Don’t let politics strangle virus-economy relief, by Michael R. Strain

*Federal assistance highly effective now to support employment by providing money for struggling state, band local governments and small businesses

Michael R. Strain

Yes, it is a crazy time in Congress. But, there’s a plan that needs attention now as suffering spreads.

The United States (US) Congress has a full plate, to say the least.

The coronavirus pandemic has claimed over 200,000 lives, and the virus will continue to spread this fall and winter. Members of both Houses are up for re-election in November 2020.

The Senate will probably be asked to approve President Donald Trump’s next nominee to the Supreme Court.

Funding to keep the Federal Government running expires later this month.

And struggling workers, families and businesses need Congress to pass another round of economic recovery legislation.

Some members of Congress understand the urgency, and are trying to break through the political cacophony.

Last week, a group of 25 Democrats and 25 Republicans in the House of Representatives released a framework for a fourth round of relief measures that builds on the first three, enacted last spring.

These members are part of the Problem Solvers Caucus, and the total cost of their plan is $1.5 trillion, a number that should be politically acceptable to both parties and to the White House.

This bipartisan group faces resistance from both sides of the aisle. Some Republicans in the Senate oppose additional spending, and Majority Leader Mitch McConnell refuses to bypass them and work directly with Democrats.

House Speaker Nancy Pelosi has insisted on spending amounts that she must know would prove impossible for Republicans to accept, and with good reason.

A stalemate is in the political interest of Democrats, as a stimulus-fuelled economy this fall would help Trump’s re-election chances.

But partisan politics and a reflexive opposition to economic recovery spending will prolong the downturn and hurt struggling workers, families and small businesses.

Despite a rapid recovery beginning in May, the economy remains in terrible shape. Economists at Goldman Sachs estimate that consumer spending is down by a whopping 4.3% relative to its pre-virus level.

Over 13.5 million Americans are unemployed, and the unemployment rate, at 8.4%, is more than double the rate in February.

According to my calculations, even if the US economy grows at a 30% annual rate in the quarter ending this month, which is plausible, the level of economic output will still be lower than at any time since the fourth quarter of 2017.

The recovery has been more robust than many economists and business people expected. But the expiration of provisions in the $1.8 trillion relief law passed in March — including expanded unemployment benefits, direct payments to households and the subsidies for businesses to keep workers on payrolls — has led the recovery to slow.

The economy added a stunning 1.4 million jobs in August. But it added twice as many jobs in May and around 3.5 times as many in June in the first stage of the rebound from the March-April crash.

Consumer spending grew by 1.6% in July relative to June. But the monthly gain in June was 5.7%, and the gain in May was 8.4%.

The expansion will probably continue without more federal relief spending, but the economy will face major headwinds this fall. In most of the US, outdoor dining, which has been helping to sustain restaurants, will be less attractive as the weather continues to cool.

Cold and flu season could reduce economic activity by keeping people home who are feeling ill and are unsure if they have been infected with the coronavirus.

The colder weather, along with school reopenings, could accelerate the spread of the virus and further reduce economic activity.

The Goldman Sachs economists estimate that exports are 7% lower than their pre-virus level.

A resurgence of the virus abroad, already underway in Europe, could reduce exports even further.

The economy is still in a deep hole. My calculations suggest that US gross domestic product would have to grow at a 46% annual rate in the third quarter to reach the first quarter’s level of economic activity.

In that quarter, the economy was shrinking as the virus reduced output in March.

To return the economy to where it was in the fourth quarter of 2019 would require current-quarter growth of 54%. The more optimistic forecasts for the current quarter’s annual rate of growth are in the range of 30% to 35%.

Some Republican senators argue that the recovery is healthy enough without another government booster shot.

They have it backward. The good economic news of recent months, particularly in May and June, are a testament to the efficacy of government action, notably the big March relief measure dubbed the Cares Act. Federal assistance would be highly effective now to support employment by providing money for struggling state and local governments and small businesses.

According to recent research by economists Jeffrey Clemens and Stan Veuger, who is also my colleague at the American Enterprise Institute, state and local governments will face a $240 billion revenue loss for the fiscal year ending next June.

This comes with $105 billion from lost state sales- and income-tax revenue.

Revenue losses that severe will force states and localities to lay off employees, prolonging the downturn.

State and local governments have already reduced payrolls by 1.1 million workers relative to February.

The Paycheck Protection Program that sent cash to small businesses expired in early August.

Without it, the US will see small businesses lay off additional workers, and more small business permanently close their doors.

This would extend the period of economic weakness even after a Covid-19 vaccine is widely distributed by reducing the number of job opportunities available to unemployed workers.

It’s time for Democrats and Republicans to embrace their colleagues’ compromise plan as a starting point to resume negotiations, despite its faults. Its unemployment-benefit payments are too generous, and would discourage many workers from resuming their jobs because it would pay some of them whatever they were earning before being laid off.

The $500 billion it allocates to state and local governments is more than is needed to prevent layoffs and reductions in essential services.

The $95 billion it would allocate for a renewed Paycheck Protection Program won’t keep enough small business from permanently closing their doors.

Still, Trump signalled recently, that he would like another round of stimulus and is open to spending more than congressional Republicans would like.

Speaker Pelosi feels pressure to make a deal from rank-and-file Democrats facing competitive races in November.

The Problem Solvers have pointed a way forward.

To help struggling families, shorten the length of the downturn, and preserve the productive capacity of the economy, Congress should follow their lead.

Michael R. Strain is a Bloomberg Opinion columnist, and Director of Economic Policy Studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.