By Paul Davidson, Michael Collins, and Charisse Jones
Is President Joe Biden’s proposed $1.9 trillion COVID relief bill a critical lifeline to millions of Americans still reeling from the financial effects of the pandemic?
Or is it a study in excess — an over-the-top catchall that goes too far in rescuing even those directly affected by the pandemic while tossing in a grab bag of unrelated social policy initiatives and pork-barrel morsels?
Among other things, the legislation would send another round of checks to most Americans – this time, for $1,400. It would extend a federal bonus to unemployment benefits through August and bump up the amount to $400 per week. And it would provide more aid to small businesses, and set aside $75 billion for COVID vaccinations and treatments.
The bill also expands programs such as the earned income tax credit and Medicaid, rescues teetering pension plans and raises the federal minimum wage to $15 from $7.25.
Critics say the legislation reaches beyond its core mission of COVID-19 relief. In doing so, they say, it risks a spike in inflation that could derail the economic recovery or further swell the nation’s $28 trillion debt, leaving little political will for other vital investments and eventually pushing up borrowing costs for consumers and businesses.
Stimulus 'could be targeted much better'
“While the package is filled with good ideas and important priorities, it is fair to say it could be targeted much better,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB), a nonprofit watchdog group.
The CRFB has identified more than $310 billion in spending that it said has little to do with the pandemic and another $500 billion that could be cut without fundamentally changing the package.
Others say the American Rescue Plan is a fitting response to a health crisis that triggered the worst recession in U.S. history and, despite a robust partial recovery, has still left 10 million Americans unemployed, led millions of others to drop out of the workforce and shuttered hundreds of thousands of small businesses.
Better to go big than not do enough during a rare moment when Democrats have the votes to push through a sweeping plan in the evenly split Senate, advocates say.
“We know we’ve lost a ton,” says Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “If we can make up some of it ... If we can get back to pre-pandemic levels very quickly, that’s very valuable.”
A big steroid shot for the economy
No doubt the bill – which the House is expected to pass this week – provides another big steroid shot to the economy. It would allow the U.S. to add about 6 million jobs this year, compared to 2.5 million without any legislation, according to Moody’s Analytics. The 6.3% unemployment rate would tumble to 4.8% by year-end under the Biden plan, while virtually flatlining with no aid.
Biden’s blueprint would power economic growth to 6.5% this year – the best rate since 1984 – vs.4% without it, Barclays economist Jonathan Millar estimates. Morgan Stanley predicts economic output next year will top what it would have been if the pandemic hadn’t occurred in “a remarkable outcome.”
But does that underscore that the package may be too big?
The spending comes on top of about $4 trillion in COVID relief since last year. If the $1.9 trillion package is approved, total pandemic relief would amount to about one-quarter of the U.S. economy, significantly more than the 10% or less of gross domestic product by other countries, Moody’s says.
Fed's view of economy:Central bank has no plans to raise interest rates or reduce bond purchases
Federal stimulus during the Great Recession of 2007-09 totaled well under 10% of GDP. Biden has acknowledged the $787 billion stimulus during that downturn fell short, leading to a sluggish recovery and spurring his determination to push through a larger package this time.
But much of the $4 trillion federal stimulus allocated last year remains unspent, says Adam Andrzejewski, CEO of OpenTheBooks, a government transparency group.
'Let the existing funds work'
“Let the existing funds work through the system,” he says. If additional relief for testing, vaccines, small businesses and individuals is needed, then Congress could consider a smaller relief package, he says.
Another dilemma is that the pandemic’s effects are likely to ease by midyear with mass vaccinations, allowing Americans to more freely visit restaurants and travel, jolting the economy.
Meanwhile, many people are out of work and stores have shut down. Those casualties will remain even after the economy looks normal again.
“We’re in a transition period,” says Moody's Chief Economist Mark Zandi. “That’s why this is a very tricky piece of legislation.”
Former Treasury Secretary Larry Summers, a Democrat, says the hazard of a stimulus package that is too large is the risk of inflation, which many economists try to forecast by looking at the gap between actual and potential economic output.
That gap is currently about $50 billion a month, based on a Congressional Budget Office analysis, but the stimulus would generate about $150 billion a month, three times the size, Summers says. If lots of customer demand can’t be met by a limited capacity of labor, factory machines and other supplies, that likely would drive up wages and prices.
The Biden plan could “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability,” Summers wrote in a Washington Post opinion piece.
The Federal Reserve’s preferred inflation measure was at 1.3% in December and the Fed has vowed to keep its key interest rate near zero even if inflation rises above its 2% target for some time. But an unexpected surge in prices could force the central bank to raise interest rates more abruptly than anticipated, possibly causing a recession, Morgan Stanley says.
Zandi with Moody's disagrees with Summers' analysis. He believes the output gap is larger and the $1.9 trillion package would close it but not spill over. And with unemployment still high and inflation stubbornly low for years, Zandi says there’s little chance of a jump in prices.
Another downside: The plan increases the federal deficit by nearly $2 trillion by 2030, according to CBO. Economists worry that a rising deficit and debt will eventually push up interest rates, increasing Americans’ borrowing costs.
