So far, the U.S. economic-policy response to the coronavirus crisis has been impressive. Nobody could accuse Congress and the Federal Reserve of being timid about supporting output and employment.
Even so, their work is just getting started. The recovery is underway, but it follows an extraordinarily deep decline. If all goes well from here — a big if — it will take months and maybe years to get back on track. Meanwhile, several of the emergency budget measures included in the recent CARES Act and other pandemic legislation will soon expire. The economy needs a new round of fiscal support.
In designing the next package, Congress would be wise to lean heavily on the plan advanced recently by Jason Furman, Timothy Geithner, Glenn Hubbard and Melissa Kearney — distinguished economists and former policy makers from both political parties. Their proposal not only meets the needs of the moment by extending support where required. It also redesigns several of the main instruments of fiscal stimulus so they'll work more effectively both now and in future recessions.
The plan includes extended income support for the unemployed and underemployed; new temporary subsidies for low-wage workers; cheap loans for small and medium-sized businesses and additional support for state and local governments. The eventual cost isn't certain. It might range between $1 trillion and $2 trillion, say the authors, depending on whether the recovery is fast or slow. But note that this elasticity is a good thing. Settling on a number for additional public spending regardless of how things work out makes little sense, because the slower the recovery, the more support will be needed. It's better to specify the policies and let conditions dictate the outlay.
The CARES Act supplemented existing unemployment-insurance programs with several new measures, including an extra payment of $600 a week for those out of work. That's one of the provisions due to expire next month. Furman and colleagues propose to extend the extra support, but in the form of an addition to state unemployment benefits that's capped at 40 percent of covered wages up to a maximum of $400 a week. The idea is to replace, in all, about 80-90 percent of lost wages for workers who were making the median wage or less. This avoids the financial penalty that the flat $600, if renewed, would impose on low-wage workers returning to their jobs.
In addition, the plan would help these workers directly by temporarily boosting the Earned Income Tax Credit. And it would permanently link federal support for extended unemployment insurance to state jobless rates. That way, workers in areas with high unemployment get more help, and the additional support phases out automatically as more people get back to work. In these ways, the scheme strikes a better balance, as the recovery proceeds, between helping low-wage workers and supporting the unemployed.
In the same vein, the plan both extends and modifies other aspects of the existing fiscal-support measures. For instance, instead of the forgivable loans of the Paycheck Protection Program, it favors loan subsidies. This kind of support is better targeted at firms that will be viable and capable of expanding as the recovery advances, as opposed to those that are likely to fail regardless. The plan also includes a generous extension of support for state and local governments — in the form of block grants (with strings attached), expanded Medicaid assistance linked to state unemployment rates, and additional support for K-12 and higher education.
A scheme like this has a narrow purpose. It shouldn't rule out other additions to public spending, least of all investments that would pay for themselves, such as funding for infrastructure and clean energy. And it shouldn't sideline broader fiscal reform, including the need for a fairer system of taxes and entitlements, and a plan for securing long-term budgetary control. For the moment, though, an effective response to the pandemic has to come first.
That means supporting demand, boosting employment and protecting the most vulnerable from economic harm. If the existing instruments for achieving those goals can be made more powerful at the same time, so much the better.
— Bloomberg Opinion