WashU Experts: We need economic rescue, and we need it now 

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After months of failed negotiations that left many Americans, businesses and a further weakening economy in the lurch, lawmakers are scrambling the week before Christmas 2020 to reach a deal on an economic stimulus plan that could top $900 billion. If Congress passes the deal, will it do enough to help struggling Americans and businesses stay afloat?

To answer that question, three business and economics experts at Washington University in St. Louis shared their thoughts on the proposed plan, what lawmakers got right, what is missing and what ticking time bombs remain.

Emerging compromise bill more ‘rescue’ than ‘stimulus’

Fazzari

“In mid-March, when it became clear that the pandemic would create huge economic disruption, I argued the federal government needed to do three things to rescue the economy. First, assure adequate funding for a massive emergency public-health response. Second, greatly supplement meager state unemployment benefits. Third, provide financial support to businesses most affected by the crisis to keep them viable until the health crisis passes.

“The CARES Act went big and did a reasonably good job meeting these three objectives, but it was premised on an optimistic hope that the pandemic would fade away during the summer. Unfortunately, as epidemiologists predicted, the pandemic did not fade away; just the opposite as infections, hospitalizations and deaths at the end of a nasty 2020 rise above springtime peaks.

“The economy is better adapted to this situation now than in last April and May, but the slowdown in the jobs recovery over the past few months, the increasing share of unemployed workers who are dropping out of the labor force, and the rise in initial unemployment claims in late November and early December all signal a weakening economy that needs further support from the only possible source: the federal government. The same three priorities from last spring remain.

“The economy will slow as the grip of the pandemic tightens, and this slowing is not necessarily a bad thing. Responsible ‘sheltering-in-place’ behavior limits the spread of this awful disease; this is what should happen. But the impact on workers and businesses in the restaurant industry, travel, entertainment, personal services industries, among others, is severe. They need financial support to put food on their tables and pay their rent. Their human need is most important, but an effective rescue also limits the spread of the economic fallout by containing the decline in spending from those whose jobs and businesses are most affected.

“The emerging compromise bill is better viewed as a ‘rescue’ than ‘stimulus.’ It is far from perfect; it should do more for the unemployed and help cash-strapped state and local governments. But it does address the three big objectives that we need to support public health and contain economic damage over the next few months, setting the stage for a robust recovery when widespread vaccination finally defeats COVID-19.”

 Steve Fazzari, director of the Weidenbaum Center on the Economy, Government and Public Policy and the Bert A. and Jeanette L. Lynch Distinguished Professor of Economics, Arts & Sciences

Unlikely to be enough for small businesses, unemployed workers

Gopalan

“The proposed plan is a pared down version of the earlier plan, or at least the parts of the earlier plan that appear to have worked: sending checks to people and small business support. The two main items that are missing are money to state and local governments to bridge some of the revenue shortfalls and liability protection for companies against employee lawsuits.

“The Federal Reserve and other observers of the economy expect that it will take more than a year for the labor market to reach pre-pandemic levels. That means we are likely to have millions of additional workers remaining unemployed for a year or more. Given the magnitude of the problem, I fear the current stimulus is unlikely to be enough.

“I also feel that the pandemic has stretched too long for government aid itself to save small businesses. Apart from payroll, small businesses have other expenses, like rent, etc. They can only go so long with no or reduced revenue. I fear we will face significant rates of failure among small businesses.

“The other ticking time bomb is the rental market. I am not sure how long the CDC and the local governments can extend eviction moratoriums. Both residential and commercial renters are defaulting on their rental payments at historical levels. Given that some of the commercial properties are financed with commercial mortgage backed securities, this has the potential to disrupt financial markets in a big way.”

 Radha Gopalan, professor of finance and academic director of the IIT-Bombay-Washington University Executive MBA Program, Olin Business School

We’re not learning from mistakes of previous stimulus packages

Thomadsen

“The previous stimulus packages were huge, but very inefficiently spent money. While something like the Paycheck Protection Program could be good in theory, it turned out to be a huge lottery giveaway, where some companies were able to pocket a lot of money while others suffered. Unfortunately, the money was not allocated efficiently in terms of truly protecting jobs and compensating people from the COVID-19 shock.

“Ultimately, the issues we have right now are getting enough vaccine and getting the vaccine to people. On top of that, we need to keep companies and people financially afloat, until at least June. That means getting money directly in the hands of citizens and helping businesses pay rent or make up revenues lost from COVID.

“There are ways we could do this that could enforce accountability, but we have chosen not to do that. There is money in the package that will accomplish some of what we need, but, unfortunately, I feel that this is a bad bang for the buck. It probably spends close to the right amount — although $2 trillion might be the right amount for an optimally designed stimulus — but the money goes to the wrong places.

“The proposed package includes $600-$700 of direct payments to individuals. Giving everyone a check may be the most efficient way to run an economic safety net. However, I wonder whether this is enough to really help households in economic trouble. Similarly, the package looks like it will have a $300-a-week enhanced unemployment insurance offering. Whether that works well depends on how the unemployment is structured, but I see no evidence that Congress has learned how to implement the program better.

“The proposed emergency rental assistance is an area where I think Congress really should have done more in the past. I have concerns, though, that $25 billion will not be enough.

 Raphael Thomadsen, associate professor of marketing, Olin Business School

 

The December stimulus bill should take into account lessons learned from the CARES Act

Knott

The December stimulus bill looks very similar to the CARES Act from March. The difference is that in March we were forecasting the likely impact shutdowns would have on businesses and individuals and now we have the benefit of nine months of experience. Based on these lessons, I am making the following policy recommendations for the new stimulus plan.

Economic Impact Payments increased savings rather than stimulating the economy.  The CARES Act provided economic impact payments of up to $1,200 per adult and $500 per child under 17 years old, up to a maximum of $3,400 per family. This was a direct transfer from the top 10% of households to the remaining 90% of households, intended to either to boost to the economy or compensate those harmed by the interventions.

Unfortunately, the Economic Impact Payments took no account of economic impact. Thus, the payments had little value on easing the pain on those most harmed by COVID-19. Giving money to people who don’t need it, and most importantly have nowhere to spend it, is likely to increase either the inflation rate or the savings rate. While the big concern was that the payments would be inflationary, other than a 6.6% increase in housing prices, that turns out not to be the case. Rather, the payments increased the savings rate, which is now 13.6%, or about double the rate before the Economic Impact Payments.

Suggestion: Limit the new Economic Impact Payments to those hurt by the shutdowns.  This data will be readily available as people start filing their 2020 returns.  Rather than checks, these could be implemented as need-based tax credits.

 The Paycheck Protection Program is mismatched to the damage caused by shutdowns.  The PPE loans went to several businesses unaffected by COVID, because there was no “harm” test.  Rather there was merely a requirement that the company continue to employ workers.  I know two businesses which received loans despite the fact their revenues were growing, and their employees were under no risk of losing their jobs.  In fact, one employee was recruited away and was difficult to replace.

In contrast, restaurants, shops, hair salons, gyms, movie theatres, airlines and hotels were all decimated, as were their employees. These losses were due to shutdowns, and therefore constitute eminent domain.

Suggestions: Businesses harmed by shutdowns should receive direct payments (rather than loans) based on their losses. Further the payments should come from states and municipalities rather than the federal government, because these shutdowns are implemented locally. The extent of loss will be easy to determine, now that the businesses are filing their 2020 returns—they can compare 2020 returns to 2019 returns. Similarly, an easy way to implement the payments is through tax credits for the difference in income.

  Anne Marie Knott, Robert and Barbara Frick Professor of Business

 

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