The House may have passed President Biden’s $1.9 trillion stimulus bill (along strictly partisan lines), but the economic case for the bill is collapsing. It remains likely to become law—dragged over the finish line in a partisan vote stuffed with payoffs to keep all Democratic lawmakers on board. But as new information contradicts and undermines the bill’s intended purpose, the exercise has become more about saving face and showing partisan unity than intelligently addressing the pandemic and recession.
The bill has grown too large for three reasons. On economics, liberals have come to believe that the Great Recession’s slow recovery was due to insufficient stimulus spending, and have vastly overcorrected. On politics, Democrats remain committed to the $3 trillion price tag they demanded last fall (net of the $900 billion legislation enacted in December)—despite an improving economy requiring much less aid—because scaling it back would mean compromising with Republicans they detest. And on policy, the bill provides an opening to create permanent new government expansions and spread benefits to their popular constituencies like state governments and unions.
Yet this $1.9 trillion would bring total pandemic-response spending to $5.4 trillion in just 12 months—which will comprise one-fifth of the entire national debt—with rapidly declining effectiveness.
As to the particulars: First, the overall package is too large for the size of the recession. The Congressional Budget Office (CBO) estimates that the economy will operate $420 billion below capacity this year, and a total of $857 billion (or about 1 percent) below capacity over the next four years before the economy returns to full employment in 2025. Even for soft Keynesians who believe that government spending has a small multiplier, a $1.9 trillion stimulus bill would vastly overshoot the output gap. Don’t take my word for it, these concerns have been voiced by the left-of-center Brookings Institution and top Clinton and Obama White House economist Lawrence Summers.
Overshooting the output gap means that any additional “stimulus” will not stimulate anything except the national debt. It also risks inflation, economic volatility, and an overall misallocation of resources that can harm long-term growth. And it does nothing for industries that remain on lockdown.
Nor do the proposal’s individual components align with America’s needs. Start with the pandemic. The centrist Committee for a Responsible Federal Budget (CRFB) explains that “only about 1 percent of the entire package goes toward COVID vaccines, and 5 percent is truly focused on public health needs surrounding the pandemic.” That leaves $1.8 trillion for other non-pandemic spending.
The House legislation contains $129 billion that is purportedly for school mitigation measures to accommodate social distancing and pandemic risks. However, the CDC has estimated that school mitigation strategies should cost no more than $23 billion. Moreover, education policy expert Dan Lips notes that state and local governments are still sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills. Then what is the purpose of this additional $129 billion? Certainly not to address the pandemic; the CBO calculates that more than two-thirds of this spending would occur between 2023 and 2028. If lawmakers want to hand schools $129 billion for long-term renovation needs (likely the largest federal K-12 grant ever), that should be debated outside an emergency pandemic bill.
Even more egregious is the proposed $350 billion bailout for state and local governments. Even top Democratic economists Jason Furman and Mark Zandi agree that $350 billion is way too much because it far exceeds state and local budget shortfalls. Data from CRFB show that Washington has already provided more than $500 billion in emergency aid to state and local governments thus far. These governments have also collected taxes on much of the other $2.5 trillion in economy-wide federal assistance over the past year.
Consequently, state and local tax revenues rebounded from a mid-year dip, and by the end of 2020 were more than 2 percent higher than the final quarter of 2019. When including federal aid, state and local government receipts increased by 10 percent in 2020—compared to spending rising 2 percent. And yet California—now boasting a projected $25 billion budget surplus in the upcoming fiscal year—would inexplicably receive a $26 billion federal bailout (plus $34 billion for its local governments), according to CRFB. Some states have suffered more serious downturns that Moody’s Analytics calculates would require just $86 billion in federal assistance.
And even that figure may be too high. After all, if the rest of the $1.9 trillion bill completely closes the output gap as promised, then state tax revenues would automatically return to their full-employment levels. Without budget holes to plug, governors and mayors may dangerously use a temporary $350 billion federal windfall to create permanent new spending expansions or tax cuts—setting themselves up for more red ink when the federal gravy train ends.
The stimulus bill would also hurt the economy by maintaining overly-generous unemployment packages even after the economy reopens. President Biden has proposed increasing the federal unemployment insurance bonus (which is on top of state benefits) from $300 to $400 per week and extending it through September. Economist Michael Strain of the American Enterprise Institute calculates that this would provide over $3,000 in monthly unemployment benefits for the average worker. He also cites a recent study calculating that “62% of workers would receive more from unemployment compensation than from working. For over one-quarter of workers, weekly benefits would be 40% larger than their weekly wages.”
Large federal unemployment bonuses (as high as $600 per week last year) were not economically harmful last year when Washington encouraged jobless workers to stay home. But as the economy is projected to grow rapidly this spring and summer as the pandemic recedes, some may delay their return to work. Again, don’t take my word for it. Left-wing economist Paul Krugman wrote in his textbook that, “If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit.”
The $15 minimum wage appears unlikely to survive, due to opposition from several Democratic senators, as well as budget rules forbidding these reforms from budget reconciliation bills. CBO estimates that this policy would kill 1.4 million jobs, as many workers learn that the real minimum wage is always $0. Minimum wages should be set locally, based on local wages, prices, and economic conditions. The minimum wage that owners of a Manhattan steakhouse can afford to pay busboys is far different from that of a Biloxi diner.
Biden’s proposal would also raise the tipped minimum wage from $2.13 to $15 per hour. Hitting a collapsing restaurant industry with a 600 percent minimum wage hike on waiters and waitresses—even one phased in over a few years—is nothing short of economic malpractice.
The $1,400 relief checks are likely to be enacted because nothing unites Washington like buying off voters with free money. Nearly everyone supports aid to families and businesses who have lost income during the pandemic—and numerous other policies are doing just that. Yet there is no policy justification for Washington going deeply in debt to give the typical family of four who has lost no income $11,400 in combined relief checks since last summer. The last relief checks were largely saved, and the next round will be even more so—and even the spent portion will not stimulate new demand once the output gap is eliminated.
Finally, there are policies that lawmakers cannot even pretend are related to the pandemic or recession. This includes a $110 billion one-year child credit expansion (which will exceed $1 trillion over the decade if Congress refuses to let it expire), an $80 billion multi-employer pension bailout, $26 billion expansion of the Earned Income Tax Credit, and even payoffs for farmers.
If Congress wants to create permanent expansions of government, it should debate these programs on their merits and pay for them, not stuff them into a pandemic emergency bill.
There is a bipartisan path forward on a smaller, more targeted bill that focuses on distributing vaccines, safely reopening schools, and compensating families who have lost income. Senate Republicans have already approved a historic $3.4 trillion in pandemic-relief legislation, endorsed $600 billion more in this latest round, and expressed an openness to negotiate upward from that level. Democrats should listen to their own economists, and adjust their proposal to evolving economic conditions. A $4 trillion pandemic response in 12 months is still a victory for progressives, and scaling back this bill’s excesses would put nimble and intelligent economic policy above stubborn politics.
