prior Quarter

Source: U.S. Bureau of Economic Analysis
* Seasonally adjusted at annual rates

Democrats have taken the pandemic and recession seriously from the beginning, offering the HEROES Act in mid-May. Republicans have had more than two months to get serious about another package. Now, they have put forth an unserious proposal, lacking a macroeconomic prescription. A deal is distant. The negotiations may drag into mid-August, postponing recess. 

Below, we highlight the affirmative, stimulative agenda for Democrats in what could be one of the most tense coronavirus package negotiations. 

Macro Fix 1: Automatic Stabilizers

Although excluded from HEROES, automatic stabilizers should be a top priority in the negotiations over the next package. These stabilizers function counter-cyclically, ramping up spending during economic downturns and decreasing spending during expansionary periods. They ensure continued relief for as long as necessary without the need for reauthorization. During the Great Recession, Congress voted to reauthorize expanded unemployment insurance (UI) benefits 13 times over four years. We don’t have the time.  

In yesterday’s Joint Economic Committee hearing entitled “Reducing Uncertainty and Restoring Confidence during the Coronavirus Recession,” Republicans asserted that increasing automatic stabilizers would balloon the deficit. Yet Jared Bernstein, former Chief Economist for Vice President Biden, said the Republicans were confusing counter-cyclical policy with entitlements. Automatic stabilizers, by definition, are deficit-neutral in the long run. 

The American Workforce Rescue Act, released by Senate Minority Leader Schumer and Sen. Wyden, ties expanded UI benefits to state unemployment rates through March 2021. On Wednesday, Rep. Beyer introduced a similar bill in the House, H.R. 7821, the Worker Relief and Security Act, which has 35 original cosponsors. Other Democrats are floating automatic stabilizer proposals for the Federal Medical Assistance Percentages and the Supplemental Nutrition Assistance Program.

Macro Fix 2: Paycheck Continuity 

House and Senate Democrats have offered several plans for ensuring workers’ salaries and benefits through the crisis. Ensuring salary replacement is essential in the next package.

  • Rep. Jayapal’s H.R. 6918, the Paycheck Recovery Act (PRA), would subsidize salaries for workers up to $90,000 and has 108 bipartisan cosponsors. The PRA also includes elements of automatic stabilizers, as the program would automatically renew until the national unemployment rate is below seven percent for three consecutive months. 
  • A similar bill introduced by Sens. Warner, Sanders, Jones, and Blumenthal, S. 3793, the Paycheck Security Act, has support across the Democratic ideological spectrum. 

Currently, 26 states and D.C. have workshare programs, allowing employers to reduce their employees’ hours while the government subsidizes those workers’ lost wages. To strengthen workshare, Sen. Van Hollen and Rep. Pocan released the Rebuilding Main Street Act. The bill provides federal support to encourage more states to adopt workshare programs, encourage states that already do to shore up their existing programs, lower the eligibility threshold, and provide grants to pay for non-payroll costs. 

Macro Impact of State and Local Cuts

At the start of 2020, states were projecting revenue increases around three percent. Now, tax revenues are cratering at the exact moment that state spending needs to increase, both to pay for public health initiatives and keep up with sudden demand spikes on social safety net programs. Per Brookings, a one percentage point increase in unemployment coincides with a $40 billion decrease in state tax revenue. Since February, unemployment has jumped nearly eight points.

Forty-nine states and D.C. have balanced budget laws. These prevent states from running deficits and force them to cut services (and jobs) when revenues decline. Since the start of the pandemic, state and local governments have laid off or furloughed over 1.5 million workers, roughly one million of whom have been public school teachers. Nationally, almost 10 percent of public school teachers have been laid off since March.

The Center on Budget and Policy Priorities predicts that, between 2020 and 2022, state budget shortfalls will total $615 billion. And per Moody’s Analytics, in order to avoid four million additional layoffs, state and local governments need at least $500 billion in additional federal aid.

COVID-19 State Budget Shortfalls Could be Largest on Record

State budget shortfalls in previous recessions, billions of 2020 dollars

Source: Center on Budget and Policy Priorities

Without additional assistance to states and localities, the recovery is going to be slower and more painful. The HEROES Act creates new State and Local Coronavirus Relief Funds. These funds would provide $875 billion for states and localities to stop the hemorrhaging of public employees and help bridge the gap towards economic recovery. 

What Price for Democracy?

The presidential election is 95 days away. For months, state and local election officials have been sounding the alarm, imploring Congress to provide additional election funding. House Democrats provided $3.6 billion for this purpose in HEROES. The HEALS Act provides $0. 

Instead, Senate Republicans opted to allow businesses to write-off 100 percent of the costs of their lunches through 2020. The Center for a Responsible Federal Budget estimates this will cost the federal government $3 billion in foregone revenue — more than enough to ensure universal vote-by-mail and safe, in-person voting this fall.

If Democrats do not hold out for necessary election funding, then millions will face the disenfranchisement experienced by voters in the Wisconsin and Georgia primaries. Already under-resourced state election administrations will be overwhelmed with unprecedented numbers of absentee ballot applications, creating a backlog that will prevent eligible voters from receiving ballots and making it more difficult to count the returned ballots. Per the Brennan Center, ensuring a universally available vote-by-mail option, maintaining safe, in-person polling sites, developing online registration portals, and a nationwide campaign to educate the public on voting options costs $3.6 billion.

Pounds, not Pennies

As over 30 million Americans watched their unemployment assistance expire, Leader McConnell adjourned the Senate for a long weekend. With negotiations over the forthcoming Corona 5 package stalled and the GOP split, Democrats are in the driver’s seat. The White House is now willing (they should be desperate) to cut a deal without a blanket liability provision, which has been Sen. McConnell’s “red line” for months. 

Democrats would be wise to listen to just about every economist consulted and stimulate the economy through adequate and targeted spending. Automatic stabilizers, paycheck guarantees, and state and local funding are serious macroeconomic stimulus. Delay or inaction will have cataclysmic consequences for the economy, the citizens of the country, and the Party in charge, come November. 

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