In mid-spring, America was eager for a return to its usual rhythms after months of lockdowns—clearly over-eager. Governors re-opened states for business before they met minimal benchmarks for control of the coronavirus. People crowded beaches and city streets and bars. Many refused to wear masks. The stock market surged, ultimately regaining all its losses in 2020. Most heartening to the optimists, the unemployment rate fell, defying the expectations of economists. Finally, tens of thousands marched side by side in the streets to protest the murder of George Floyd, deciding that the urgency of action for the health of the nation was more important than fear of infection.
But America faces severe tests ahead. On June 11, the Dow Jones industrials collapsed, down more than 1800 points, and the S&P 500 almost the equivalent. The obvious became palpable. By June 24, it became still more tragically undeniable: Coronavirus infections are spiking again as people congregate and often ignore best practices, including social distancing and mask-wearing. The market fell even more. As the coronavirus infections rise again, so will the U.S. and world economies fall again. Another round of fiscal stimulus is needed to support demand, but Republicans like Larry Kudlow and Mitch McConnell are stalling. Kudlow, in fact, says all is well even as the White House’s own senior economic advisers agree trillions in stimulus are needed.
We need new approaches to protect the salaries and wages of individuals who ultimately support the demand that sustains GDP, and to avoid a harsh rise in poverty.
Democrats are, at least, proposing expanded policies; but so far, they need to be bolder to meet the moment. Our contention is that new, powerful policy proposals that go further than the CARES Act and the HEROES Act, passed by the Democratic House, are now needed. We believe we need new approaches to protect the salaries and wages of individuals who ultimately support the demand that sustains GDP, and to avoid a harsh rise in poverty. This economy cannot recover without individuals having some wherewithal to spend and avoid living hand to mouth.
The Dangers for Our Economy Are Set Only to Increase
America now faces several major and frightening headwinds in the summer and early fall. Of most concern is the possibility of experiencing an even more serious return of the coronavirus infections than we are currently confronting. Already, infections are rising rapidly in the United States, especially in the South, which have opened itself for business. The political protests may also trigger new infections. Some model makers are predicting another 100,000 infections by the late fall. (USA Today reports, “Dr. Ashish Jha, director of the Harvard Global Health Institute, said the United States must be prepared for 100,000 victims in the next few months.”)
The damage to the economy will be severe. Some may refuse to go to work, others will get sick, still others die, and many more will not earn wages because they won’t have the opportunity to get their jobs back. They will in turn not be able to purchase goods or services, sending the GDP into a tailspin, leading to more lay-offs and still less demand. As we enter this season of unknowns, there are still some thirty million Americans on the unemployment rolls now. With a new round of infections, more workers will get laid off, reversing progress made on unemployment.
The decrease in unemployment for May (announced in early June) sent a mild signal to determined optimists that all was well with the economic engine and a recovery about to begin. But the federal programs to supplement American incomes—the Keynesian source of renewed demand, the current engine of growth—are now coming to a close. The $1,200 stimulus checks have already been delivered and will not be renewed without additional legislation. Businesses have run through much of their Payroll Protection Program (PPP) support. The PPP was implemented poorly and probably unfairly, especially for minority- and women-owned businesses. The Economic Injury Disaster Loan program has money but has also been poorly run, and the employer retention tax credit, while promising, has been undersubscribed. Most importantly, we have seen cracks in the state-run unemployment insurance programs, which, even when workers get benefits from them, replace on average less than half of prior paychecks. The additional unemployment insurance of $600 will end in July, and Republicans say they will not renew it. If employment does not recover, and stimulus payments are cut off, who will support demand in this economy? To be sure, the Trump economy had a weak foundation before the pandemic, and was only serving to exacerbate social and economic inequality. But these trends will worsen without action.
