Fiscal policy matters
Any proposal for a Phase 4 stimulus package must balance when and how to bring Americans back to work safely.
Bottom Line At the trough of the recession in April during the current “Great Lockdown,” the unemployment rate (U-3) peaked at 14.7%. But possibly reflecting the impact of the CARES Act, signed into law by President Trump on March 27, U-3 surprisingly declined to 11.1% in June. But that stunning pace of improvement over the past two months is likely to moderate over the second half of this year. In its most recent Summary of Economic Projections, the Federal Reserve forecast that unemployment might decline to about 9-10% by year-end. However, more constructive private economists believe that with the right fiscal policies, unemployment might decline to perhaps 7-8% by the end of 2020.
In sharp contrast, with the unemployment rate at 8.3% and rising during the Great Recession, President Obama signed the 2009 Recovery Act into law in February 2009. Key provisions for those who had lost their jobs included cash benefits, health insurance and food stamps and the regular 26 weeks of unemployment insurance was extended to 99 weeks. But unemployment during the “Great Recession” continued to stubbornly rise and didn’t peak until 10% in October of 2009. A year later in November 2010, U-3 was only marginally lower at 9.8%, sparking an historic change of control in the House of Representatives in the 2010 midterm elections. Congress allowed the extended unemployment benefits to expire in December 2010, and U-3 then declined rapidly to 7.7% by November 2012.
With key unemployment provisions of the CARES Act set to expire at the end of this month, Congress and the administration face an important decision on how to intelligently redesign the existing fiscal policy stimulus program to extricate the economy from a deep recession and get the labor market back on track.
Where do we stand with Phase 4? Speaker Nancy Pelosi and House Democrats passed a proposed $3 trillion Phase 4 HEROES Act in late May. But Senate Republicans were unwilling to negotiate on the bill until they saw the June jobs report on July 2 and after both chambers returned from vacation on July 20. Their relatively narrow window to pass Phase 4, then, extends until the CARES Act expires on July 31, which might drag on until August 10, when the Senate adjourns again until after Labor Day. We fully expect that Congress will pass some form of this legislation during this window, which we believe will approximate half the size of what Speaker Pelosi had originally proposed.
There are several key elements that enjoy bipartisan support, such as more financial aid to individuals and businesses, more state and local aid to meet current financial obligations, and more assistance for hospitals and labs to facilitate more coronavirus testing. Republicans also are insisting that legal liability from junk lawsuits be included to protect businesses which have taken the necessary steps to protect employees and customers from Covid-19.
Legislative controversy brewing As Congress meets to discuss the Phase 4 fiscal stimulus later this month, concerns exist over the inherent disincentive for Americans to safely return to work. Democrats want to extend the existing $600-per-week unemployment bonus (scheduled to expire on July 31) until the end of January 2021.
But according to a recent study from the Congressional Budget Office, 83% of the people who are receiving this bonus, plus their regular $400-per-week unemployment insurance (totaling $1,000 per week), are making more money staying home unemployed, which creates a perverse incentive for them not to return to their jobs.
One idea gaining traction in Congress is Sen. Rob Portman’s (R-Ohio) proposal to discontinue the $600 weekly unemployment bonus when it expires, in favor of a $450 weekly return-to-work bonus. Democrats counter with questions such as, what if the employee’s company hasn’t taken the necessary safety precautions, or if the employee has young children home from school or has sick parents? What if the employee’s company has gone out of business or downsized, forcing that unemployed worker to find another company and job, perhaps acquire a new skill or move to a different part of the country? All of that takes time.
Senate Majority Leader Mitch McConnell is proposing another direct payment of $1,200 per adult, like we saw in early April, except this time limited to the bottom half of America, perhaps $40,000 in annual income or less. Sen. Ron Wyden (D-Ore.) has proposed extending the current $600 weekly unemployment bonus based upon an individual state’s 3-month average rate of unemployment. As the rate drops below 11%, Wyden would reduce the bonus by $100 for every 1% decline until the state’s overall unemployment falls below 6%. If Portman’s back-to-work bonus and McConnell’s additional direct payment are approved, Wyden’s proposal might serve the cause better if it were amended to start at $350 per week and trigger $50-per-week reductions as unemployment declines.
Lesson learned? Looking back at the Great Recession, there was a direct correlation between the extension of overly generous unemployment benefits and maintaining an elevated unemployment rate for much longer than expected. Congress is tasked with a similar responsibility to avoid making the same mistake today, potentially hampering a relatively quick return to robust employment levels. Recall that unemployment was at a half-century low of 3.5% last February, before we shut down the U.S. economy to save lives from the deadly coronavirus. To be sure, it’s a very delicate balancing act to identify the right time to cut benefit extensions and safely bring Americans back to work. This is exacerbated by the spike in infections across the country, particularly in states with great importance to the U.S. economy, such as California, Arizona, Texas and Florida.
Research assistance provided by Federated Hermes’ summer intern Sophia Tropaitis.