What the Next Stimulus Should Look Like

(Bloomberg Opinion) - So far, the U.S. economic response to the coronavirus crisis has been impressive. Nobody could blame Congress and the Federal Reserve for being shy about supporting production and employment.
Still, her work is just beginning. The recovery is underway, but is following an exceptionally deep decline. If everything goes well from here - a big if - it will take months and maybe years until we are on the right track again. In the meantime, some of the immediate budget measures included in the latest CARES law and other pandemic laws will soon expire. The economy needs a new round of financial support.
In designing the next package, Congress should rely heavily on the plan recently put forward by Jason Furman, Timothy Geithner, Glenn Hubbard and Melissa Kearney - respected economists and former political decision-makers from both parties. Your proposal not only meets current needs by expanding support when needed. In addition, some of the key fiscal stimulus tools are being redesigned to work more effectively both now and in future recessions.
The plan provides for increased income support for the unemployed and underemployed. new temporary subsidies for low-wage workers; cheap loans for small and medium-sized businesses; and additional support for state and local governments. The possible costs are not certain. It could range from $ 1 trillion to $ 2 trillion, the authors say, depending on whether the recovery is fast or slow. However, keep in mind that this elasticity is a good thing. There is little point in agreeing on a figure for additional public spending, no matter how things go, because the slower the recovery, the more support is needed. It is better to specify the guidelines and let the conditions determine the effort.
The CARES Act supplemented existing unemployment insurance programs with several new measures, including an additional payment of $ 600 per week for the unemployed. This is one of the provisions that should expire next month. Furman and colleagues suggest extending the additional support, but in the form of an increase in state unemployment benefits, which are limited to 40 percent of covered wages, up to a maximum of $ 400 a week. The idea is to replace a total of about 80-90% of lost earnings for workers who earned average wages or less. This avoids the financial penalty that the $ 600 flat-rate renewal would be for low-wage workers returning to work.
In addition, the plan would directly help these workers by temporarily increasing the earned income tax credit. And it would link federal support for expanded unemployment insurance to government unemployment rates on a permanent basis. In this way, workers in areas with high unemployment receive more help and the additional support expires automatically when more people return to work. In this way, as the recovery progresses, the system strikes a better balance between support for low-wage workers and support for the unemployed.
In the same way, the plan extends and modifies other aspects of existing tax support measures. For example, loan subsidies are preferred over the unsuccessful loans of the paycheck protection program. This type of support is better for companies that are profitable and can expand as the recovery progresses than for companies that are likely to fail anyway. The plan also provides for a generous increase in support for state and local governments - in the form of block grants (with conditions), expanded Medicaid support related to the state unemployment rate, and additional support for K-12 and higher education.
Such a scheme has a narrow purpose. Other additions to public spending should not be ruled out, least of all investments that would pay for themselves, such as financing infrastructure and clean energy. And it shouldn't override broader tax reform, including the need for a fairer tax and entitlement system and a plan to ensure long-term budgetary control. At the moment, however, an effective response to the pandemic must come first.
This means supporting demand, promoting employment and protecting the weakest from economic damage. If the existing instruments for achieving these goals can be made more efficient at the same time, so much the better.
Editorials are written by the Bloomberg Opinion editorial team.
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