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When Congress returns from its summer break on July 20, its primary job (really, its only job) is to respond to the COVID-19 pandemic. Congress and the Trump Administration must address three domains—public health, state and local government aid, and support for businesses and households still reeling from the pandemic.
But what should they do? In two of those areas, the answers are relatively clear, though still controversial. But the unprecedented nature and speed of the economic decline makes the third murky at best.
Let’s start with the two easy ones.
Stronger public health initiatives
First, the Trump Administration needs to develop a coherent public health response to the pandemic. This includes a reliable testing strategy; sufficient personal protective equipment for health and long-term care workers; depoliticizing the wearing of masks; rationalizing social distancing rules; and developing a coherent strategy for vaccine research, development, production, and distribution.
Fixing this is mostly the job of the administration, but Congress could help with additional targeted funding. The most important message: Absent these initiatives, no stimulus will get the US economy back on track. Until people are willing to shop, travel, dine out, send their kids to school, or work the economic slump will not end.
State and local help
Second, state and local governments need federal financial support. My TPC colleague Lucy Dadayan estimates that the pandemic already has drained about $75 billion from state revenue alone, and will cost the states another $125 billion in the new fiscal year. No state is immune. And cities and counties face their own severe revenue shortfalls.
Without money, state and local governments—most obligated to meet balanced budget requirements—will have to slash services and lay off workers. How much will those governments need is less clear—and will depend on the course of the pandemic itself. But it likely will be in the hundreds of billions of dollars.
The third policy domain is the toughest to navigate, in large part because we still don’t fully understand the scope and scale of the problem.
In a typical recession, the policy response is clear: Since consumer spending represents about 70 percent of the US economy, government usually can restore output by distributing money to households. They spend some of what the government gives them. And more consumption creates jobs making what people buy.
An unusual crisis
But our current crisis is far from typical. Consumers are not spending for two reasons. In part, they can’t because state and local governments are imposing (and now re-imposing) constraints on supply. Restaurants are closed or limited to a fraction of normal capacity. Most theaters are shuttered.
But that’s just part of the problem. Even when government allows businesses to open, some struggle to find customers. Who goes to a mall these days? On the other hand, online sales are booming.
What is the effect of all this on the job market? In the current environment, it is hard to understand even the past. A June 6 headline in the financial blog seeking alpha says it all: June Jobs: We Have No Idea. We know that millions of workers have lost their jobs in recent months and only some have gotten them back. But while the official unemployment rate for June was 11.1 percent, huge data challenges make that estimate highly uncertain.
Predicting the future
If looking retrospectively is hard, predicting the near future is impossible. COVID-19 cases are spiking in much of the US. Many states that had opened retail and hospitality venues now are closing them again. Many firms that used CARES Act Paycheck Protection Program (PPP) loans or grants to pay workers will run through that money over the next month. It is not possible to know how these changes will affect commerce, but it would be no surprise if the recent burst of hiring stalls, or even reverses.
Where does that leave fiscal policy?
Democrats want to extend the $600-per week increase in federal unemployment benefits that expires at the end of the month. Republicans say these generous benefits discourage work. They may be right, but with the renewed spread of COVID-19, how many jobs really will be available In August?
If unfilled jobs are plentiful, more unemployment benefits may be exactly the wrong answer. But if many of those early June jobs dried up as the pandemic blossomed throughout the south and west, unemployed workers may need more help. It simply is impossible to know who is right.
One solution: Extend the federal top-up of unemployment benefits but tie the extra assistance to changes in state unemployment. As a state’s employment increases, federal jobless benefits would decline.
Similarly, there has been bipartisan support for an employer wage credit aimed at encouraging firms to retain—or hire—workers. But if COVID-19 continues to spread at current rates, who will be hiring, tax subsidy or not? Would it make more sense to continue—but better target—the PPP?
In a month, lawmakers may know a bit more about where the economy is heading (the July unemployment report is due on Aug 7, for example). Still, they largely will be flying blind when they consider their next major new stimulus plan. That may suggest a bill that includes state and local aid, more public health support, and another round of temporary payments to households and businesses—perhaps followed by another effort in a lame duck Congress, when we may better understand the COVID-19 economy.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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