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How Democrats can save the US economy over and over again

U.S. Senator Joe Manchin (D-WVA)
Reuters/Kevin Lamarque
Senator Joe Manchin, the US Senate’s man in the middle.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

Senator Joe Manchin, the conservative West Virginia Democrat, has thrown cold water on plans to send $2,000 checks to many American households in a future relief bill, arguing that new aid must be more targeted.

For Democratic leaders who promised Georgia voters they would deliver the new checks, this marks the first of no doubt many irritations, as they face at least the next two years of pleasing the median Manchin. But their strategists could find a way to make sensible economic policy out of the conflict by pressuring him—and Republican lawmakers—to enact laws that automatically deliver aid to people in need during recessions by tying it directly to economic conditions.

If generals are always fighting the last war, economic policymakers are always fighting the last quarter. That’s due to the delay built into economic metrics—the best information we have about jobs, spending and trade are weeks or months old, while contemporaneous data are much more uncertain. Then, weeks or months of political wrangling makes lag in action even greater.

This dynamic was true in the 2008 recession, when a massive stimulus bill enacted under president Barack Obama was seen in retrospect as too small for a speedy recovery. It took seven years for the labor market to recover. At the time, Christina Romer was the chair of Obama’s Council of Economic Advisers. Her forecast that unemployment would peak at 8%, made in Dec. 2007, turned out to be a dramatic under-prediction, and politics made it impossible for lawmakers to correct their error.

“What was not clear at the time was how quickly and strongly the financial crisis would affect the economy,” she said later.

The same dynamics exist today. Even before the CARES Act was passed in April 2020, economists warned that another relief package would be necessary to protect Americans from the pandemic recession. A second bill, enacted at the very end of the year, offers laudable extra relief, but its most important provisions expire in March, well before anyone expects the US to have the coronavirus under control.

Now, as Congress prepares to impeach president Donald Trump for a second time after he incited his supporters to violently stop the certification of his defeat in the 2020 elections last week, lawmakers are also contending with the timing of a new relief bill. Just as with any major legislation, weeks must be spent finding votes, placating interest groups and moving the bill through the Capitol, before federal and stage agencies take further days or weeks to distribute the funds.

Still, we already know the basic outline of what any such legislation will contain. Most importantly, it will expand aid to those who can’t find work, through the unemployment insurance program. It might also expand the food stamp program, cut taxes, or send checks to lower income workers. Instead of sucking aid to laid-off employees into battles over workplace lawsuit liability or partisan debates over the precise size of any fiscal boost, what if those expansions to unemployment benefits were automatic? 

Senator Ron Wyden, an influential Democrat from Oregon, argues that the next relief bill can do this by linking the expansion of unemployment insurance’s generosity and duration to economic metrics produced by the US government, rather than guesses about when hardship will end. This summer, he suggested they should be tied to measures of state unemployment. This is doubly important because aid arriving too late means Americans run up credit card balances or spend down savings, and aid that ends too early threatens the virtuous economic cycles that lead to growth.

It’s true that unemployment insurance is already automatic, in the sense that most employed people who lose their work can gain access to cash benefits. But the benefits in the US aren’t generous—an average of $387 a week in 2019, expiring after six months. That may be appropriate when the labor market is hot, but when people can’t even go to work because of a deadly pandemic, much less find jobs, it’s not enough to sustain families, or a US economy predicated on consumer spending.

That’s why lawmakers added an extra $600 to weekly unemployment benefits to the CARES Act last April, and also expanded eligibility to include people who had been self-employed, contractors, or otherwise not eligible for normal unemployment insurance. This, in combination with checks sent directly to American households, grants and loans for businesses, and the Federal Reserve back-stopping financial markets, led to the remarkable result of US per capita income climbing in the midst of the recession.

When the Senate took up the second relief measure in December, one aspect of the final compromise involved cutting weekly aid to the jobless by $300 in exchange for a one-time $600 stimulus check for many households. While these direct payments became a political touchstone and drove the popularity of the relief bill, they also shortchange some of the most vulnerable Americans. If a third round of checks proves a political bridge too far in a narrowly-divided Senate, using it as leverage to make jobless aid more flexible and generous could help working people during the pandemic, and in recessions to come.

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