A bigger worry, Summers says, is that the mounting deficit lessens Congress’s appetite for Biden’s “Build Back Better” plan to invest in infrastructure, renewable energy, worker training, preschool education and more. Such initiatives can have a more enduring effect on the economy by boosting productivity and growth over the longer term.
Not to worry, Zandi says. Later this year, Democrats can again use the legislative maneuver they are employing now to pass some of Biden’s longer-term plan without Republican votes.
Yet with the economic effects of uncertain, some analysts say the American Rescue Plan should be pared back:
Stimulus ideas that could be dropped
CRFB identified provisions such as reforms to the child tax credit (cost: $110 billion) and the earned income tax credit ($23 billion), enhanced subsidies and Medicaid matching funds related to the Affordable Care Act ($50 billion), and a bailout of private-sector pension plans ($58 billion)..
If lawmakers want to make those changes responsibly, they should raise taxes or cut spending elsewhere, the watchdog group said. Otherwise, it said, those provisions should be stripped from the bill.
Zandi says that’s viewing the government’s role too narrowly. Low-income restaurant employees and other workers slammed by the pandemic will be greatly helped by expanding the earned income tax credit, for example.
And “preserving and extending (health) coverage is even more important now because it helps shield families from COVID-19’s financial hardships and supports public health efforts,” says the Center on Budget and Policy Priorities.
Questionable spending
Auditors at OpenTheBooks.com also cite examples of what they consider dubious spending in the bill, including: $1.5 million earmarked for the Seaway International Bridge connecting New York to Canada; $50 million for family planning groups such as Planned Parenthood; $852 million for civic volunteer agencies such as AmeriCorps, AmeriCorps Vista, and the National Senior Service Corps; and $470 million for libraries, museums, arts and humanities agencies.
State and local outlays
One of the most divisive provisions would provide $350 billion to state and local governments, which Biden says would replace revenue lost in the pandemic so they can pay police officers and firefighters, keep libraries and recreation centers open, and provide other core services.
In addition, the legislation would give $130 billion to help reopen public schools and $30 billion to transit agencies to help them with operational expenses.
“The money for states should only go to those which need it – many do not,” MacGuineas says.
Total state and local revenues have largely recovered from the pandemic, and many states and localities were actually better off financially in 2020 than the previous year because of $360 billion in federal relief enacted last year, CRFB says. Many states now have budget surpluses or strong revenue gains while many others are experiencing more modest losses than expected.
MacGuineas’ group estimates that $200 billion in total support to states, localities, schools and transit agencies should be plenty to cover their needs.
$1,400 stimulus checks
Many of the $1,400 stimulus checks would go to households that don’t need them, MacGuineas’ group says.
The rebates are designed to phase out for individuals with income between $75,000 and $100,000 and families with incomes of $150,000 to $200,000. That would mean a family of five that made $130,000 in 2019 and saw its income rise to $150,000 in 2020 would receive $7,000. That is on top of the $3,000 it received in January and $3,900 last spring during the first two rounds of direct stimulus payments.
“The rebate checks should be sent only to those in need whose incomes have declined due to COVID or the recession,” MacGuineas says.
A Morning Consult study concluded that by lowering the income threshold for married couples to $100,000 from $150,000, 20 million Americans who couldn’t pay their bills in January would be able to do so, just 2.6 million fewer than under Biden’s plan.
A study by Opportunity Insights found that households with incomes above $78,000 plan to spend just $45 of their $600 checks they received in January. Indeed, Americans have socked away the vast majority of the stimulus money they’ve received, accumulating $1.6 trillion in added savings.
Yet those checks were largely aimed at tiding over households who have fallen through the cracks because they don’t qualify for unemployment or haven’t gotten their checks, for example, Sheiner says.
“To help people who really need it, we’re going to help some people who don’t,” she says.
Still, Zandi says targeting the aid to lower-income households would save about a quarter of the program's $425 billion price tag.
$400 unemployment supplement
Michael Strain, director of economy policy studies at the American Enterprise Institute, a conservative think tank, opposes the proposed $400 boost in unemployment insurance.
“I think it’s too much,’’ he says.
The extra $600 in the first relief package was designed to boost the average weekly unemployment benefit to $950, Strain says, matching the wages workers would earn on average when employed.
“This made sense,’’ he says. “We were entering a lockdown where people were being urged not to leave their homes unless it was necessary … But we’re in a very different environment now."
The extra $400 means about six in ten people will make more from that assistance than they would working, Strain says. “Benefits that generous will lead some workers, certainly not all … to stay unemployed so they can continue collecting that benefit."’’
But Andrew Stettner, senior fellow with The Century Foundation, says the $400 makes a difference, both for individuals needing to pay their bills and the broader economy.
“The greatest danger is not fueling the economy enough so it falls into a larger malaise.’’
Zandi suggests phasing out the $400 in states with lower unemployment rates, saving about $75 billion of the program's $290 billion cost.
All told, Zandi says the bill could be trimmed to $1.5 trillion without losing its benefits. The extra $400 billion, he suggests, could be channeled to Biden’s Build Back Better plan.