Right now, the most pressing U.S. economic policy challenge would seem to be to limit the economic damage from an expected dark Covid-19 winter so as to ensure that we are in the best possible shape to enjoy a strong post-vaccine economic recovery.
The U.S. $ 908 billion budget stimulus now being proposed by a bipartisan group of Senators and Congressmen is to be applauded. This is especially the case considering that it is designed in a manner that should provide immediate and effective economic support without unduly adding to the country’s already very high public debt burden.
The near-term downside risks to the U.S. economic recovery cannot be overstated. Even before the pandemic’s most recent surge, the U.S. recovery was running out of steam as underlined by disappointing jobs numbers and by the Federal Reserve’s repeated warnings that high-frequency economic data were pointing to a slowing economy. At the same time, absent early support, the country was facing the prospect of a wave of small and medium-sized business bankruptcies as well as large scale cutbacks in essential services by cash strapped state and local governments.
The expected winter Covid-19 surge now threatens to darken an already difficult economic outlook. At its present rate of around 200,000 cases a day, the current infection rate is already some three times higher than its earlier July peak. This is now pushing hospitals to their limits and is already inducing states like California to start rolling back the earlier easing in their lockdown restrictions.
If the health experts are to be believed, in the months ahead the Covid situation is bound to lead to a considerable exacerbation of our already very disturbing health crisis. This is not simply because the colder winter months force more people indoors. It is also because unrestricted travel during the holiday season exposes more people to infection.
In proposing additional budget support to the economy, the U.S. $ 908 billion bipartisan budget proposal seems to have drawn lessons from the earlier U.S. $ 2 trillion CARES Act. While the CARES Act did provide timely budget support that helped the U.S. economy avoid a prolonged depression, it did so in a manner that was not well-targeted and that added unduly to the country’s debt.
According to the Congressional Budget Office’s latest estimates, the net result of the Covid-induced recession and stimulus package was to widen the U.S. budget deficit to around 15 percent of GDP in 2020. It also had the effect of causing the public debt to GDP ratio to skyrocket to around 100 percent by yearend.
Against the backdrop of our country’s shaky public finances, it is to be welcomed that the bipartisan proposal is smaller and very much better targeted than previous such proposals. This offers the prospect that the economy will not be unduly scarred by a wave of bankruptcies in the challenging economic times between now and the time that the vaccine becomes widely available by the spring of next year. It also offers the prospect of a more manageable public debt level than would otherwise be the case.
A particularly welcome feature of the bipartisan proposal is that each its three main pillars effectively addresses a pressing need of the economy. The US$300 billion of the package devoted to the Paycheck Protection Program should help many small and medium-sized businesses stay afloat until real help from a post-vaccine recovery gets underway. The US$ 180 billion earmarked for additional unemployment insurance payments should quickly inject demand into a weakening economy by going into the hands of those most likely to spend additional budget support. Similarly, the US $160 billion in state and local government support should help those cash-strapped states avoid drastic cuts in their payrolls just at a time when the economy could least afford another large round of layoffs.
Should Congress fail to pass this bipartisan proposal, it would seem that we will have to wait till February for a new Congress to act. By then, however, the economy could very well have succumbed to another leg down which would run the real risk of scarring the economy and blunting the strength of any post-vaccine economic recovery. For which reason, we must hope that Congress does the right thing and soon pass the bipartisan proposal.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.