A crisis can stretch for weeks, months, even years, but its arc can be shaped by a few crucial moments in which political leaders choose a course of action. For a U.S. economy still reeling from the devastation of the novel coronavirus, one such moment is approaching.
Economists are warning the nation is in danger of careening off a fiscal cliff unless Congress approves a rescue package to succeed the $2 trillion Cares Act. Key elements of that are set to expire this month, just as a resurgence of the virus in states that rushed to reopen their economies is making the nascent recovery look decidedly vulnerable. The Trump administration is calling on Republicans and Democrats to get legislation passed before the start of the summer recess in August.
“If Congress fumbles this, it’ll be a pretty big setback for the economy,” says Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., the country’s largest bank.
The two parties are approaching this crossroads from wildly different starting positions. House Speaker Nancy Pelosi insists Congress should appropriate even more than the $3.5 trillion Heroes Act passed by the Democrat-controlled House in May. “This is about survival of our economy,” she told reporters on July 16. “The clock is running out on it.”
Republican Senate Majority Leader Mitch McConnell has dismissed the bill as a bloated liberal wish list. Many of his colleagues have raised concerns about adding more to a federal debt that now exceeds 80% of the country’s gross domestic product. That said, McConnell told the White House he’s open to as much as $1 trillion. “New spikes in large and economically central states show that we are nowhere near out of the woods,” he said on July 20, adding that he hopes to unveil a plan this week. “It would neither be another multitrillion-dollar bridge loan to make up for a totally shut-down economy nor an ordinary stimulus for a nation ready to get back to normal.”
Economists are not nearly as divided. A growing body of research shows the $3 trillion approved by Congress since March played an enormous role in preventing the economy from sinking into a depression. Most important, the Cares Act sent direct payments of $1,200 to low- and middle-income households, plus more to those with children, and topped up unemployment benefits by $600 a week. Income for some families increased, and they spent most of the money, providing the overall economy with desperately needed relief.
“It was definitely a godsend,” says David Beckworth, a senior research fellow at the Mercator Center at George Mason University, a group that champions free-market economic theory. “Nothing’s perfect, but in the absence of that we would now be very much worse off.”
Retail sales, which plunged in March and April, rebounded sharply in May and were strong again in June. But the stimulative effects of the one-time payments are beginning to fade, while by some calculations as many as 25 million Americans will stop receiving the federal pandemic unemployment benefit near the end of July. Simultaneously, the latest data show the economy is beginning to stall again as Covid-19 infections surge in Sun Belt states from California to Florida.
New jobless claims soared in March then dropped in April and May, but they’ve remained high, well more than 1 million a week. The Great Recession never saw a single week with initial claims higher than 665,000. Meanwhile, the University of Michigan’s Consumer Sentiment Index nose-dived in July, an unexpected drop that bodes ill for retail spending.
“If nothing is passed, the likelihood of a double dip becomes our base case,” says Julia Coronado, president and founder of MacroPolicy Perspectives, an economic advisory firm. “Too many unemployed people are just running out of money.”
In a survey conducted early in June before the latest virus surges, Bloomberg asked economists how much additional stimulus spending would be appropriate this year. The median answer: $1.75 trillion. JPMorgan’s Feroli says $1 trillion represents the minimum needed to support demand.
Former Federal Reserve Chairman Ben Bernanke weighed in recently with an op-ed in the New York Times urging Congress to “act decisively.” Asked what the size of the next stimulus should be during July 17 testimony before a House panel, Bernanke’s successor, Janet Yellen, replied, “I don’t know what the right number is,” but added that she thought it should be bigger than $1 trillion.
The current chair, Jerome Powell, who generally shies from offering prescriptions on fiscal policy, said in April that lawmakers shouldn’t be worrying about containing the federal debt. “This is the time to use the great fiscal power of the U.S.,” he.
Not every economist advocates an extra-large stimulus. “Do I think the Heroes Act had a number toward the upper end of the range or maybe a bit above? Yes,” says Jason Furman, a former chief White House economist under President Barack Obama and now a professor at Harvard. “That was sort of an ambitious first bid.”
Furman says $2 trillion would be enough to make a significant difference, especially if it’s targeted at people and institutions that would go out and spend it.
What’s needed most, and where will Congress get the most bang for its buck? Among economists interviewed for this story, three things were raised repeatedly: a new round of direct payments, especially for those with low income; some extension of extra unemployment benefits; and a sizable chunk of aid to state and local governments, which were neglected in the Cares Act. (The legislation made $150 billion available to states and locales, but specifically for fighting the coronavirus, not for more generally plugging holes in their budgets.)
The first two are seen simply as the most effective way of replacing lost income and spending power until more Americans get back to work. “We’re trying to avoid a vicious spiral where people lose their jobs and don’t spend as much, and that causes more job losses and less spending,” Furman says. “Arresting that vicious spiral can’t wait.”
Beckworth argues that when it comes to extending unemployment payments, Congress shouldn’t even put a number on the total amount available but tie its gradual withdrawal to some measure of overall economic activity, like nominal GDP. “Don’t define the size of the package upfront. Let the goal define how big the package ends up being,” he says.
In his New York Times op-ed, Bernanke made the case for substantial aid to state and local governments, which face “ominous budgetary outlooks.” One of the lessons of the Great Recession is that belt-tightening by state and local governments can blunt the effects of fiscal and monetary stimulus. In the last downturn, states and municipalities cut 720,000 jobs over four-plus years, according to Moody’s Analytics, an outcome Bernanke said “meaningfully slowed the recovery.”
This time around, in just three months they’ve already axed about 1.5 million workers, and more cuts are on the way. Aside from the impact on policing, infrastructure upkeep, and a whole range of critical services, that’s going to put a drag on overall spending and growth.
Coronado makes the point that more aid to state and local governments could also help them open schools safely, which would benefit working parents and the businesses that need them. “School reopening is the underappreciated issue here,” she says. “If parents can confidently send their kids to school and focus on their work, then the labor market will function better.”
Despite all the talk about the death of bipartisanship, the unanimous vote on the Cares Act was a reminder that politicians in Washington can still find common cause in a crisis. But party ideologies appear to be reasserting themselves as the country draws closer to the presidential election in November, with members of the GOP seeking to reclaim their credentials as fiscal conservatives, while Democrats are eager to demonstrate they’re looking out for the interests of working-class families. That could complicate negotiations on the latest iteration of the rescue. In the meantime, the clock is ticking, and for millions of American households that fiscal cliff is coming into view.