Update 504 – Recovery Robust or Go-Bust?
What’s at Stake in $1.9 Tr. Covid Relief Bill
On Wednesday, the House passed a budget resolution for fiscal year 2021, and this morning, following an all-night ‘vote-a-rama,’ the Senate advanced the resolution. These are the first steps in the reconciliation process allowing Democrats to pass President Biden’s $1.9 trillion stimulus package with a simple majority rather than 60 votes in the Senate.
This package reflects and responds to a vast array of needs. It enjoys broad popular approval — nearly seven in 10 Americans say they support it. Importantly, it is designed to provide not just relief, but also the stimulus required to avoid a painfully protracted recovery. The costs of not acting soon and not doing enough are clear from history. Below, we look at what is at stake in this bill and the current state of play.
Democrats need unanimous support to pass the relief package without Republican votes. Biden has not entirely abandoned bipartisanship, but has made clear that he wants a “big, bold package.” The House will finalize the budget resolution today and authorizing committees will begin drafting the stimulus legislation. A floor vote in the House is expected by the end of February, and Democrats expect to pass the bill in the Senate by March 14.
PAYGO and Sequestration: Democrats must eventually pass a PAYGO waiver to prevent the across-the-board cuts to non-exempt mandatory spending programs. If Democrats can’t get the 60 votes in the Senate necessary to pass a PAYGO waiver, it would trigger around $130 billion in sequestration cuts to Medicare, farm subsidies, military retirement fund, and a handful of other programs in 2022. They may end up taking a page out of the Republicans’ TCJA playbook and tack the waivers onto a must-pass bill.
The Case for More Stimulus
Only around half of the 22 million jobs lost during the pandemic have been regained. The Congressional Budget Office (CBO) projects GDP growth to top four percent this year, but downgraded its forecast of longer-term growth from 2.1 percent to 1.7 percent and indicated that employment will not recover to pre-pandemic levels until at least 2024.
Per the Brookings Institution, Biden’s proposal restores the economy to its pre-pandemic path by Q3 2021 and elevates long-term GDP growth above current CBO projections. Seventy-eight percent of Americans, including nearly two-thirds of Republicans, support a new round of stimulus checks. Haunted by undershooting the 2009 recovery for the sake of bipartisanship, Democrats will act swiftly and strongly to pass a relief package.
Economic Impact of the Key Provisions
Democrats are attempting the most extensive use of the reconciliation process in history. Several provisions could be standalone bills themselves, including:
- Economic Impact Payments ($465 bn.): Biden’s plan includes a third round of economic impact payments, at a maximum amount of $1,400 per person, and expands eligibility for dependents and families with mixed U.S. citizenship.
Value of Relief: Households increased spending by $0.25-$0.40 per dollar of stimulus in the initial weeks after the CARES Act checks went out. The CBO projected that those payments boosted economic output by 0.6 percent in 2020. Declining consumer spending in recent months underscores the need for direct cash payments.
- Unemployment Benefits ($350 bn.): The package extends federally expanded unemployment insurance (UI) benefits through September, plus an additional $400 per week. UI benefits are scheduled to end in March, but the poor shape of the labor market renders an extension critical.
Value of Relief: According to Brookings, UI extension would have a significant projected impact on GDP per dollar of aid. The CBO projected that unemployment compensation from the CARES Act boosted real GDP by 1.1 percent in 2020.
- Vaccine Funding ($20 bn.): Implementation of vaccine distribution will be critical to normalizing economic activity. The multiplier effect of this (relatively modest) funding would be significant.
- Rental Assistance ($35 bn.): President Biden extended the federal eviction moratorium to March 31, but millions of families face the prospect of homelessness when the moratorium is lifted. The proposed stimulus extends the moratorium through September and allocates $30 billion to rental assistance.
Value of Relief: This is a small amount of the total package, but according to Brookings, direct aid to financially vulnerable households in forms like rental assistance, SNAP benefits, and UI extension would yield the largest effect on GDP per dollar of aid of the package’s provisions.
- Child Tax Credit ($120 bn.): The proposed expansion of the federal child tax credit would lift millions of families out of poverty — especially important given the pandemic’s disproportionate impact on low-income families.
Value of Relief: Every $1 loss in federal revenue from the CTC yields a $1.25 increase in GDP by Q4 of 2021, according to a Moody’s report.
- State & Local Government Aid ($350 bn.): Proposed funding for state and local governments would prevent layoffs of essential workers like firefighters and teachers and have ripple effects across the economy.
Value of Relief: Federal aid to states and localities would have an estimated $1.34 multiplier effect, per Moody’s.
- Small Business Aid ($50 bn.): The package authorizes aid to small businesses through a combination of loans and grants.
Value of Relief: While many small businesses still require assistance, this is not as central to the new stimulus package as with previous COVID relief bills. Brookings found that, of all the package’s provisions, aid to small businesses would have the smallest impact on GDP per dollar spent, and economists have begun to cast doubt on the efficacy of the Paycheck Protection Program.
- Minimum Wage: Raising the federal minimum wage to $15 would undoubtedly help families, especially frontline workers. The provision may require a compromise with more conservative members of the caucus if ruled eligible for the reconciliation package. This may take the form of a longer transition period or reducing the $15/hr amount.
Valuable or “Orthogonal”? Keeping millions of families above the poverty line has as good a multiplier effect as any provision.
Targeting Stimulus Payments
Republicans are calling for a more-targeted approach to stimulus checks — phasing out cash payments once an individual’s income reaches $40,000 ($80,000 for married couples). But Democrats maintain that broad distribution is necessary and have counter-offered with a phaseout proposal of their own: $50,000 for individuals and $100,000 for couples. The previous economic impact checks began to phase out payments at $75,000 for individuals and $150,000 for married couples. During last night’s Senate vote-a-rama, an amendment saying that “upper-income taxpayers” should not receive checks passed with 99 votes.
While an estimated 85 percent of Americans qualify for a payment under the past COVID bills’ income threshold, 71 percent would qualify if the phaseout begins at $50,000. There is some economic justification for this: lower-income families need these payments to cover basic expenses like rent, but many middle-class families have saved their stimulus payments.
Size and Proportions
The stimulus package’s size indicates that Democrats are taking the threat of an economic downturn seriously. Though the price tag may be altered in the course of the legislative process, Democrats appear unwilling to negotiate down very much. The bulk of the bill’s spending goes to the economic impact payments and state and local government aid, reflecting Democrats’ willingness to push through key priorities left out of the December package. But other items such as vaccine funding and the CTC, despite costing less, have significant multiplier effects and could play just as important roles in supporting the economy. Democrats’ initial steps indicate that they are willing to be aggressive — because the potential costs of inaction are too high to bear.