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The U.S. economy is recovering but there’s still a long way before it comes back to even. With the overhang of the presidential election largely behind us, Congress should quickly pass another stimulus bill.
Although U.S. GDP rose 7.4% in the third quarter of 2020, the economy is still more than 3% smaller than it was at the end of 2019. Around 22 million Americans lost their jobs in March and April of this year. Despite substantial employment gains over the third quarter, almost half of these Americans are still out of work.
Many knowledge workers have been able to work effectively from home. Seeking more space and backyards, they have driven up home prices in suburban and exurban areas. But many lower-income Americans need to be physically present to work at factories, hospitals and essential public services in large cities. Others struggle to work or study remotely without separate home offices or strong internet connections.
Most importantly, even with this week’s announcement of progress on a vaccine for the coronavirus, the pandemic will still be a major drag on the workforce and economy until next summer at the earliest. The daily rates of new infections in the U.S. are now hitting new highs of more than 100,000 per day, as the coronavirus spreads to new locations. Even if the FDA approves a new vaccine before the end of 2020, it will take at least six to nine months to implement. The logistical problems of delivering the vaccine are daunting, especially with a significant portion of Americans saying they don’t want to be vaccinated — at least in the initial wave.
So how will the U.S. help these unemployed and low income workers make it through next summer? As the economy continues to be weighed down by the pandemic, these are the Americans who will struggle to pay for rent, medicine and food.
The Federal Reserve has done more than could have reasonably be expected by keeping interest rates near zero, buying bonds of all types and running loan programs for small- and medium-size businesses. However, as Fed Chairman Jay Powell has recognized, monetary policy has its limits; Americans need another fiscal stimulus bill to bolster the weak parts of the U.S. economy through next summer.
Before the November election, House Democrats had pared back their version of the new stimulus bill from $3.4 trillion to $2.2 trillion, and Treasury Secretary Steven Mnuchin seemed to be receptive to a legislative package of up to $1.8 trillion. But Senate Republicans were then opposed to such a large spending bill. Now Republican Majority Leader Mitch McConnell has publicly stated that Congress should pass a new stimulus bill.
Secretary Mnuchin and House Speaker Nancy Pelosi have already agreed on another round of personal grants in the new stimulus bill — $1,200 per adult and $500 per dependent for households below certain income levels. Both also agree on more government assistance for small businesses, airline workers, schools and child care.
Stumbling blocks and wild cards
One stumbling block has been the supplemental federal benefits for unemployed workers, which were originally $600 per week. I and others raised questions about whether that amount would discourage workers from seeking unemployment if the total of regular unemployment benefits plus these supplemental benefits exceeded their wages in their prior jobs. However, recent research clearly shows that $600 per week in supplemental benefits have not deterred unemployed workers from seeking new jobs. Instead, they put more value on the long-term income associated with a lasting job than on the temporary income available from unemployment benefits.
The other main stumbling block has been assistance to state and local governments. The House has proposed $436 billion in funds to be distributed over the next year, but the Senate is concerned that these funds not be used to bail out cities and states which did a poor job of managing their pension liabilities over the last decade. A compromise bill could direct that these funds be used only to pay specified categories of employees of city or state governments — such as first responders, healthcare workers, and teachers.
Nevertheless, the politics of such a compromise bill are still up in the air. It is still unclear if the Republicans will hold on to their majority in the Senate. While Senate Republicans will certainly retain 50 seats, they will have to win at least one of the two seats up for grabs in the Georgia runoff elections this January. In one race, Republican Senator David Perdue received almost 100,000 votes more than the Democratic challenger Jon Ossoff, but was denied a majority of the votes cast in Georgia because the Libertarian candidate Shane Hazel garnered 114,000 votes.
Democrats will face big challenges in persuading these 114,000 Hazel voters to support Ossoff. Hazel is a libertarian vehemently opposed to most domestic government programs; indeed, he has advocated for the elimination of public schools. He also has railed against the “bureaucratic D.C. cabal” acting in the interests of “international aristocrats.” By contrast, Ossoff is a progressive liberal who supports public education and other domestic programs. Moreover, he spent five years working in Washington D.C., after graduating from Georgetown University’s School of Foreign Service.
The other wild card is President Donald Trump. Last Saturday the Associated Press and other media outlets, based on state ballot counts, said former Vice President Joe Biden had enough electoral college votes to win the 2020 election, but Trump allies have filed legal suits against the results in several states. If Trump vetoes the new stimulus bill, it may be difficult for Congress to override his veto. However, before the election, Trump urged Senate Republicans to pass legislation with higher spending levels.
Senate Republicans and Trump may be willing to accept a compromise bill that is also supported by Democrats. Such a bipartisan effort is needed now to provide a funding bridge through next summer for millions of Americans in dire financial straits.
Robert Pozen is a senior lecturer at MIT Sloan School of Management and a former president of Fidelity Investments. Research assistance for this article was provided by MIT undergraduate Peter Hoffman.
Plus: Hoped the election would shake loose a stimulus deal? Think again
