The Big Problem With the Stimulus Is It’s Too Small

Noah Smith

(Bloomberg Opinion) -- The Senate has passed a $2 trillion spending bill to fight the economic devastation wrought by the coronavirus pandemic. Though there was much last-minute dickering, the final vote was unanimous, indicating that legislators take the crisis seriously. Now the bill goes to the House, and let's hope it passes quickly. Time is of the essence. With many cities and states under shutdown to stop the spread of the disease, businesses are laying off millions of workers — an unprecedented collapse in employment:

To call the bill a “stimulus” is a little misleading because this is more about direct economic relief. Traditional economic stimulus is done in response to a shortfall of aggregate demand — a situation where people are cutting consumption, usually in response to a financial crisis, and the government wants to get them spending again. But now the economy is being forcibly ground to a halt by necessary pandemic-fighting measures. People can do without restaurant trips and new TV sets for a couple of months, but they still owe rent, debt payments and other bills. Businesses could simply shutter their doors and take a pause for a while, but they also owe monthly payments, so they’re in danger of bankruptcy.

This so-called stimulus is actually a piece of financial restructuring, designed to transfer some of those monthly obligations from households and businesses to the federal government. That’s good, because the federal government is able to borrow cheaply and can service these obligations more easily.

Households benefit in two ways. First, many middle-class households get a one-time direct cash payment of $1,200 ($2,400 for married couples) plus $500 per child. Second, unemployment insurance has been vastly (though temporarily) expanded — laid-off workers will receive $600 a week for four months, in addition to what they would have otherwise received. Unemployment insurance has also been extended, just as it was during the last recession.

This is actually pretty good in terms of the size of the payment — in some ways, more generous than Canada’s relief program. A family of four with one laid-off worker would get $8,200 over the course of two months on top of normal unemployment insurance. For many people this will be enough to get by. The bill also extends this assistance to freelancers, gig workers and independent contractors.

But for people in big cities — where the epidemic is hitting the hardest — it may still fall short. If the aforementioned family of four lives in New York City and pays median rent (more than $3,400 a month) for a two-bedroom apartment, that family will have only $800 left per month from the stimulus — on top of normal unemployment insurance — to pay for utilities, debt service and necessities such as food. Because the bill didn’t index the payments to the local cost of living, middle-class and working poor families in the worst-affected areas of the country may still have to dip into their savings or face major hardship.

Businesses will also get a boost. The bill creates a $500 billion fund to provide loans to big businesses. In addition, small businesses will get $350 billion in loans and direct cash assistance. Crucially, if small businesses maintain their payrolls, more of the assistance will come in the form of grants rather than loans.

This last part is very good because it’s much less economically disruptive to have businesses maintain workers on their payrolls during the shutdowns than to fire them and then hire them back later. Economists on the left and the right have both coalesced around this approach. Big businesses also should have been paid to keep workers on payroll, although this would be politically unpopular.

The bill will also give $150 billion to state and local governments. This is probably not enough. State and local government revenue fell $120 billion during the Great Recession, and this time around it’s likely to be worse. Because state and local governments are much less able to take on debt than the federal government, forced austerity tends to cause big layoffs, which hurts the rest of the economy for years. Boosting federal aid to these governments is thus one of the most effective tools of recession-fighting.

Finally, the Senate bill includes some much-needed spending on actually fighting the pandemic. There’s $140 billion for hospitals and medical workers, including funding for critical protection equipment and money to make coronavirus testing and future vaccines free for patients. This is very good, but it needs to be expanded. The only way that cities and states will be able to reopen businesses and public spaces safely is to implement comprehensive testing programs with contact tracing and rapid isolation of the sick. This is what has been done in countries such as South Korea, and the U.S. will need lots of funding to copy their success.

So the so-called stimulus bill includes essentially all of the things it needed to include, but not enough money for long enough. Support for workers in expensive cities, aid to state and local governments, and funding for test-and-trace systems to suppress the epidemic all need to be expanded. And two months goes by very quickly; if the crisis isn’t over by then, follow-on bills will be needed very soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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