These problems are widespread and are getting worse. Only the federal government has the wherewithal to boost the economy in order to ensure that this recovery happens quickly and is more effective than the recovery after the Great Recession, which left America’s working class behind. Any federal government intervention will have to address three key goals:
- It needs to build up public health infrastructures to combat the pandemic.
- It needs to offer quick relief to the tens of millions of Americans that are already suffering from or are about to face hunger, poverty, eviction, foreclosure, and a lack of health care.
- At the same time, any government intervention will need to make investments in the economy to ensure that robust economic and widespread job growth quickly return.
President Joe Biden’s American Rescue Plan meets all of these goals. It lays the foundation for better public and economic health, although additional steps to build a strong recovery over the longer term will be necessary.
Here are seven principles the new administration and Congress should follow as they develop the response plan to the economic and public health devastation wrought by the ongoing coronavirus pandemic:
- Congress needs to act fast. Many people and businesses have exhausted their resources, and many others are on the precipice of bankruptcy, eviction, and foreclosure. Without quick action, a deeper and longer recession becomes a self-fulfilling prophecy.
- Now is the time to think big in order to reignite growth. The economic needs after a downturn that has lasted almost a year are vast. There is ample fiscal space. Getting the economy back to its full potential may require spending in the area of $3 to $4.5 trillion dollars. This is an amount greater than currently proposed. The American Rescue Plan, even if enacted in full, will likely only be a very important first step toward building a strong, equitable recovery for the longer term.
- Any economic package needs to include massive investments in public health. This includes money for the production and distribution of the vaccine, building up health care capacity in underserved communities, and paid family and sick leave, so that people no longer have to choose between their health and their financial security. Protecting the public’s health is key to reviving the economy.
- Congress needs to provide more financial support for those struggling the most. This includes added stimulus payments but also expanded unemployment benefits that add more than $400 per week, as long-term unemployment is rising rapidly and added unemployment insurance benefits are highly effective help for those struggling the most. Other measures include an expanded child tax credit (CTC) to $3,000 per child and making it fully refundable in order to target relief to families with children facing the myriad challenges of income loss, rising threats to their health, and school closures. It should also boost the earned income tax credit (EITC) to boost incomes for those who still have a job but struggle with added demands on their finances amid limited or no financial reserves. Finally, Congress should provide more money to raise the minimum monthly benefit and increase the maximum benefit from the Supplemental Nutrition Assistance Program (SNAP) by 15 percent. This would substantially lower food insecurity, especially among low-income seniors, veterans, children, African Americans, and Latinos.
- Congress needs to finally support state and local governments with quick, sizeable and reliable aid. State and local governments handle many of the added demands of the pandemic from vaccine distribution to helping those who have been pushed into poverty, hunger, and homelessness. They also had to make public health and physical infrastructure investments in education to ensure that students, teachers, and staff are safe during the pandemic. State and local governments will need quick and large help that they can count on for the duration of the crisis. Such help will ensure that state and local governments will be able to deliver on the increased demands brought about by the pandemic without taking the counterproductive steps of cutting vital services or laying off employees (mainly teachers) en masse. Funds should go to health care, childcare, education, public health, and other measures but should also provide state and local governments with some flexibility to address the many needs of their communities. Congress must act to avoid a repeat after the last recession, when state and local governments cut spending and laid off people, contributing to a very slow recovery for years.
- Congress should make a renewed effort to tackle massive and rising income and wealth inequality. Widespread inequality will otherwise continue to put the brakes on economic growth. Measures such as a higher minimum wage; renter and homeowner protections from eviction; foreclosure moratoriums; and added financial help to small businesses, especially those owned by people of color, are long overdue.
- A second, future “infrastructure and jobs” package needs to make additional explicit pro-growth investments. The weak economic position of many businesses and households means that an economic slowdown can last for a long time. A long-term economic recovery package should include robust, comprehensive investments in infrastructure that boost national competitiveness, raise household incomes, and reduce greenhouse gas emissions. The final package should include transportation, water, clean energy, schools, rural broadband, and affordable housing, among other sectors. When infrastructure investments are done right, they can lower household transportation costs by reducing auto dependence; increase access to employment and educational opportunities; and redress past discriminatory policies and projects that disproportionately burdened low-income and communities of color. Moreover, federal funds should be targeted to those communities facing sustained economic hardship. Equitable infrastructure investments are an essential component of achieving inclusive prosperity. Additionally, an infrastructure package should support new sustainable technologies, advanced manufacturing, the care economy, and education. All of these investments would pay long-term dividends.
Pursuing these goals with the range of measures mentioned above will have three important effects. It will reduce the growing financial hardships that people face on a daily basis; it will lower economic inequality; and it will reverse the economic slowdown that is under way. In fact, it will start returning the economy and the labor market to stronger, positive growth.
