Another Round? Public Policy Expert Talks Pros and Cons of Second Stimulus Package

By Tom McLaughlin

With only weeks to go until Americans decide their next president, congressional lawmakers have renewed talks on a second round of stimulus spending.

So, what are the prospects of a second stimulus package, the proposals on the table, and the pros and cons of a new bill?

Hayes maintains that the House bill addresses many of the economic concerns and uncertainties facing the current economic recovery.

To get to the bottom line, we check in with Michael Hayes, assistant professor of public policy and administration at Rutgers University–Camden.

In the last few days, the White House has suggested passing a piecemeal set of stimulus packages instead of one large stimulus package. For example, President Trump is asking Congress to focus only on passing a bill to provide federal aid to the airline industry for the time being. Is this a good approach?

No, it is not. The federal aid to airlines is only a small portion of the stimulus bill passed by the U.S. House of Representatives last week. A stimulus package for only the airline industry is very limited in scope. The vast majority of economists would suggest that a large and comprehensive stimulus bill is needed to help the economic recovery and also prevent further reductions in jobs. Additionally, the political will might not exist to pass the other portions of the stimulus bills in the future. For these reasons, I recommend Congress to continue to find middle ground on passing one, large stimulus bill that includes all needed items.

So then, many Americans want to know: Is there any compromise between Democrats and Republicans on a new stimulus package?

The short answer is no. On Oct. 1, House Democrats passed their own $2.2 trillion stimulus package after the Democrat and Republican party leaders failed to reach a compromise.

What are some key proposals in the House bill?

Key items in this bill include restarting the $600 per week unemployment benefit, funding a second round of $1,200 stimulus checks to individuals, providing federal aid to state and local governments, providing federal aid to universities and colleges, funding a second round of business loans via the Paycheck Protection Program, and providing $25 billion in aid to the airline industry.

How does that differ from what Republicans have proposed?

Republican leaders are seeking a less expensive bill by limiting the $600 per week unemployment benefit to $400 per week, and wanting less federal aid given to state governments, the local governments, and the airline industry.

Where do you stand on these differing proposals?

The House bill addresses many of the economic concerns and uncertainties facing the current economic recovery. For example, the recent September jobs report published by the Bureau of Labor Statistics provides evidence of a slowing economic recovery, especially in the state and local government sector. Given that state and local governments are required to have balanced budgets, additional federal aid will likely allow state and local governments to avoid severe cutbacks and layoffs.

Hayes explains that if there was no government intervention during the last six months, we would likely be facing a much larger recession, a financial market crisis, and likely deflationary pressure on assets like home values.

Are Republicans right to be concerned over the higher price tag – and the long-term consequences of this spending?

While Republicans may be concerned about the cost of the House bill, many economists argue that it is better to ‘overspend’ on stimulus, especially given the uncertainty of the economic recovery and the current health crisis due to COVID-19.

What do you see as the immediate impact of a new bill on the economy, business, and employment?

In the short term, I expect a new stimulus bill will have a positive impact on the economy. Additional stimulus checks and expanded unemployment benefits allow suffering households to continue to pay their bills and mortgages, while allowing all other households to make purchases or pay down debts that will benefit the overall economy and credit markets. This boost to consumers will create a positive spillover effect on businesses and job creation.

Additionally, federal aid to state and local governments, higher education institutions, and the airline industry will help prevent further job layoffs/furloughs in these sectors. Airports and universities serve as major employers for particular cities and college towns. Many college towns’ local economies depend heavily on these institutions.

How about the long-term effects of a new bill?

It is impossible to predict what the long-term effects of this new bill would be. With a health crisis that has yet to be contained, it is possible that further stimulus bills may need to be passed to prevent a severe and prolonged recession. With that being said, there is a long-term financial cost because the government is borrowing money to pay for these bills. Even though the 10-year government bond interest rate has been less than 1 percent for the last six months, the federal government’s budget might be restricted due to the growing size of the national debt. However, a speedy economic recovery should help reduce federal deficits in future fiscal years.

What were some missteps or issues with the first one, and how does the second stimulus package rectify these issues?

A major issue with the first set of stimulus bills was not including adequate levels of federal aid to state and local governments. These governments are required to pass balanced budgets, which forces them to make severe cutbacks and layoffs during recessions. Across the country, there has been a large reduction in jobs in the state and local public sector.

For example, there have been over 1.5 million jobs lost in this sector since the pandemic started. To put this in perspective, there were less than 800,000 jobs lost in the state and local government sector during the Great Recession. These job losses will have a negative spillover effect on the local economies.

What do you want to see most in this new stimulus bill?

The general framework shown in the Democratic and Republican proposals appear sound. I tend to agree with economists who believe a ‘larger-than-needed’ stimulus bill is needed. The slowing economic recovery and the uncertainty around the COVID-19 health crisis make it impossible to predict the amount of stimulus needed to prevent a severe and prolonged recession. Some research on government spending suggests that every dollar spent by the government creates over $1.50 in economic output, especially during severe economic recessions. This is the rationale for stimulus bills.

Why has there been a delay in issuing a second package?

Like anything in Congress, the major reason for the delay is politics. This is especially true now because it is an election year. The biggest disagreements between Democrats and Republicans, as we’ve mentioned, are over the size of the bill.

In general, are you on board with offering these stimulus packages?

Absolutely. When there are severe reductions in income and consumption – for example, limited private-sector output – the only way to provide adequate demand for labor, resources, and products is for government intervention. This is especially true because the spread of COVID-19 forced governments to shut down the economy to combat the health crisis.

To sum it up, if there was no government intervention during the last six months – for example, monetary policy via Federal Reserve Bank and fiscal policy via Congress – we would likely be facing a much larger recession, a financial market crisis, and likely deflationary pressure on assets like home values. Deflation would have dealt such a setback to the economy that it would had been very challenging for the government to prevent a second Great Depression.

 

 

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