GOP’s Unkindest Cuts

Update 471 — GOP’s Unkindest Cuts:
The Skinny on Mitch Bill to Slash CARES

Even emaciated elephants don’t change their stripes. Mitch McConnell’s half-baked, half-loaf, half trillion dollar retreat from the last GOP relief offer would cut CARES benefits across the board. This when 30 million Americans are newly out of a job, millions of firms are defaulting and weighing bankruptcy, and markets are suddenly volatile.

But if market discipline is of no help here, political discipline is coming in the form of democracy. Americans won’t likely mistake the contrast between the Parties’ policy responses to COVID. Nevertheless, we persist, laying out the costs of GOP inaction and eventually inadequate offers. 

Best,

Dana

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Last week’s Bureau of Labor Statistics August unemployment report showed an unexpected drop in the unemployment rate from 10.2 in July to 8.4 percent last month. Trump advisor Larry Kudlow said that the White House would be satisfied without further congressional action on coronavirus relief. But Senate Majority Leader McConnell announced yesterday that the Senate would vote on his “skinny bill” on Thursday. 

Democrats and the GOP continue to differ over the size of the bill. Republicans are now signaling an unwillingness to pass anything much costlier than $500 billion and Democrats unwilling to accept anything below $2.2 trillion.

Meanwhile, millions of workers continue to struggle with a high unemployment rate not seen since 2011. States and localities are facing massive budget cuts at a time when more spending is needed. In the midst of a crushing recession, with a federal budget deadline at the end of the month, Speaker Pelosi and Treasury Secretary Mnuchin have agreed to a continuing resolution. Their tentative agreement reduces the threat of a government shutdown to force relief negotiations. 

Below, we explore the current unemployment situation, the state and local budget crises, and what may and ought to be included in a fifth coronavirus package.

Unemployment: GOP Cuts Lifeline Funds

At the end of its June meeting, the Fed projected that the August unemployment rate would drop to 9.3 percent. The real unemployment rate for August was almost a percentage point lower, prompting Republicans to again prematurely declare victory over the recession. 

Workers, particularly low-wage workers, are still in dire straits. The employment rate for low-wage workers is 15.3 percent lower than it was in January, while the rate for high-wage workers has almost completely recovered. Further, last week, new unemployment claims rose for the third straight week as 1.6 million more workers filed for unemployment. And claims for Pandemic Unemployment Insurance are at their highest level since July. 

Source: The New York Times

Permanent layoffs are also increasing at a pace quicker than during the Great Recession. Permanent job losses increased over half a million last month to a total of 3.4 million permanent layoffs during the pandemic. Major companies announced permanent layoffs numbering over 50,000 in the last two weeks alone. Almost half of businesses that have furloughed or laid off workers are considering more cuts. States and cities are forced to layoff public-sector employees. Without further funding from the Paycheck Protection Program, which closed in early August, or additional aid for state and local governments (SLG’s), businesses continue to shutter, many permanently.

President Trump’s August action on unemployment authorized a $300 increase to state unemployment benefits paid out of FEMA’s disaster relief funds. All states except South Dakota are participating in the program with some supplementing another $100. But these funds pale compared to the amount of relief provided by the CARES Act. Trump’s action authorized only $44 billion, while the CARES Act appropriated $250 billion. Funds are already beginning to run out, emphasizing the need for further congressional action. But Republican offerings are meager.

Standoff on State and Local

Aid to SLG’s remains one of the biggest sticking points in COVID negotiations. The HEROES Act, passed by House Democrats nearly four months ago, would extend $915 billion in SLG aid to plug revenue gaps and alleviate the strain on social safety net programs. Republicans, on the other hand, continue to cry foul about “Blue State Bailouts,” offering $0 for SLG’s in either the half-baked HEALS Act or this week’s skinny bill.

The bickering over SLG support could hardly come at a worse time. At the start of 2020, states were projecting revenue increases of around three percent — fairly standard in an expanding economy. But now, CBO is forecasting that SLG’s will suffer a collective budgetary shortfall of around $1 trillion in 2021. About half of this will fall on state governments, which are already being forced to cut services (and jobs) because of balanced budget laws.

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

Accordingly, SLG’s have begun laying off employees en masse. Over 1.1 million government employees have lost their jobs since February. Due primarily to overly restrictive loan terms, the Federal Reserve’s Municipal Liquidity Facility has been largely ineffective. Without additional fiscal assistance to states and localities, the recovery will continue to be slower and more painful than necessary. Per the Hutchins Center, cuts in state spending lowered real GDP growth by 1.2 percent between 2009 and 2012.

Emaciated Bill on Life Support…

Yesterday, in another half-hearted attempt to put Democrats on the defensive, Majority Leader McConnell unveiled a skinny bill. Sen. McConnell hopes to pressure Speaker Pelosi and Minority Leader Schumer back to the negotiating table with a $500 billion opening offer that makes no concessions on the issues that drove the sides into August’s recess with no deal.

While the Majority Leader made sure to include liability immunity to shield businesses from COVID-related lawsuits, his proposal cuts Pandemic Unemployment Assistance benefits in half. The bill provides a meager $16 billion for states, but because the funds are only for testing and contact tracing, budget crises will remain unresolved.

…but Not Lacking For Pork

McConnell’s skinny bill should have been an opportunity to reopen negotiations on critical COVID relief issues. But the Majority Leader opted to shoehorn in several unrelated legislative riders. Instead of providing a second round of stimulus checks, the bill changes protocols to reduce “mineral dependence” on China. And while emergency funds for SLG’s apparently remain a redline item, McConnell’s bill authorizes billions in tax credits for families to send their children to private and religious schools. 

McConnell’s latest effort is the first move in what is sure to be a flurry of negotiations taking place this month, but it should not be taken seriously. The $500 billion price tag is a significant step backward from the Trump administration’s August stance when Secretary Mnuchin cited figures as high as $1.5 trillion for a relief package. With McConnell unable to unite his conference behind a proposal, Democrats remain in the driver’s seat.