(Bloomberg Opinion) -- Negotiations on the next round of economic recovery legislation will begin in earnest Monday. Posturing on Capitol Hill and White House chaos and veto threats have made it seem plausible that the whole thing will fall apart just as the nationwide explosion in coronavirus cases makes it clear how desperately it will be needed. Ignore the noise: There will be a bill in the near future. The question is what Congress will and should put in it.
The forthcoming bill, dubbed “Phase 4” because it follows three other rounds of legislation to address the virus and its economic effects, will build off the $1.8 trillion “Phase 3” Cares Act that Congress passed in March. The Cares Act added a $600 weekly payment from the federal government to supplement standard, state-provided unemployment benefits. This extra payment expires at the end of July. A major point of conflict between Republicans and Democrats will be what to do next with unemployment benefits.
The payments are so generous that, if extended for another six months, the vast majority of laid-off workers would have higher incomes on unemployment benefits than they would from working.
This is bad stewardship of taxpayer dollars, but the payments have helped the economy by boosting consumer spending, and they aren’t discouraging unemployed workers from getting new jobs because there aren’t jobs to get. As the labor market recovers and strengthens, however, benefits this generous will hinder the recovery by discouraging the unemployed from working. This will hurt those workers’ longer-term job outcomes as well.
The debate over unemployment benefits is premised on a false choice, as if it’s impossible to support consumer spending without excessively discouraging people to go back to work. Cutting the bonus payment in half and putting it on a glide path to zero over the rest of the year would help consumers keep spending while reducing the perverse employment disincentive. (Better yet, tie the bonus payments to state-level economic conditions.) And taking some of the funds that would have gone to larger unemployment payments and using them for one-time re-employment bonuses for unemployed workers who get jobs would also put spending money into people’s pockets while encouraging employment.
An additional use for some of those funds would be to temporarily increase the tax credit for children, being sure to make the credit refundable so that families that don’t earn enough to owe taxes can receive it. This would recognize the special burden that’s now being placed on parents, many of whom have to deal with missing work and losing wages to help their kids deal with virtual learning, and may also be facing additional child-care expenses. In addition, an expansion of the earned-income tax credit would support spending by supplementing the earnings of low-income households, while also encouraging work.
The Cares Act tried to keep workers employed and small businesses from going bankrupt by creating the Paycheck Protection Program, which offered forgivable loans to businesses with fewer than 500 employees for payroll and other expenses. Support for small businesses will continue to be crucial, and Congress should extend the PPP. It should add funding to the program, allow businesses the flexibility to spend more of the forgivable portion of the loan on non-payroll expenses, and take measures to encourage businesses and banks to participate, in part by giving the administration of President Donald Trump less leeway to administer the program as it sees fit.
Treasury Secretary Steven Mnuchin has another change in mind: “This time we need to have a revenue test and making sure money is going to businesses that have significant revenue declines,” he said last Friday. Several Republican senators have said they agree.
It’s a bad idea. A forward-looking revenue test would give less assistance to businesses that lost less income relative to, say, the same month a year before. It would subsidize poor business performance. Rather than taxing success, Congress should consider limiting eligibility for the program as a way to control its costs and to make sure that it is better focused on vulnerable businesses.
The Cares Act allocated grants to state and local governments, but much more is needed. States face balanced-budget mandates, and are seeing tax revenue plunge. For example, at least seven states, including California and New Jersey, expect revenue shortfalls of more than 15% in 2021. With revenue losses that severe, states would have little choice but to lay off large numbers of workers unless Washington pitches in. This would weaken the recovery and keep the unemployment rate elevated. In addition, states would have to severely cut back on services as basic as education, law enforcement, sanitation and transportation.
State and local governments have already laid off 1.5 million workers since February, including over 900,000 school employees. To deal with the virus and reopen in the fall (or in the spring), schools will need more workers and more money to upgrade heating and air-conditioning systems, buy protective equipment, conduct health and temperature screenings, fund deep cleanings, convert football fields into sets of outdoor classrooms, and the like.
Congress should attach some strings to the money. For example, Republicans rightly don’t want to shore up mismanaged state pension funds. But broad-based block grants to state and local governments are needed for schools and other essential services.
The Cares Act provided $454 billion to the Treasury Department in support of Federal Reserve lending programs to large and mid-size businesses. Very little of that money has been put to use, and the Phase 4 bill should address this. It should protect businesses that make good-faith efforts to follow public health guidelines from frivolous lawsuits. Congress should consider including incentives for business investment. Because of the role they play in facilitating employment, Congress should fund the virus-related costs childcare centers are facing to help them keep their doors open.
The economy can’t recover until the virus is contained. The White House is reportedly pushing back against Senate Republicans who want to include additional funding for states to develop testing and contact tracing capabilities. This is bizarre. Public-health funding should be included in the Phase 4 legislation.
How much should the government spend overall? The best answer is that Congress should focus more on what is necessary and prudent to spend for each individual part of the bill than on the overall price tag. But a macroeconomic perspective is valuable, too. My back-of-the-envelope calculation suggests that the virus will chop roughly $740 billion from U.S. gross domestic product from August through the end of January, when the next presidential term begins. So the $1 trillion Senate Republicans are targeting is a reasonable figure. Congress should keep in mind that, for the economy as a whole, the risks of spending too little on the Phase 4 bill are larger than the risks that spending too much would bring from bigger deficits and more debt.
The White House has been publicly conflicted over the past few months on whether additional legislation would be needed at all and, if needed, what should be included in it. Trump should be made to understand that he has a much better chance to be re-elected if the economy is improving rapidly in the fall. From this political perspective alone, a sensible White House would be pushing Congress for as large an economic recovery package as it could get.
Instead, the White House is in chaos, reportedly insisting that the bill shouldn’t include money for testing, and signaling last Thursday that the president would veto any legislation that didn’t have a payroll-tax cut that has little support among Senate Republicans, let alone House Democrats.
See through the chaos. There will be a bill. And Congress had better get Phase 4 right, because there probably won’t be a Phase 5 until after the elections in November.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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