summary
  • Congress Doesn’t CARE
  • Another Tariff Tiff
  • Getting Schooled

Our family took its regular summer sojourn to Northern Wisconsin last week. COVID-19 made this year’s trip a little different: we ventured out less, masked when we did, and ate at our rental unit instead of dining out. Fortunately, some of the simpler pleasures were the same as always: reading books outdoors, enjoying cherry pie, and watching some of the best sunsets anywhere. After five months of limited movement, it was nice to get away.

Weekly Economic Commentary - Chart 1 - 08/14/20

I try to avoid the news during these annual intervals, to clear my mind. I always hope that some of the world’s problems will get solved while I am off, allowing a gentle re-entry to work. But this year provided no such respite. Upon my return, I learned that the U.S. Congress departed for its summer leave without extending key pandemic-related aid programs. Negotiations continue, but each week that goes by without a deal raises risks for the U.S. economy.

COVID-19 has proven hardy and stealthy. Its long contagion period and its ability to produce asymptomatic carriers have proven difficult for public health officials to deal with. In some places, the public has grown weary of the restrictions that remain the best way to slow the spread. Several countries have endured significant second waves after seemingly having the outbreak under control.

The United States is chief among them. New cases peaked at about 32,000 daily in early April, then began a slow decline. But as restrictions were removed in late May and early June, new cases began to accelerate rapidly, reaching a new peak of 65,000 daily in late July. Reopening plans have been paused or reversed in many states, leaving businesses shuttered and tens of millions still out of work.

The U.S. Congress has passed four separate bills to address the economic damage done by the pandemic. Spending and lending programs totaling more than $3 trillion, equivalent to more than 15% of gross domestic product (GDP), has been enacted. The CARES Act, a broad-ranging bill passed in late March, was the centerpiece of the effort.

The feeling at that time was that the pandemic would run out of steam with the arrival of warmer weather, leading legislators to give key provisions of the Act summer expiration dates. This step also helped contain the cost of the effort, which required enormous amounts of financing.

“Initial rounds of stimulus assumed that the pandemic would recede by midsummer.”

It took some time to disperse funds from the CARES Act, but its provisions have sustained demand across the economy. One-time stipends were sent to households in the spring, and an additional $600 per week was made available to the unemployed. (The Act also extended jobless benefits to the self-employed for the first time.) Many small businesses received loans whose balances will be forgiven if workers are kept on payrolls. Congress allocated $150 billion to help state and local governments compensate for significant losses of sales tax revenue.

Weekly Economic Commentary - Chart - 08/14/20

The spending power generated by the CARES Act helped initiate a recovery late in the second quarter. It limited unemployment, foreclosures and evictions.

Nonetheless, Congress has been reluctant to extend this support. There are some good reasons for hesitation:

  • The national debt is growing rapidly, which should always give pause.
  • Some businesses currently receiving support were struggling before the pandemic and may not have the right model to survive after it ends. Preventing failure at all costs prevents healthy and natural economic churn.
  • Some CARES Act programs were designed with speed in mind, and money may not have been distributed as carefully as it should have been.
  • Aid would ideally be targeted specifically at damage caused by COVID-19, and not used to cover the consequences of poor decisions made prior to the pandemic.

Perhaps the biggest concern surrounding another round of aid is fear that supplemental unemployment benefits have provided a disincentive to work. For some occupations, support payments exceeded wages, leading some employees to purposely remain on the sidelines. But these situations are very much in the minority. A vast number of businesses remain closed, or are operating well below full capacity. And the uncertainty surrounding the duration of supplemental jobless benefits might be an incentive to go back to work. Analysis at the state level shows little correlation between the generosity of benefits and levels of unemployment.

“Closed businesses, not jobless benefits, are keeping people out of work.”

Some legislators might also note that the economy is recovering, which would limit the need for additional stimulus. But both employment and GDP remain well below their pre-pandemic levels, and high frequency indicators suggest that the recovery may be losing momentum. Layoffs at state and local governments, small businesses and airlines loom large on the horizon. Adding a loss of spending power to the mix will make further progress much more difficult to achieve.

Last week, the White House attempted to compensate for Congressional inaction with a series of memoranda aiming to sustain unemployment benefits and forestall evictions. But procedural hurdles will limit their effectiveness. Authority for appropriations is vested in Congress, which won’t return from recess until after Labor Day. And when it does, election year politics will continue to complicate fiscal deliberations.

With the CARES Act, Congress attempted to build a bridge to economic recovery. With the waters below still choppy, the span needs to be lengthened. But reaching a deal to extend support is increasingly looking like a bridge too far.