Update 512 — House OKs Biden Bill Intact
$1.9 Trillion: What Will be Its Legacy, Impact?
President Biden entered office seven weeks ago, promising a $1.9 trillion federal pandemic response to address unabated individual, family, and small business needs. He also promised stimulus aimed at an economy suffering 10 million jobs lost with millions more slipping into poverty. At 2 pm ET this afternoon, the House passed the Senate’s amended version of the American Rescue Plan (ARP). Biden is expected to sign it Friday.
Congressional Democrats were able to deliver on almost all of what Biden originally asked for in his ambitious but vastly popular bill. Years from now, we will remember not just the size of the package but its efficacy in terms of stimulative power and the rebalancing of long-standing inequities. We assess that ab initio below.
The Biden team successfully avoided mistakes made in the Obama administration’s opening days, structuring its relief package primarily around direct benefits and safety net enhancements instead of tax cuts. Democrats also demonstrated a more nimble legislative strategy, quickly pivoting toward reconciliation rather than negotiating down their package for a handful of Republican votes. Though not perfect, ARP constitutes one of the greatest federal transfer payments ever.
Percent Change in After-Tax Income
Source: Urban-Brookings Tax Policy Center Microsimulation Model
Unemployment Benefits ($230 Billion)
The ARP extends all the emergency unemployment programs (PEUC, PUA, MEUC, FPUC) and maintains the $300 enhanced UI through September 6. The APR also provides a tax waiver for up to $10,200 in UI benefits collected in 2020.
- Distributive Value: With 10 million fewer jobs than a year ago, this UI extension was badly needed. Workers at the lower end of the income scale will be the primary beneficiaries of this expansion. The success of expanded UI over the past year should be a template for Congress to enact permanent automatic stabilizers to ensure that families will receive necessary resources in times of economic crisis.
- Stimulus Value: UI is one of the most effective forms of stimulus, with a fiscal multiplier rate around 1.49, meaning every dollar spent on unemployment benefits generates gains in total output that are greater than the amount spent. Money distributed through UI is almost perfectly targeted to maintain strong levels of consumption for the millions of families left without a paycheck due to the pandemic.
Direct Payments ($410 Billion)
The ARP directs the Treasury to send out a new round of $1,400 direct payments per person with a steep phaseout set at $75k of income for individuals and $150k for married couples.
- Distributive Value: These payments are targeted to the bottom 90 percent of households. The problem with making payments any more targeted is that IRS data does not always provide an accurate portrayal of a family’s current economic conditions. It is better that too many families get payments than too few.
- Stimulus Value: Direct payments are not a very effective form of stimulus, with an estimated fiscal multiplier only around 1.09. However, for the one third of families living paycheck to paycheck these payments amount to keeping a roof over their head and food on the table.
CTC & EITC ($143 Billion)
The ARP increases the refundable CTC from $1,400 to $3,000 ($3,600 for children under 6) while also eliminating low-income thresholds. The maximum EITC for childless workers also gets a bump from $543 to $1,500, and the ARP makes the EITC accessible to workers younger than 25 and older than 64. Both of these policies are set to sunset at the end of the year, but Democrats clearly want to make them permanent.
- Distributive Value: EITC and CTC expansions will make a significant dent in poverty. The expanded benefits from these programs will be overwhelmingly directed to the bottom three quintiles of households. However, administering the CTC through the IRS leaves out millions of families that do not earn enough to file taxes. Making the CTC fully refundable is a good first step, but Congress should transition towards a universal child benefit.
- Stimulus Value: The CTC and EITC have a strong average fiscal multiplier of 1.26. They are well-targeted programs that supplement the wages of working families and generate local economic activity.
State and Local Governments (>$360 billion)
Previous CARES Act bills were held up over partisan disputes regarding the federal government’s responsibility to protect vital state and local services. The ARP includes a whopping $360 billion to state and local governments ($195 billion to states, $155 billion to local governments, territories, and tribes, with $10 billion put toward infrastructure projects). In addition to the $360 billion topline, around $200 billion are separately dedicated to school reopenings, as well as child care, housing, and transportation services.
- Distributive Value: State budget cuts disproportionately affect women and black workers. Women account for nearly three of every five state and local government employees, and African Americans make up 14.1 percent of the state and local government workforce compared with 11.5 percent of private-sector employees. Beyond the immediate pain of layoffs, budget shortfalls directly affect poor communities who depend on government services, trapping many in a cycle of poverty. The massive ARP aid will significantly counter these effects of the coronavirus crisis.
- Stimulus: State and local governments have shed 1.3 million jobs since the pandemic began; absent ARP relief, this number could climb to over five million. The multiplier effect here is clear: spending cuts trigger more job losses and lost contracts with local businesses; as workers’ income drops, they pull back on their consumption spending. It is estimated that each dollar of state and local aid produces roughly $1.34 dollars in economic activity.
Federal Fiscal Multipliers
Source: Moody’s Analytics
Senate Changes to House Provisions
While Democrats mostly succeeded in blocking attempts to water down the ARP, the major exception was the $15/hr minimum wage component. In a vote to override the Senate parliamentarian’s ruling, eight Democrats joined with Republicans to prevent the House-passed minimum wage increase from getting reincluded in the bill. But Senate Democrats were able to use the ~$67 billion in on-budget savings from removing the Raise the Wage Act to bolster other essential programs.
Other noteworthy changes to the bill in the Senate include:
- Reduced UI enhanced benefits from $300 to $400 per week;
- Extended emergency UI programs through September 6, rather than August 29;
- Excluded the first $10,200 of 2020 Unemployment Insurance (UI) benefit from taxation;
- Tightened stimulus payment eligibility through faster phaseouts;
- Exempted future student loan forgiveness granted in the next five years from taxation;
- Expanded the Employee Retention Tax Credit;
- Increased federal subsidy for COBRA coverage from 85 to 100 percent of premiums;
- Increased Emergency Rental Assistance by $1.3 Billion;
- Created a $8.5 billion fund for rural hospitals;
- Extended cap on business losses for pass-throughs by one year.
President Biden has his bill almost exactly as ordered. The absence of a minimum wage increase and student debt relief are shortcomings, but the accomplishments of this package as legislation and its promise as policy make it a landmark, if the sheer size and scope don’t. Democrats may have caught the popular sentiment supporting what was dismissed for decades by some as “welfare state” spending. Though the ARP is designed as temporary relief with a limited stimulatory duration, its popularity has shifted realm of the possible in federal policymaking firmly and is a harbinger of progressive legislative and economic victories to come.