When the Covid pandemic hit, it hit hard and fast. To their credit, Congress responded as quickly as almost anyone could have imagined, with generous spending designed to put the nation’s economy on ice as the pandemic heated up. The goal was to mitigate the devastation caused by the abrupt halt in supply caused by closures. But some of those initial efforts had an expiration date and it’s coming soon. Many of the provisions created to aid Americans and businesses at the time of the onset of the crisis will expire at the end of July. While the widespread closures initially required to slow the spread of Covid may be behind us for now, much of the economic fallout is still yet to come. Even as businesses are able to reopen, the damage done to household balance sheets means we’ll be facing reduced demand, possibly for years to come. Congress needs to act quickly, again, to respond to that reality.
Some recent economic news might have casual observers believing that the worst is behind us, but the truth is that, in the best-case scenario, we’re just barely beginning to dig out of the massive hole dug into our previously strong economy. For example, retail sales rebounded last month, up by almost 20 percent from April, but despite that record-setting monthly rise, sales still remain nearly 10 percent below pre-pandemic levels. That news about retail sales came on the heels of the surprising news that the unemployment rate had dropped in May. But the unemployment rate, 13.3 percent, remains well above the single worst month of the Great Recession. Despite the fact that the economy supports 21 million fewer jobs today than it did in February before the slide began, Wall Street seemed to celebrate the news by rallying on the release of that data. These data points aren’t an indication that the worst is behind us, but rather an indication that the fast and deep slide we’ve been on since February may be slowing. For this reason, this surely isn’t the time to ease up on fiscal support. As Fed chairman Jerome Powell has frequently reminded us in recent appearances, the concern now is the “lasting economic damage.”
The most urgent need is for Congress to pass an extension in some form or another of the bonus payments made to unemployment insurance recipients in order to make their household balance sheets closer to whole. Prior to the initial relief package, displaced workers on unemployment were receiving somewhere between 35 to 55 percent of their lost wages from the program. With the additional $600 per week allocated by the Federal Pandemic Unemployment Compensation program, as many as two-thirds of displaced workers were collecting more than they had earned while employed. That model has the obvious downside of discouraging workers from returning to work. To date, this hasn’t been an overwhelming challenge since jobs remain scarce, but if left intact would necessarily slow the labor market’s recovery. I encourage Congress to act quickly to replace this hastily crafted program with one that operates in more fundamental alignment with the existing unemployment insurance infrastructure to increase the percentage of lost wages received, rather than delivering a flat bonus.
States will also need direct support in the form of direct funds to cover the unprecedented and unpredictable costs of fighting the pandemic. The economic downturn will result in direct cuts to tax revenue while simultaneously putting a new and unprecedented financial burden on many state operations, including healthcare, education, and social safety nets, including unemployment insurance. Conditions on funds directed to states should aim to limit the extent to which they can be used to repair pre-existing budget shortfalls unrelated to the pandemic.
The economic pain of the Covid pandemic and the resulting closures will be deep and long-lasting, but smart fiscal stimulus, like continued support for state unemployment insurance programs and combined grants to states to cover Covid costs can go a long way toward supporting the welfare of Americans during this challenging time.
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