Some economists believe the stimulus deal congressional leaders are crafting could avert a double-dip recession, but argue more will likely be needed to ensure the recovery is robust.
“It’s enough to avert a double-dip recession, but just enough,” said Mark Zandi, chief economist at Moody’s Analytics.
“It doesn’t forestall a few bad months,” he added.
The emerging deal largely builds off the $908 billion proposal that a bipartisan group of legislators put out two weeks ago to revive negotiations on a fifth COVID-19 package.
Economists worried that congressional gridlock would lead to a slew of safety net programs expiring, dropping the floor out from people grappling with unemployment and potential evictions at a time when a surge in COVID-19 cases has led to renewed restrictions on businesses.
“It gets us over this cliff,” said Andrew Stettner, a fellow at the left-leaning Century Foundation.
“It will prevent 7.6 million Americans from going into poverty in January at a time when 5 million are worried about being evicted.”
But while the deal is expected to include hundreds of billions for small businesses, funding for vaccine distribution and medical protective equipment, and an extension for central unemployment insurance programs, it also contains one major difference from the bipartisan proposal.
The deal, which as of publication has not been finalized, is expected to redirect $160 billion originally earmarked for state and local aid toward a second, smaller round of stimulus checks.
A Moody’s analysis out Thursday will show a collective $170 billion deficit for state governments through June of 2022.
“That’s meaningful. They’re going to have to fill those holes by cutting jobs, programs and services,” Zandi said.
Although stimulus checks are broadly popular, Zandi says they are less effective at boosting the economy than state and local aid.
“Swapping out state and local aid for stimulus checks is a downgrade,” he said.
For every dollar the federal government spends on stimulus, economists calculate a “multiplier” showing how much that dollar will boost gross domestic product. The most effective expenditures for stimulus purposes tend to be those that will be spent quickly, rather than saved up.
When it comes to multipliers, at the top of the list is unemployment benefits, which are likely to be spent quickly because they are directed at people who rely on them for income. Unemployment benefits are likely to be spent on rent, food, medicine and the usual expenses that families might cut back on without any economic support.
But state and local aid is a close second.
“The last thing the economy needs right now is another round of layoffs, but if aid is dropped states and localities will very likely lay off more teachers, health care workers, and others, and cut spending in other ways, and that will worsen the recession,” said Michael Leachman, vice president for state fiscal policy at the Center on Budget and Policy Priorities.
Leachman says even a delay on state aid will be detrimental.
“The time to provide aid is now. Starting in January, states will head into legislative sessions at which they’ll make consequential decisions about balancing this year’s budgets and writing their budgets for next year,” he said.
“Aid is needed before states start laying off workers and cutting in other ways,” he added.
Democrats say funding for schools and pandemic-related medical care will help ease the burden on state and local budgets, even if further aid won’t come until next year.
Stettner says that stimulus checks are still important, but less effective than state and local aid because they are less targeted, going to people who have been able to keep working at full pay and those who have been unemployed for months on end alike.
“We shouldn’t have had to choose between those two, but it’s an important component to add in,” he said.
“It may or may not be as effective as state and local aid, but we do know that stimulus checks will reach a lot of people who are really hurting.”
The stimulus checks made their way in after a heavy push from an array of odd bedfellows.
Treasury Secretary Steven Mnuchin included checks in his proposal, replacing an extra $300 in weekly unemployment benefits to cover the costs.
The Congressional Progressive Caucus said Tuesday night that it would reject a deal that lacked stimulus checks.
Progressive Sen. Bernie Sanders (I-Vt.) and conservative Sen. Josh Hawley (R-Mo.) teamed up on an amendment to provide a second round of the $1,200 checks, plus $500 for children, provided in March’s CARES Act. The current round is expected to come in at $600 per person, plus $600 per child.
But the limitations of the package may not be determinative for the economic recovery.
President-elect Joe Biden has made clear that he will push for further economic relief once he is in office, and the brief, 13-week extension on crucial unemployment benefits means another deadline will loom in early April.
Zandi says that lawmakers should take that opportunity to boost state and local government.
“I think if we don’t do it, if there’s no further help coming, it’ll be a meaningful drag,” he said.
“The long dark tail of this pandemic is going to be longer as a result of not helping state and local government.”
Many economists point to insufficient state and local funding as a major reason the recovery from the Great Recession was so slow.
But getting the economy back on track for the long term will require more meaningful investments.
“The thing that comes immediately to mind is infrastructure. I’d be focused on that like a laser beam,” said Zandi.