Today, Democrats in the U.S. House of Representatives released the HEROES Act, which would provide critical relief and recovery measures to the U.S. economy and the people and businesses in it. One of the most important features of the bill is that it would provide $875 billion in direct state and local aid, as well as targeted fiscal help for education and Medicaid spending for state governments. This is an essential step forward, given that state and local governments will need up to $1 trillion by the end of 2021. The bill would also provide an extension of the unemployment insurance (UI) provisions in prior relief and recovery packages. This is excellent news from both a humanitarian and economics perspective—particularly the extension of the increased UI benefits of $600 a week, which was one of the most effective parts of the earlier packages. The bill includes many other key provisions, including investments in coronavirus treatment, testing, and contact tracing, which are necessary to reopen our economy.
Inevitably, some policymakers will express concerns over the price tag, which is estimated to be on the order of $3 trillion. This concern is utterly misplaced in this crucial moment. What are scarce in the economy right now are opportunities for workers to earn wages and demand for firms’ output. Fiscal resources are not scarce—interest rates (our best real-time signal of scarcity of the federal government’s capacity to take on debt) remain historically low. We need to use what we have in abundance—fiscal resources—to relieve the crushing constraints imposed on families by the scarce opportunities to work and earn income. Investments financed by greater public debt will reduce the severity of the economic crisis and will help avoid a prolonged period of high unemployment that would do far more serious and persistent damage to the economy. In short, these investments will have a very high rate of return. Further, the investments this bill calls for are the absolute minimum required to address the magnitude of the crisis we are facing. The Congressional Budget Office projects that without additional relief, the unemployment rate will average 16% in the third quarter of this year and 10.1% for the entire calendar year of 2021. Those numbers, which were released two and a half weeks ago, are now looking overly optimistic, given that more than 30 million workers have already filed for unemployment insurance and millions more claims continue to pour in.
A deep concern in today’s legislation is the lack of “automatic” triggers for the expiration of the bill’s provisions. There is an enormous amount of uncertainty around how the economic impact of the coronavirus will unfold. Assigning arbitrary end dates to provisions to sustain the economy, as the bill does, makes little sense when the process could be handled automatically, by having provisions phase out as the unemployment rate or the employment-to-population ratio are restored to near pre-virus levels. Using automatic stabilizers would not be any more expensive than the cumulative cost of multiple extensions of the programs in the bill—but it would prevent destructive lapses in critical programs while Congress negotiates extensions, and it would alleviate corrosive uncertainty by giving businesses, states, and households crucial confidence around budgeting and planning.