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Don’t Know How Much Stimulus Is Needed? Put It On Autopilot, Some Say

Democrats, some economists propose keeping extra unemployment insurance until jobless rate hits triggers. Don’t Know How Much Stimulus Is Needed? Put It On Autopilot, Some Say

One of the trickiest questions facing Congress when it takes up the debate on new stimulus later this month is just how much help the economy needs to recover from the Covid-19 pandemic.

If it is already recovering rapidly, the government may spend and borrow more than needed, pushing the national debt higher. If the recession drags on, multiple rounds of economic relief may be necessary, a process fraught with political hurdles.

Some economists and lawmakers say they have the solution: put stimulus on autopilot, so that aid to households automatically becomes more or less generous as economic triggers are hit. They say enhanced unemployment benefits could be authorized to continue until the unemployment rate falls below a preset threshold, avoiding the political fights that can slow stimulus efforts.

“There were 13 votes in the wake of the [2007-09] recession to extend unemployment benefits,” said Rep. Don Beyer (D., Va.), the vice chairman of Congress’ Joint Economic Committee. “That’s a lot of political back and forth. Any time you have to go through a tough negotiation, there are political costs to both sides, so why not take it away from that?”

A few features of current law already act as automatic stabilizers: When the economy weakens, more people qualify for food stamps and unemployment insurance, and the Treasury collects less tax revenue. When the economy strengthens, that goes into reverse, thus automatically “stabilizing” the business cycle.

The U.S.’ automatic stabilizers are weaker than in some other advanced countries. Tying these programs to economic conditions would be one way to make them more powerful, at a time when the Federal Reserve has less room to cushion the economy since interest rates are already close to zero.

At the end of March, Congress expanded those programs by adding $600 a week to regular unemployment benefits, which ranged from 31% to 54% of weekly pay in 2019, widening eligibility to contract workers, such as delivery drivers or freelance writers and extending the duration of benefits.

Senate Minority Leader Chuck Schumer (D, N.Y.) and Sen. Ron Wyden (D., Ore.) introduced a measure on July 1 that would extend the extra $600 until a state’s average unemployment rate over three months is below 11%, then gradually shrink the bonus as the rate drops further. It would also extend the duration of regular benefits from 39 to up to 78 weeks, as long as a state’s unemployment is above 5.5%.

House Speaker Nancy Pelosi (D., Calif.) has endorsed the idea of using triggers for enhanced aid, though she didn’t include them in the latest coronavirus relief package the House approved in May. That bill would extend enhanced benefits through the end of 2021 at a cost of $432 billion, pushing the cost of the overall bill to $3.4 trillion, according to the Congressional Budget Office.

The unemployment rate, which stood at 11.1% in June, is expected to fall to 10.5% by year-end and to 7.6% by the end of 2021, still well above the 3.5% recorded in February before the virus spread throughout the U.S., according to the CBO.

Tying benefits to economic triggers would cost even more depending on how the proposal is structured, said Claudia Sahm, macroeconomic policy director at the Washington Center for Equitable Growth, a left-leaning think tank, who advised House leaders on the measure. But if the economy recovers rapidly, automating the enhanced benefits means they would quickly phase out, leaving minimal impact on the debt.

Triggers could be especially useful during this recovery, whose pace depends on the virus. Strong economic data in May prompted calls from Republicans that another big aid package might not be necessary. Just weeks later, a resurgence of cases appears to have slowed growth.

While the current proposal for triggers revolves around unemployment insurance, in theory tax cuts, higher benefits for food stamps and stimulus checks could be similarly linked to the state of the economy.

The proposal is unlikely to make headway so long as Republicans control the Senate. Critics say enhanced benefits discourage workers from returning to the labor force. There is some evidence that extended benefits have that effect: A 2015 study by economists Marcus Hagedorn, Iourii Manovskii and Kurt Mitman found an abrupt stop in extended benefits in the U.S. at the end of 2013 led to higher employment the following year.

“There is a vicious cycle here that the unemployment rate won’t fall if the government keeps the benefit so high,” said Chris Edwards, an economist at the libertarian Cato Institute, who also warned such fiscal policy rules could add trillions to federal debt.

“I don’t see what the advantage is in trying to make decisions for the future now,” he said.

