A new policy memo by EPI Director of Research Josh Bivens recommends Congress provide debt-financed fiscal support of $2 trillion between now and the middle of 2022, and then continue support on the order of $400 billion annually between then and the end of 2024, with a slow phaseout of this aid thereafter.
The COVID-19 pandemic has caused over 250,000 U.S. deaths. Millions of workers are still unemployed months into the pandemic and yet the first round of relief and recovery aid passed this spring has largely faded, with the last bits of enhanced unemployment benefits set to expire on December 26th. Bivens explains that the urgently needed policy response must first stop the economic bleeding and then repair the aspects that have been “rotted away” in order to rebuild a resilient economy.
“The Senate’s failure to provide crucial relief and recovery aid has left families without a lifeline and will severely damage prospects for recovery,” said Bivens. “Policymakers must prioritize a high-pressure labor market characterized by low unemployment and strong public investments.”
Bivens explains crucial pieces of smart relief and recovery include enhanced unemployment insurance benefits, federal fiscal aid to state and local governments, and targeted safety net expansions. To sustain fiscal support and keep a “fiscal cliff” from causing a contraction as this aid is drawn down, debt-financed public investments to mitigate greenhouse gas emissions and early childcare and education should be ramped up and sustained through the end of 2024, phasing out only gradually.
Recent history tells us why getting this relief and recovery package right is so crucial. Recovery from the Great Recession of 2008-09 was agonizingly slow, largely because the admirable initial round of fiscal recovery efforts was too small and came offline too quickly. Given that there are very promising signs of a vaccine on the near-term horizon, there is every reason to think that economic normalization will be possible in 2021, so long as recovery is not held back by a shortfall of demand. This means that policymakers’ goal today should absolutely be to return economic growth to the trajectory it was on before the shock. This goal will inform the assessment of how much fiscal support is needed.
Policymakers should be ambitious in picking an unemployment rate target that constitutes labor market health. Pre-pandemic, the unemployment rate hit 3.5% with no evidence that it was too low and likely to lead to a surge of inflation. Bivens recommends a target for overall unemployment of 3%.
“Policymakers should not phase out funding too quickly and must continue fiscal support through the end of 2024,” said Bivens. “We have to be careful not to think of this as jumpstarting an engine and instead think of it like towing a car out of a rough patch to smoother ground. If large fiscal support is removed quickly, the fiscal contraction can overwhelm private sources of growth and tip the economy back into recession.”
Once a strong recovery is secured with a right-sized relief and recovery package, policymakers will still have lots of work to do to ensure we build an economy that generates faster and fairer growth. Key tasks in this vein include strengthening social insurance programs, protections for workers, and key public investments. In short, focusing on an ambitious relief and recovery package is not a substitute or a distraction from the longer-run effort to create a fairer U.S. economy generally, it is instead a crucial first step.