If Congress does not act now with a quick and sizeable relief package, the effect of this recession will linger for years; millions of unemployed workers will again have to wait years to find a new job; and families will drown in debt.
The state of the economy: Weak and getting weaker
The economy is slowing from a weak position toward the end of 2020. Gross domestic product (GDP) grew just under 1 percent in October, November, and December (or, 4 percent on an annualized basis), a marked slowdown from the previous quarter. Unemployment at 6.7 percent is still much higher than in the spring, when the recession started. Inequality soared as tens of millions lost their jobs, while others saw their incomes, stock portfolios, and house prices go up. And large shares of businesses have permanently closed their doors. Congress will need to move fast and go big with an economic package to counter this downward momentum, help families, and save businesses and communities.
The economic recovery stalled at the end of 2020. When the pandemic hit in March 2020, the economy went into free fall, and tens of millions of people lost their jobs. Over much of the rest of 2020, the economy sprung back to life, but much slower than it could have been amid a shambolic government response to the novel and deadly virus. By the fall, job growth slowed as the pandemic surged. The number of new jobs added was a fraction of that of the spring and far below what was needed to recover the jobs that the economy initially lost. In fact, the labor market is starting to lose jobs again; temporary job losses turned permanent; and long-term unemployment soared. The overall unemployment rate has stayed at 6.7 percent in December 2020, while the unemployment for Black men was still at double digits at 10.3 percent. By the end of January 2021, 1.3 million people applied for some kind of unemployment assistance for the first time, and 18 million people received unemployment insurance benefits in early January. These unemployment numbers are actually worse than they look since millions of people left the workforce, thus not counting as unemployed. An estimated 8.1 million people were pushed into poverty between June and December as federal aid expired. Millions of people are suffering in a stalled economy. Small businesses, women, and communities of color are seeing disproportionate harm from the pandemic, while wealthier and white households are more likely to have weathered the storm.
Much of the slowdown in jobs recovery is tied up with the harm to small businesses. Many are in industries that have been especially hard hit, such as restaurants, child care, and health care. Their revenues were down 31.1 percent (from last January to December 31, 2020). And, the surging virus has many people scared of seeking health care, putting financial pressures on doctors’ offices, physical therapists, and other health care providers. Sales at restaurants and bars tumbled 4.5 percent in December. The number of small businesses open is estimated to be down by 29.7 percent. The pandemic’s surge in the winter months has made a bad situation worse, and lots of businesses will not come back. In fact, a record 10,000 stores could close in the United States this year. Communities are losing vital parts of their economies and households are losing their savings and livelihoods.
The pain of the economic downturn and the slowing recovery is unequally distributed. Women suffered more than men under the multitudes of financial effects of the pandemic and recession. Women of color were particularly vulnerable as they worked in industries that quickly shut down. These women also tended to have more caregiving responsibilities for children and other family members. And people of color have to worry more about the impact of the pandemic on their health, since they often live in communities woefully underserved by the health care system and frequently encounter bias and discrimination by health care providers. Yet, those households—mainly people of color and the individuals most exposed to the recession and pandemic—had the least financial reserves to weather this storm.
Other households, often college-educated white ones, saw their fortunes go up. Their incomes were stable and sometimes even increased in industries that benefited from the massive shifts in economic activities toward working from home, remote learning, and new investments in public health, medications, and vaccines. Many of these households also saw their wealth go up as stock and house prices soared, as college-educated households and white households are more likely to own stocks and a house compared to those without a college degree as well as people of color. Whatever economic recovery there has been, it has been very uneven.
Stimulus packages passed by Congress in 2020 helped, but it’s clear that more aid is needed
Congress quickly rose to the challenge in the spring of 2020 to help struggling businesses and Americans. It enacted several relief packages that helped people deal with the recession through the summer. This initial bill offered added unemployment insurance benefits—an extra $600 per week—to a larger group of unemployed workers than would have been the case in a regular recession. Households received stimulus checks to help fill the often-gaping holes that opened up when businesses across the U.S. economy shut down from one day to the next.
The combination of a widespread and potentially accelerating pandemic amid insufficient government assistance could quickly slow the economy, possibly pushing it deeper into the recession. Mutating virus strains are accelerating the spread of the virus, while the supply of vaccines is too low to end the pandemic immediately. No matter whether governments enact countering measures, businesses and people will react on their own to protect people’s health. The results are less shopping, less travel, fewer visits to restaurants, and delayed health care procedures. If decisive economic action is delayed, the stalled economic recovery may get worse and people may not get back jobs—and in many cases, they may even lose jobs.
The current economic slowdown happens in a context of economic weakness:
- Unemployment is high, leaving many families already financially strapped.
- Millions of people have left the labor force, often to take care of children and other family members, but also to protect their own health. They have less income to spend, putting a drag on economic growth.
- In a similar vein, millions of businesses have closed or declared bankruptcy, spreading their economic pain to others through layoffs, unpaid bills, and debt they defaulted on. As in any other recession, waves of business failures result in more business failures.