Mr. Beyer, who introduced a House bill similar to Messrs. Schumer and Wyden’s plan, said the triggers proposal might not make it into the next fiscal package Congress expects to pass by the end of the month, but he is optimistic. After the House passed its bill, Mr. Beyer said Mrs. Pelosi told a group of lawmakers from relevant committees to continue to explore the idea.

And if Democrats win control of the White House and Senate in November, “It wouldn’t surprise me if we do it in January,” he said.

Updated: 7-25-2020

‘Fed Accounts’ For All — With Automatic And Recurring Payments Triggered By Economic Crises

The next coronavirus relief package must fix the flaws of the first, and here’s how free bank accounts for all Americans at the Federal Reserve fit into that solution.

Wealthy interests have thrived during the pandemic. The CARES Act authorized trillions in spending to support wealthy people and corporations. Most of the money was used to guarantee liquidity for banks and hedge funds, backstop corporate balance sheets, and purchase debt to save commercial loan markets. Overall, 82% of the $170 billion tax provision included in the stimulus legislation benefited individuals making more than $1 million per year.

The results this spending are in. The Dow industrials and the S&P 500 have been on the rise for weeks, and the Nasdaq Composite is at an all-time high, while the aggregate net worth of billionaires has increased by 20% in the last five months.

On July 31, the $600 lifeline in extra federal unemployment benefits expires, and the $1,200 checks authorized by the CARES Act will be long gone. And despite having received direct aid, most states and cities will be facing a cash crunch, which could lead to massive layoffs and cuts to critical social services. If these issues were not enough, President Donald Trump is demanding that school districts bring students back, without the billions in resources needed to do so safely.

The federal government’s job is to spend to stimulate the economy during a crisis, and we know this strategy works. Now Congress must do the same for working people and for communities across the country.

Without dramatic congressional action in the coming days, the American economy is poised to drive off a cliff.

Thankfully, members of Congress are negotiating another stimulus package. But this next one must fix the flaws of the first. This time, the stimulus package must prioritize recurring aid and structural reforms for working people and local governments.

The next stimulus package must extend the unemployment benefit and provide a recurring guaranteed income of $2,000 per month, create free bank accounts at the Federal Reserve — “Fed Accounts” — for every American, and supply state and local governments with ongoing cash payments and ensure that future economic crises trigger automatic payments.

The federal government’s job is to spend to stimulate the economy during a crisis, and we know this strategy works. Now Congress must do the same for working people and for communities across the country.

Before the pandemic, many Americans were barely making ends meet. Only four in 10 Americans had $400 in the bank to weather an emergency, millions of households were living check to check, and many were spending more than a third of their income on housing. This was an economy with historically low unemployment and soaring stock markets. The coronavirus forced its brittle underbelly to the surface.

By providing to every American a $2,000 monthly guaranteed income, America will be a more resilient nation. Monthly cash payments will ensure people can pay rent and buy food, provide the peace of mind needed to socially distance today, and better prepare everyone for the next disaster.

According to the Federal Reserve’s data, 22% of Americans are underbanked or unbanked. About 40% of the unbanked used some form of predatory service such as a check-cashing service, pawnshops, an auto title loan, payday or paycheck advance, or a tax-refund-advance product. For perspective, currency exchanges typically charge 3% to cash a government check (one that has zero chance of bouncing), 1% of a utility bill to pay that bill, and up to 400% on a payday loan.

Put another way, billions of dollars’ worth of income and future wealth is being extracted from communities because we do not treat access to banking as a public utility like water or electricity.

When it came time to disburse the CARES Act checks, millions of people had no way to receive the help. Many waited weeks. Some are still waiting. The creation of free Fed Accounts will ensure everyone has a public option for a free bank account and to receive their guaranteed income for no cost via government keystroke.

Finally, Congress should pass a structural reform where states and cities receive recurring countercyclical aid when there is an economic crisis. State and local governments have watched revenues plummet because of the coronavirus, and there are additional risks on the horizon.

With continued unemployment and a possible wave of defaults on residential and commercial rents and mortgages, income- and property-tax revenues are under threat. States and cities are required to pass balanced budgets by law, even if it means harming the people they serve. Historically, they have had to do all three and, in doing so, hurt recovery efforts in the long term. By supporting local governments with recurring aid, the federal government will fuel the national economic recovery.

These are reasonable demands. It is unreasonable to think people and communities can weather the pandemic without additional help. Yes, these items will cost money — but inaction will result in more death and cause permanent damage to the economy.

The clock is ticking.

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