A Big Idea to Avoid Stimulus Standoffs Is Winning New Support

(Bloomberg) -- The standoff over pandemic relief measures in the U.S. is winning new support for an old idea: that fiscal stimulus should be tied to the state of the economy, not left to the whims of politicians.

Spending programs that kick in automatically when the economy turns bad and phase out as it recovers, without any need for lawmakers to pass new bills, are known as “automatic stabilizers.” Democrats have backed a bigger role for such policies during the coronavirus slump.

Their presidential candidate Joe Biden, who leads polls ahead of next week’s election, says he wants to apply them in future recessions too, though the party would likely need to sweep Congress as well as the White House to get that done.

Unemployment insurance is the most important stabilizer in the U.S., and it’s been central to the deadlock in Congress. The extra $600-a-week benefit introduced early in the crisis expired in July -- an arbitrary date that helped win bipartisan approval for the plan, but left millions of jobless Americans facing a sudden drop in income while the economy was still weak.

“July 31 is the reason that we should have automatic stabilizers,” says Claudia Sahm, a former Federal Reserve economist who’s done pioneering work on the topic. “That was when Congress broke down in terms of the discretionary process of sending out more relief.”

“When the sky is falling, Congress will act,” she says. But in the recovery phase, when the economy is in “a slow grind out of a big hole” -- like now -- political disputes can get in the way.

Benefit ‘Triggers’

For months, both parties have said they want some kind of supplemental benefits to continue -– but partly because they couldn’t agree on what kind, or how much, the stimulus dried up. That’s exactly the outcome automatic stabilizers seek to avoid.

One Democratic proposal was to gradually reduce the $600 federal benefit by $100 at a time, pegged to the decline in unemployment rates back toward pre-pandemic levels.

Biden’s economic platform takes a similar approach, promising to keep the expanded benefits in place and set up “automatic triggers based on economic and public health conditions” that will determine when they’re phased out. It also says the benefits should be “renewed in future crises.”

One big question, often raised by President Donald Trump’s Republicans, is how to pay for such plans. The U.S. has already run up a record $3.1 trillion budget deficit this year fighting the coronavirus slump.

Unemployment insurance systems are run at the state level, often with creaky machinery. And states can’t inject much cash in a downturn because that’s precisely when they’re short of spending power. Unlike the federal government, states can’t create money and typically have to balance their budgets.

Even though the federal government funded the $600-a-week supplements this year, states still ended up footing some of the bill. They’ll probably pay about $4 billion more as a result of the top-up, which made benefits more attractive and encouraged people to apply who might not have done otherwise, the Congressional Budget Office estimates.

‘Workers Pay’

With the increased demand, “state payroll taxes are going to have to rise in the long run,” says Matt Weidinger, a fellow at the American Enterprise Institute whose research has focused on safety-net policies. “Workers pay the cost of that in terms of lost jobs and lost wages.”

There are other proposed fixes to the U.S. social safety net that have more cross-party support.

One of them is known as short-time compensation, or work sharing. It pays pro-rated benefits to offset lost wages for employees whose hours have been reduced -– helping companies avoid layoffs and keep people in their jobs. That’s a similar goal to the Paycheck Protection Program, one of the hastily rolled-out pandemic measures.

Plans along these lines have been key to the coronavirus response in Europe. About half of U.S. states already offer such programs, but they’re limited in scope and many businesses are unaware they exist. Biden promises to “dramatically scale up” the programs, and there’s backing for the idea among conservative economists too, including Kevin Hassett, former head of Trump’s Council of Economic Advisers.

“We’d far rather see everyone have a 50% job, and their health insurance and stay connected to work, than to have them pick half of their workers having a job,” said Rachel Greszler, a research fellow at the right-leaning Heritage Foundation.

‘Automatic as Possible’

Health insurance is another area where the safety net failed for millions of Americans. The Economic Policy Institute estimates that about since the pandemic began, roughly 6.2 million workers lost access to their employer-sponsored coverage.

The Medicaid program for low-income groups, which acts as a stabilizer, has seen increased enrollment. Still, Matthew Fiedler, a fellow with the USC-Brookings Schaeffer Initiative for Health Policy, says the uninsured rate has likely risen over the last six months. In states that haven’t expanded Medicaid, some people found they were earning too much to qualify for that program, but too little for marketplace subsidies under the Affordable Care Act.

There’s a case for stabilizer policies to be expanded into other areas too.

Indivar Dutta-Gupta, co-executive director of the Georgetown Center on Poverty and Inequality, says it makes sense to offer automatic paid leave to parents when schools get unexpectedly shut down –- which can happen in extreme weather events like hurricanes or fires as well as health emergencies.

One of the most ambitious proposals, which won backing from some of Biden’s primary-season rivals, is for a federal jobs guarantee in which the government would act as employer of last resort.

One overarching lesson of the pandemic, says Fiedler, is the same as it’s been in previous slumps: “Making as many things automatic as possible could dramatically improve the policy response in the next recession -- whether it’s caused by a pandemic or not.”

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