- Many households have depleted whatever meager financial reserves they had. They have to cut back on spending, as they cannot or do not want to increase their debt, again slowing economic growth.
- More than 1 in 10 households have borrowed from friends and families to pay for their regular expenses from August to December 2020. The economic pain of some families has spread to others, who now also have less money to spend.
- The new relief package eventually passed in December 2020 offered some of the much needed help for businesses and people, but it barely filled the holes left after the expiration of many of the provisions of the CARES Act in the summer and fall of 2020.
- State and local governments have already seen drops in revenues, while their spending needs increased due to the dual onslaught of a public and economic crisis. So far, Congress’ actions have fallen short on helping state and local governments that have to bear the brunt of the crisis. Large parts of the economy—businesses, people, governments—have already exhausted their financial resources, setting the stage for a renewed and prolonged economic slowdown.
The economic slowdown in 2021 will look different from 2020, and Congress’ actions must adapt to this new reality
This slowdown will thus look different from the initial recession of the first half of 2020. First, the economy is in a weaker position, which makes it less likely that the economy can recover on its own. Second, millions of businesses are gone, so that job growth will be concentrated in industries and occupations that have withstood the recession, leaving less room to add new jobs. Third, the pandemic is more widespread across the country, so that all parts of the country will suffer, not just those where the virus is especially prominent. Fourth, the lack of income and wealth for many households means that people will cut back on everything, so that a wider array of industries will suffer from this slowdown than was the case in the spring of 2020. Because this slowdown furthers preexisting weaknesses and because it happens amid massive and rising inequality, many households and businesses—even among those that have come out largely unscathed so far—will suffer. Only quick and large action by Congress can get the economy out of this slump. The private sector will not do enough to jump-start a strong recovery.
A good proxy for the degree that a policy can boost economic activity is the fiscal multiplier. It measures the economic output produced for each dollar spent by the government. Higher multipliers have more potential to reactivate the economy in the short term. Importantly, multipliers show what happens on the demand side of the economy. For instance, they show the total increase in spending in the economy by first reducing food insecurity through more spending on SNAP. They thus provide an indication of what will likely happen to economic growth in the short-term.
But multipliers do not show the added, longer term benefits to economic productivity. Spending more money on people’s economic security has multiple, productivity-enhancing effects. The investments mentioned above would result in more housing stability, better nutrition, improved health, and less stress, among others. These factors make it much more likely that people can do their jobs well, boosting productivity and economic growth from the supply side. These positive effects on the productive capacity of the economy are real, even if they are not included in fiscal multipliers.
Estimated fiscal multipliers alone already show how effective these measures will be to strengthen the economy. The recent estimates of fiscal multipliers by Moody’s Analytics in the table below summarize a range of fiscal multipliers for different spending initiatives. All of the measures mentioned above that are also parts of President Biden’s plan (see Table 1) have comparatively large multipliers that are much greater than one, meaning that each dollar spent will increase economic output by more than one dollar. For instance, one dollar spent on additional SNAP benefits will increase economic output by $1.61 in relatively short order. Some questions have arisen about the effectiveness of government spending on economic growth amid the pandemic. The main concern is that people will not spend the money right away and the economic impact will consequently be smaller than expected. Most of the measures suggested above will not fall into that category. Higher unemployment insurance benefits; more SNAP dollars; improved EITC and CTC; as well as aid to state and local governments will go to people and entities that already exhausted their resources. They need to pay their bills to keep a roof over their heads, keep themselves warm and fed, and make sure that they are healthy and their children can keep up with schooling. Right now, many of these families severely curtail their spending and are going deeper into debt. The added assistance from a new economic package will almost certainly result in the expected boost to spending.
In fact, a recent study estimates that if the Biden package were enacted, GDP would reach the Congressional Budget Office’s (CBO) pre-pandemic GDP projection after the third quarter of 2021, exceeding it by 1 percent in the fourth quarter of this year. Exceeding the projections would be desirable, since it would mean that workers and their families could catch in terms of higher incomes, building more financial security that they have been missing for too long.
The package proposed by President Biden, the American Rescue Plan, fits the bill. It delivers on testing, vaccine production, and delivery; it provides relief to needy populations though proven mechanisms; and will produce a broad-based boost to the economy, not only by reigniting demand, but also by increasing the productive capacity of the economy.
The stakes of not acting quickly and large enough are tremendous. The aftermath of the Great Recession showed what happens when Congress does not active decisively enough. Businesses will continue to fail and people will suffer from record long-term unemployment, mounting consumer debt, and declining economic mobility. President Biden’s relief package will go a long way toward avoiding a repeat.
Andres Vinelli is the vice president for Economic Policy at American Progress. Christian E. Weller is a senior fellow at American Progress and a professor of public policy at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts, Boston.