Blog No. 280. Biden’s American Rescue Plan: Lifeboat or Christmas Tree?

It is now apparent that the initiative of ten Republican Senators to reach a compromise with President Biden on a covid relief bill came to naught. That is not a surprise, but it is unfortunate in two respects: First, plowing ahead to pass a bill with no Republican support will not bode well for future bipartisan efforts. (It continues to strike me that the name of the procedure to be invoked, “reconciliation,” is an ironic misnomer as it likely presages a variety of irreconcilable differences.) Second, the bill that emerges from reconciliation appears likely to bear a total cost that is larger than necessary and risks doing economic harm. It will almost certainly include a variety of costly components that have not been thought through.

One useful critique of Biden’s American Rescue Plan (ARP) was provided by Michael Strain of the American Enterprise Institute in February 4 testimony before the House Financial Services Committee, subtitled “Some Good, Some Bad, and Too Large.” In his testimony, Strain contrasted top-down and bottom-up designs of stimulus packages. In a top-down approach, analysts focus on whether the size of the package is sufficient to overcome a projected “output gap,” i.e., the difference between the expected level of activity in a damaged economy and the level that would otherwise be anticipated. Strain suggested that, in addition to a top-down approach, Congress should apply a bottom-up analysis that “would pay less attention to the size of the output gap and more to the specific needs facing the economy.” 

As the Economist explained further:

The right size for the bill is not best judged from the top down. America is not in a normal recession that is best solved by a calibrated slug of government spending. No amount of pump-priming will fully reopen restaurants, nightclubs and offices while the virus remains prevalent—nor would that be desirable. The government must instead fight the crisis from the bottom up.

Congress should spend whatever is needed on vaccinations and on replenishing the incomes of workers bearing the brunt of the crisis. They have lost their jobs through no fault of their own, and if their incomes collapsed, they would slash their spending, spreading the pain to the rest of the economy. Extending a generous top-up to unemployment-insurance benefits beyond its expiry in March should be a priority.

According to an article by Neil Irwin in Tuesday’s New York Times, administration officials claim that they did follow a bottoms-up approach. That claim, however, is difficult to credit in the absence of explanations of individual components and how their price tags were determined.

Irwin’s article also indicated that “the Biden approach represents a rejection of the technocratic bent within the Democratic Party that many on the left believe has been deeply damaging to the country.” The rejection of “technocratic” analysis is somewhat ironic in light of Biden’s insistence that, unlike Trump’s administration, his would “follow the science” in formulating policy. Economics was long ago dubbed “the dismal science” by Thomas Carlyle, but it is a science of sorts, and it should not be pushed aside for the sake of ideology.

In terms of total cost, the most prominent and articulate voice to urge caution has come not from a Republican, but from a Democrat, Larry Summers. Summers was Treasury Secretary in the Clinton administration and was Chairman of Obama’s Council of Economic Advisers. In an op-ed in the Washington Post, Summers found much to like about the Biden plan, (“Its ambition, its rejection of austerity orthodoxy and its commitment to reducing economic inequality are all admirable.”)  However, he also questioned the size of the package, in relation to need, and the potential risks he foresees.

In a detailed analysis, Summers pointed out that, among other things, the proposed stimulus would increase national output by an estimated $150 billion a month—more than three times the shortfall in output the Congressional Budget Office projected would otherwise occur. He also expressed concerns that an over-sized stimulus may give rise to inflationary pressures and also that it may crowd out other needed investments, such as infrastructure, preschool education and renewable energy. While I claim no credentials as an economist, Summers’s analysis seemed to me raise serious issues that, at a minimum, merit thorough consideration.

One factor relevant to size, is the amount of funds from the previous relief bill passed in December that remain unspent. The ten Republicans who met with Biden made the point in their letter to him:

Finally, we note that billions of dollars remain unspent from the previous COVID relief packages. Just last month, Congress provided $900 billion in additional resources, and communities are only now receiving much of that assistance. Some of the spending appropriated through the CARES Act, passed last March, also has yet to be exhausted.

Nevertheless, the $1.9 trillion train now appears to have left the station. The figure of $1.9 has attained something of a symbolic status: even a modest reduction in it would be apt to produce a rebellion in Democratic ranks while insufficient to gain significant support from Republicans.