Prioritizing Our Responses
So many measures are necessary in this moment. We must focus a powerful new stimulus program on the needs of workers and their families. Unemployment insurance must be expanded and broadened to cover more people. The rate of reimbursement and extension of payments should be made contingent on the unemployment rate. We need wage guarantees paid to businesses to keep their workers, as is done in Europe. In this way, workers remain attached to their work and income sustains demand, and as a substitute for the PPP, it will be cheaper. We must explore the possibilities of federal job creation programs that can be directed on a micro basis to where they are needed, for minorities in the poor South and central cities. We believe we ultimately need a powerful infrastructure program to renew productivity growth and stimulate innovations.
In other words, we need an all-court press. But we must also continue to aggressively address the needs of the poor. If fully implemented, the CARES Act provisions on unemployment and rebates would ensure that poverty in 2020 would only rise from 12.5 percent to 12.7 percent. But if they aren’t extended, and there is no miraculous return to a normal economy, poverty could rise by 20 percent to 50 percent. Ours is the poorest nation in the rich world—in terms of the proportionate number of poor. We should make an expanded child tax credit available to all children regardless of parental income, and a permanent fixture of the American social net. And we should at last consider a negative income tax, the godchild of Milton Friedman and almost passed under Richard Nixon, that’s fully comprehensive and covers all poor Americans with an income floor. The current earned income tax credit (EITC) is inadequate, with cracks that neglect the lowest income people.
Key Steps to Shore Up against Economic Disaster
We analyze each of the possibilities for meeting these needs below.
Congress should build on the lessons of the CARES Act—that state unemployment systems have failed and that the federal government must step in in three critical areas, keeping aid going until the unemployment rate drops. Federal unemployment checks—now at $600 per week—are needed to supplement state benefits that are as low as $240 or $275 in big cities like Phoenix, Miami, or Nashville where these benefits can’t even cover the rent of an apartment. Federal benefits must be provided to those who are not covered by state programs (which had been covering less than a third of the jobless), including youth, those in the gig economy and lower-wage workers. Lastly, federal extended benefits of at least a year need to be provided to long-term unemployed workers who can’t find a job within the usual twenty-six-week period. While the federal government must step in now, the failure of state benefits to respond effectively and adequately to the COVID-19 crisis must not be allowed to happen again. The federal government should provide states with additional support to upgrade their technological and administrative capacity to pay claims, but that assistance should be contingent on taking action to pay benefits in a timely fashion and reform the restrictions in their eligibility rules.
From Stimulus Payments to Negative Income Taxes
As suggested by Nobel Prize winner Joseph Stiglitz, aspects of the CARES Act stimulus package were not as effective as they could have been because they were targeted to individuals who were more likely to spend the dollars anyway. A more powerful complement to unemployment benefits would be a negative income tax, or, more simply, a progressive universal basic income, which would lift the spending power of low-wage workers and other low-income Americans who don’t qualify for UI (including the disabled, caregivers, youth, and retirees). The progressive basic income would work like the EITC but would start with a flat amount—say $3,000 per year–available to all American households earning up to $30,000, and then phase down as individuals earn up to the average income. Similar proposals have been introduced by Representative Rashida Talib (D-MI) (Livable Incomes for Families Today [LIFT]+ Act) and by Senator Kamala Harris (D-CA). This progressive basic income should be expanded with additional benefits for families with children through a fully refundable child tax credit that delivers at least $3,000 per child per year (Canada provides nearly $4,000 and more for younger children), which phases out with higher incomes. These proposals would have the dual impact of delivering aid to those Americans with the highest propensity to consume (not save) while also reducing the major suffering disproportionately impacting communities of color and other low-income Americans.
