Congress is wrangling over details of a stimulus package, which conventional wisdom in Washington says will land in the trillions, to get us through the fall, but macroeconomists are urging policymakers to think much bigger and much further ahead.
House Democrats have pushed for a giant $3 trillion stimulus. Republicans are pushing for a bill that will deliver $1 trillion or less. In either case, the goal is to build a bridge to Election Day, or Inauguration Day when a new Congress can evaluate the situation in the first quarter of 2021, hopefully amid good news about vaccine development.
“I think at a minimum we’re at $1.5 trillion,” Elizabeth Pancotti, an economist and policy advisor at Employer America, tells me of what we’d need to get us through the fall. Mark Zandi, the chief economist at Moody’s Analytics, cited a similar number earlier in the month. Other economists, looking toward a longer time horizon, put the number considerably higher, at $3 trillion or $4 trillion, or possibly even more.
But even if good news arrives, the Congressional Budget Office calculates that an output gap — a need for fiscal stimulus to avoid elevated unemployment — will persist for years unless additional stimulus is provided soon to stop job losses and sustained for a considerable period.
The best way to achieve long-term successes, economists say, would be to incorporate more automatic fiscal stabilizers into whatever Congress comes up with, but that’s not on the table. So whether the next administration is Donald Trump’s or Joe Biden’s, it will be forced to govern in immediate crisis mode — a needlessly precarious position for the economy that could have long-term consequences.
The debate over unemployment benefits
A lot of political wrangling is focused specifically on the question of whether the CARES Act’s imminently expiring bonus unemployment insurance (UI) payments are too generous.
Under CARES, everyone gets what they would normally be entitled to in unemployment benefits plus $600 per week. That’s left a large share of unemployed service workers actually making more money on unemployment than they earned while they were working. Democrats hail this as highly effective stimulus that puts money into the hands of people who spend it rapidly — a dynamic that has prevented aggregate demand from collapsing even as the pandemic weighs heavily on the economy. But to Republicans, the idea of making it more lucrative to not work raises a troubling question of incentives and they’ve talked about sharply reducing the bonus.
Karl Smith, an economist with the center-right Tax Foundation, offers a balanced assessment, telling me the bonus UI “helped cushion what would have been a massive demand shock in the wider economy,” but he worries about the implications of extending it indefinitely.
As the Economic Policy Institute’s Heidi Shierholz told my colleague Li Zhou, for now, “the jobs aren’t there,” so cutting off the UI lifeline would be counterproductive.
A team of professors and students affiliated with Yale’s Tobin Center for Economic Policy released a study Monday that used data from the small business scheduling and time sheet vendor Homebase to explore the variation in generosity of benefits and employment response. They concluded that “people with more generously expanded benefits also resumed working at a similar or slightly quicker rate as others did,” confirming the view that work disincentives are not a binding factor on employment right now.
Joseph Altonji, an economist and one of the report’s authors, makes the point in an accompanying release that “the collapse of labor demand during the Covid-19 crisis mattered most.”
All that said, the point here is not that the $600-per-week bonus is sacrosanct, per se. Smith worries that as the economic situation improves, “the economy could hit a supply shock on the way up as companies aren’t able to find workers as fast as sales are rising.”
The question in that case is whether policymakers have created a situation where the overall demand situation is adequate so that there are jobs to be found. We’re clearly not there right now, and if we simply push hard-pressed households off the cliff without a replacement, we’re not going to get there anytime soon.
The output gap
The CBO formally models what it calls the “output gap” — the gap between how much it thinks the economy could produce given the workers and supplies available, and what it will actually produce.
In their latest economic outlook report, they expect the output gap to remain very large — comparable to the situation in 2010-2011 — throughout next year and only decline gradually after that.
The CBO, one should note, is fairly conservative in its estimates of potential GDP. They suggest, for example, that the economy was operating at an unsustainably hot level in 2018 and 2019, which is debatable at best given the mild inflation situation that prevailed before the pandemic.
The upshot is that even if we avoid a catastrophic cliff this fall, there’s plenty of need for stimulus unless we want to revisit the Great Recession experience of years’ worth of elevated unemployment and sluggish wage growth.
Jared Bernstein is an economist with the Center on Budget and Policy Priorities who served as Joe Biden’s chief economic adviser during the Recovery Act era. Looking at how much stimulus it would take to fill the output hole forecast by the CBO, Bernstein says, “the real gap over the next 3 years is about $3 trillion.” That’s assuming that funds are all spent on highly effective stimulus.
If the political situation requires spreading some cash around to lower-multiplier endeavors, even more might be needed. Claudia Sahm with the Washington Center on Equitable Growth thinks an even bigger package, over $4 trillion with automatic stabilizers built in, could be needed.
The point of these higher estimates is not necessarily that the economy is doomed if Congress settles on something in the $1.5 trillion range; it’s simply that a package like that will still leave us with the need for more action early next year. Biden has what is in many respects a surprisingly aggressive policy agenda, but just as President Barack Obama had to delay action on his platform to push for a quick economic rescue package, it seems likely that Biden could inherit an economy teetering on the brink of a new cliff and find himself fighting for economic stimulus rather than long-term reform.