Even within the $1.9 trillion framework, the individual elements of the ARP should be carefully scrutinized, but thus far, few details have emerged. A White House Summary of the ARP offers few details and is worth perusing principally to get a sense of the broad range of its ingredients. Some are related directly to the pandemic, while others are not, but throughout it is uniformly unclear as to how the proposed amounts were developed and how funds will be allocated. Such details may emerge, to some extent, in the legislative process now underway, but that process will be done with little time for debate and deliberation.

The largest single component of the ARP has benefited from public debate, i.e., the proposal for individual stimulus checks in the amount of $1400 per person. In Blog No. 279, on January 25, I argued that such untargeted payments were misguided, and since then, the provision has drawn considerable criticism from Democrats as well as Republicans. President Biden has indicated that while he would stand firm on the $1400 figure, he is open to adjustments as to how it is distributed. It now appears that some adjustments will be made, including a reduction of the income cap on eligibility, but their extent is unclear.

The second largest element of the Biden plan is $350 billion for aid to state and local governments. Republicans have broadly opposed any such aid and none was provided in the Republican alternative presented to Biden. As reported in USA Today:

Republicans have slammed the city and state relief as an unneeded bailout for liberal-controlled cities and states that mismanaged finances. This week they seized on a new J.P. Morgan study that found revenue growth in state governments declined only marginally since the pandemic hit, hardly the doomsday scenario that many forecasted last spring.

The justification for aid to state and local governments in the White House Summary was cursory at best. It is tucked into a section titled “Provide support for first responders and other essential workers,” and states that:

President Biden is calling on Congress to provide $350 billion in emergency funding for state, local, and territorial governments to ensure that they are in a position to keep front line public workers on the job and paid, while also effectively distributing the vaccine, scaling testing, reopening schools, and maintaining other vital services.

The basis for the $350 billion figure, and the criteria for disbursing funds, remain a mystery. It seems unlikely that it will be confined to support of first responders or other “essential workers.” In fact, the only program amount specified is of a different character:$3 billion to support “economic development” by grants to “state and local government entities, tribal institutions, institutions of higher education, and non-profits.”

In Michael Strain’s testimony, he suggested relief to state and local governments totaling $100 billion. When I asked Strain how his estimate was arrived at, he acknowledged that it too was approximate (and not tied to first responders):

The pandemic-related revenue hole facing states and localities from the onset of the pandemic through the end of the fiscal year (for a total of 1.25 years) is around $130 billion. Congress has already appropriated over $350 billion, but much of that funding was for specific purposes. My estimate of $100 billion isn’t overly precise; it is guided by the obvious need (as manifest by the 1.4 million jobs lost in state and local governments) and the principle of erring on the side of doing a bit more rather than a bit less.

$350 billion v. $100 billion, does it matter? I am reminded of Everett Dirksen, who once remarked “A billion here, a billion there and pretty soon you’re talking real money.” And so it is today, except that now we speak of increments not of a mere billion, but of $100 billion.

Finally, there is the proposal to increase the minimum wage to $15. That item would be highly doubtful under the reconciliation procedure which, by existing rules, is limited to items that would raise or lower revenues or expenditures. Bernie Sanders has argued for inclusion of the minimum wage provision, citing studies indicating that it would have an indirect budgetary impact. That argument, however, strikes many as far-fetched, and even President Biden has acknowledged that his proposal might not survive a parliamentary test.

Apart from the procedural issue, the merits of the minimum wage proposal are dubious, particularly at this time. While the current minimum wage of $7.25 is clearly out of date, the proposal would more than double it. An analysis by the Congressional Budget Office indicates that benefits to workers from the increase would be mixed at best: the number of people in poverty would be reduced by 0.9 million, but employment would be reduced by 1.4 million workers, or 0.9 percent. Critics have noted that the impact on businesses would be significant and would fall most heavily on some, such as restaurants that have been most severely damaged by the pandemic. Finally, one may question whether it makes sense to have single federal wage throughout the country when economic conditions and wages vary widely from state to state.

As this is posted, attention on Capitol Hill and among the public is largely taken up by the Trump impeachment trial. While that is understandable, it should not be allowed to distract for long a close examination of the ARP. That legislation will almost certainly have a more lasting impact than will an outcome that seems foreordained.

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I note with sadness the passing of George P. Schultz. There has been no public servant in my lifetime for whom I have had greater admiration. Merely listing the offices in which he served with honor and distinction—Secretary of Labor, Director of OMB, Secretary of the Treasury and Secretary of State—suggests, but does not begin to capture, the extent of his contributions to our country.