Direct Hiring Subsidies for Nonprofits and Government
Businesses have a limited ability to rehire because of general fear over reopening and an inability to make a profit even if their employee’s wages are subsidized. On the other hand, governments and nonprofit organizations that are struggling to deliver services to families in need can hire the un- and under-employed into jobs quickly. This has a triple benefit of meeting critical social needs and stimulating demand while maintaining the skills and employability of the workforce, especially in black and brown communities that have seen skyrocketing unemployment and less relief than white Americans. One of the most promising ideas is a proposal by Senator Chris Coons (D-DE) that would expand the number of AmeriCorps service positions from 75,000 per year to 500,000–750,000 jobs and increase the payment from 175–200 percent of the federal poverty level (FPL). Another is the proposed Pandemic TANF Assistance Act, authored by Senator Ron Wyden (D-OR), would appropriate $10 billion in flexible dollars to create subsidized jobs positions that are either remote or offer appropriate personal protective equipment (PPE) until the public health crisis has lifted. This proposal is modelled after the very effective TANF Emergency Fund appropriation that was used to create 260,000 jobs after the Great Recession.
Without subsidies, hiring will not move fast enough to crawl out of the deep hole of joblessness into which we’re plummeting. France has already moved to continue its 100 percent subsidies of wages through September, even though they have reopened the economy. It’s time for a more direct approach to spur rehiring here as well, with subsidies up to the first $80,000 of a worker’s salary and benefits—targeted to and capped by the amount of revenue loss and paid out for at least the next three months. This should be an efficient direct transfer from the IRS to companies, as laid out by Representative Pramila Jayapal (D-WA) in her Paycheck Guarantee Act. The employer retention tax credit (ERTC) passed in the CARES Act, and improved upon by the HEROES Act, provides a structure that would allow those businesses with flagging demand to receive a rehiring tax credit, including the waiving of payroll tax payments and a tax refund (which would serve as a grant). With demand flagging for PPP loans, the ERTC, passed in the CARES Act but underused so far, can be immediately improved by increasing the amount allowable and changed to cover non-business expenses to encourage companies to open fagain.
Infrastructure and Jobs
Investing in America is the surest way for the government to stimulate demand and create jobs, replacing the record drop in economic activity. It would also address the too infrequently discussed subject of flagging American productivity. Infrastructure plans need to address both physical infrastructure, which once again has received a D+ from the American Society of Civil Engineers, and critical needs like clean water and inadequate broadband that have exacerbated racial and social inequality throughout crises like the COVID-19 pandemic. Infrastructure needs should not be addressed through privatization gimmicks, but through proposals like the House’s $760 billion Moving America Forward framework or the $494 billion proposed Surface Transportation reauthorization]. Infrastructure plans must also include pivotal green components like a national network of electrical car recharging centers (proposed by Representatives Andy Levin (D- MI) and Alexandra Ocasio-Cortez (D-NY)) and other projects that improve our competitiveness and the environment.
State and Local Aid
State and local governments are another critical perspective to consider in the next economic stimulus. In an April 21 letter from the National Governors Association to congressional leaders, state leaders asked for $500 billion to help cover the costs of severe budget shortfalls as well as fund state infrastructure projects, replenish and improve capacity state UI systems, and increase SNAP maximum allotments by 15 percent. In the House Democrats’ HEROES Act, nearly $1 trillion was allocated for state and local governments, including $500 billion in direct, flexible aid for state governments and an additional $357 billion for local governments and counties. The HEROES Act would allocate $67 billion in aid to New York governments, including $34.4 billion to the state, $17.2 billion for New York City and $15.1 billion for other localities. New York Governor Cuomo said that the state will need $61 billion in federal aid in order to avoid massive cuts in the state budget, and that without the aid, the state would likely have to administer 20-percent cuts to schools, local governments, and hospitals. If states’ budgets are not replenished, it will result in the reverse of a Keynesian stimulus and slow the economy for all, not to mention cut down badly needed social programs and public payrolls.
Progressive Leadership Has Never Been More Needed
If the COVID-19 pandemic persists, as is likely, due to premature opening in many states, dangers for the U.S. economy remain high. It is incumbent on progressive leaders in Congress to provide the stimulus the economy needs and thereby avoid, or at least mitigate, tragic emergencies not yet imagined.