A not-so-stimulative stimulus bill
Economists advocating the $1.9 trillion American Rescue Plan often harken back to the Obama stimulus bill, which they saw as essential yet insufficiently large to fully lift the economy out of the Great Recession. Analogies between this earlier episode and the current economic situation are imperfect at best, and any lessons learned from the early Obama-era experience need to be taken with a grain of salt.
When the American Recovery and Reinvestment Act became law in February 2009, the economy was still shrinking (though the rate of shrinkage had begun to slow). The stock market bottomed the following month, the Great Recession officially ended in June and the unemployment rate — typically seen as a lagging indicator — peaked in October.
We appear to be much later in the recovery phase in 2021 than we were when the Obama stimulus bill passed 12 years ago. The economy is experiencing its third quarter of GDP growth since last Spring’s steep decline. The stock market bottomed out last March, and the unemployment rate peaked last April. The National Bureau of Economic Research has yet to call the end of the Coronavirus Recession, but its Business Cycle Dating Committee typically calls economic peaks and troughs on a delayed basis; it remains reasonable to expect that the committee will conclude that we reached the trough of economic activity sometime in 2020.
If the economy is indeed growing already, it seems reasonable to ask why more stimulus is necessary. A common response is that, although the contraction may have ended, the economy is now operating well below full employment, with millions of workers either looking for jobs or discouraged from doing so.
But if the purpose of the current relief bill is to increase employment, its provisions are poorly tailored to achieve that goal. A federal spending program can certainly reduce unemployment, but the current plan going through Congress is not such a program.
Indeed, the current relief plan includes two measures that promise to reduce employment. First, it renews and increases an unemployment benefit “plus up” that would add $400 per week to each beneficiary’s payment through August. This supplement reduces, and in some cases eliminates, the difference in income workers receive from not working as opposed to working, reducing their incentive to find new jobs. As a result, some reopened restaurants have struggled to find staff.
Another job reducing provision of the House stimulus bill is the minimum wage increase. The bill would raise the federal minimum from $7.25 per hour to $9.50 per hour immediately, followed by four annual increases until the minimum reaches $15 per hour in 2025. Irrespective of its purported merits, it is hard to imagine that this provision will not eliminate at least some jobs, especially in states with lower per capita income. The Congressional Budget Office recently estimated that the minimum wage hike would reduce employment by 1.4 million workers when fully phased in.
Other stimulus bill provisions may increase employment but are not especially efficient ways of doing so. For example, the $1,400 stimulus payment to lower and middle income taxpayers will, in theory, be spent on goods and services, stimulating job creation. But since these one-time payments will go to many individuals and families who have not suffered economic impacts from COVID-19, they may instead use the money to pay down debt or supplement their savings.
On the other hand, funds for vaccine development and distribution could spur employment and economic growth. To the extent that widespread vaccinations promote herd immunity, they could encourage state and local government to end lockdowns more quickly and give people more confidence to travel, visit restaurants and go to entertainment venues. That would restore jobs in the industries hardest hit by the pandemic.
But, since Congress and the administration have already spent billions on vaccine production and distribution, the incremental benefit of new funding is questionable. The U.S. has already purchased enough of the Pfizer and Moderna vaccines to provide two injections for every American adult. By the time the new bill passes, upwards of 100 million doses will have already been administered.
The main barrier to an accelerated vaccination program is lack of supply and not much can be done to speed the production of the two approved mRNA vaccines. A simple, low-cost step to address this problem would be to allow Americans to receive safe, efficacious vaccines that have been approved in other advanced countries. These include the Oxford AstraZeneca, Sputnik V and Sinopharm vaccines — all of which are less expensive than the Pfizer and Moderna shots.
While government spending can create jobs and temporarily stimulate economic growth in certain cases, the ill-timed and poorly targeted measure now in Congress is unlikely to substantially move the dial, its high sticker price notwithstanding.
Marc Joffe is a policy analyst at Reason Foundation, former senior director at Moody’s Analytics, and author of the study “Unfinished Business: Despite Dodd-Frank, Credit Rating Agencies Remain the Financial System’s Weakest Link.”