The House of Representatives is getting ready to pass the American Rescue Plan. This is the $1.9 trillion dollar proposal from the Biden Administration to provide relief payments to individuals, expanded unemployment benefits, an expansion of the child tax credit, aid to state and local governments, an increase in the minimum wage and other expenditures.
The various House committees have recently rejected many Republican amendments designed to cripple the bill. One important rejection was of the proposal to reduce the amount of direct COVID-19 relief provided to individuals and families. Last December, after months of total inaction due to Senator Mitch McConnell’s refusal to put a House passed bill before the Senate, Congress finally approved a $900 billion stopgap proposal to extend unemployment benefits through March and provide a paltry $600 of direct payments to individuals. In the current bill ready to be voted on in the House, the Administration’s proposes that the $600 payment be supplemented by another $1400. That would bring the direct payment to $2000, the same the amount provided back in April by the CARES Act. Reducing the scope of those payments was one of the amendments being considered in one of the House committees -- whether or not to reduce the coverage of that extra $1400. The Administration proposal was to have the same coverage as the original bill back in April. The amendment, was to take the proposed cut off of $75,000 per individual or $150,000 per married couple and reduce it by lowering the cut off to $50,000 for individuals and $100,000 for a married couple.
[For details of the bill as it is likely to emerge from the House, see Associated Press: “Highlights of COVID-19 relief bill progressing in House”]
The decisions by the House will not end the debate. The good news in the Senate is that Majority Leader Schumer will determine what gets to the floor and what doesn’t. (McConnell lost his ability to kill bills thanks to the voters of Georgia!). However, uncertainty does remain in the Senate because the Biden Administration is going to need the vote of every Democrat. That is because this bill is slated to be voted on as a “Reconciliation” bill. Reconciliation is available in the Senate for budgetary bills. It permits the Senate to avoid the need to get 60 votes to cut off a filibuster. A simple majority works for all reconciliation bills. Because of the 50-50 split, therefore, Schumer will need every Democrat on board when the final version of the American Rescue Plan reaches the floor. That way, Vice President Harris can break the tie in its favor. According to news media accounts, the one member among the Democrats whose support for the bill is uncertain is Senator Joe Manchin, who is on record as believing that the $75,000 cut off is too high. It would subsidize too many people who “don’t need it.”
Lawrence Summers, former Secretary of the Treasury under Bill Clinton, has raised another potential problem --- suggesting that the size of the relief bill raises a danger of inflation. That is a separate question. On the one hand, we have the fear that the spending will end up being wasted by subsidizing people who “don’t need it.” (That issue would exist whether or not the deficit spending would be inflationary.) On the other hand, we may need less than $1.9 trillion to give relief and bring the economy back closer to full potential --- say to a 4 percent unemployment rate. (This would be a problem EVEN if none of the money were wasted.)
The discussion of “need” is obviously a subjective argument. (And I just love it when high paid journalists, academics or politicians opine about who really NEEDS help from the government!). Here I think we should focus on the important difference between the risk of helping someone who doesn’t need it and the risk of FAILING to help someone who really needs it.
What’s the downside of helping someone like me who doesn’t need the money? --- I’d maybe buy something extra or put the money in the bank. Even if I spend that money on frivolous items, that spending will actually help the economy by increasing the incomes of the workers and businesses producing the “frivolous” items I buy. It is true, that if I put the money in the bank, the impact on the overall economy of the full government expenditure is reduced --- but not by very much. What’s the downside of NOT helping someone such as a working single mother whose income is less than $75,000 and above $50,000? Given that the benefits of the CARES act from last spring ran out during the summer, she undoubtedly had a very rough time till December. In normal good years, she probably lived paycheck to paycheck with very little cushion of savings.
[According to CNBC, close to 40% of Americans do not have enough savings to meet a $1000 emergency. For details see Lorie Konish, “Just 39% of Americans could pay for a $1,000 emergency expense,” (January 11, 2021)]
During the past year, when COVID upended all aspects of life, this working single mother probably had to spend more money on child care to keep her job because her school age children were mostly being educated via ZOOM. (Or she had to quit her job to stay home). If she missed rent payments, the eviction moratorium kept her in her home. The extra $1400 might be essential to pay down credit card debt or some of the rental arrears.
Most economists when questioned are willing to concede that in the current situation, the danger of doing too little is much more serious than the danger of doing too much. [For details, see Emily Stewart, “The risks of going too big on stimulus are real — but going too small could be riskier. The debate over how big to go on the economic recovery, explained" ] And even Summers concedes that the 2009 Recovery Act that the Obama Administration enacted to fight the Great Recession spent much too little. That was the main reason why the recovery was long and painful.
[For details on the failures of the Obama Administration’s recovery plan, see Meeropol and Sherman, Principles of Macroeconomics, Activist vs. Austerity Policies, second edition, Routledge, 2019: chapter 18.]
Thus, I believe there are good economic reasons not to heed the arguments of either the “don’t help people who don’t need it” crowd or the arguments of the “too much spending will trigger inflation” crowd.
But leaving economic arguments aside, there are also important political reasons to ignore those nay-sayers. The Democrats control the US Senate because Jon Ossoff and the Reverend Raphael Warnock won the special elections in Georgia on January 5. One of the promises they made was that they were going to make sure that the paltry $600 direct payment passed in December would be supplemented by another $1400 to bring the total up to $2000. THAT WAS A PROMISE and if the Democrats do not keep that promise --- if they pass a bill giving less relief than TRUMP did last year when he signed the CARES act, they will rightfully earn the scorn of the voters in the 2022 elections.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
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