The Covid Relief Bill is Half a Loaf

Dec 20

The new Covid-19 relief bill is too limited in scope, and, in a critical failure, it does not provide desperately needed aid for state and local state governments. Once again, Republicans have channeled their inner Scrooge, slashing relief payments for individuals by 50%, and they have taken a punitive approach to Blue states. That will hurt the whole country, not just Democratic-led states, and it is an ominous sign for the incoming Biden administration.

President-elect Joe Biden welcomed the new program, while emphasizing that Congress would need to pass another massive package soon after he takes office. Good luck with that, Mr. President.

Sen. Mitch McConnell seems to be playing the same game that he did in 2009, when Republicans refused to support a stimulus bill despite the worst economic downturn since the Great Depression. McConnell’s overriding goal then was to weaken President Obama and the Democrats, not to help ordinary Americans.

McConnell and other Senate Republicans may have agreed to pass the latest relief program mostly to help Kelly Loeffler and David Perdue win their run-off elections in Georgia. Those races will be decided in early January. Afterwards, McConnell will likely do all that he can to obstruct Biden’s initiatives, even if that means a struggling economy and continued suffering for millions of Americans.

Senate Republicans will protest loudly about the evils of deficits when a Democrat occupies the White House and pleads for another relief program. And they certainly won’t agree to repeal the Trump tax cuts, which doubled the government’s annual deficit to $1 trillion long before anyone ever heard of Covid.

The Economy Is Still Weak

After eight months of fighting, the two parties have finally produced a $900 billion coronavirus relief package. That sounds like a lot of money, until you consider the scale of the economic damage the plague has inflicted upon the U.S.

Although unemployment peaked in the summer, it remains very high. Ten million Americans are out of work. The official unemployment rate was 6.7% in November, double the year-ago level.

Furthermore, the all-in unemployment rate was 12% vs. 6.5% in November 2019. This figure includes people who are working part-time, even though they want a full-time job, and discouraged workers who have given up looking for a job.

Even worse, about 40% of the unemployed, or four million Americans, have been out of work for over 27 weeks. If people remain unemployed that long, it becomes increasingly harder for them to find a job. The U.S. economy is not built for such high levels of unemployment; we don’t have the wide social safety nets that European countries do.

Three Main Sticking Points

In April, Congress passed a $2.2 trillion relief program, which prevented the economy from going into a free-fall because of the pandemic. Subsequently, as the pandemic gathered force and unemployment rose sharply, Democrats proposed another $3 trillion program, including $1 trillion for state and local governments.

That was over-reaching, especially because massive direct Federal financial support for such governments is rare. However, the Republicans’ $500 billion counter-offer was a non-starter. The three main sticking points were:

The amount of additional relief for individuals
Democrats’ proposals for aiding state and local governments
Republicans’ demand for limiting companies’ liability for employees’ Covid claims

The negotiations stalled over the summer and fall, even though Democrats gradually scaled back their proposal to $2 trillion. They cut their request for aid to state and local governments by over 50%, to about $440 billion.

McConnell to Blue States: Drop Dead

McConnell basically refused to negotiate with Democratic leaders, attacking their proposal as a “bailout for Blue states”. McConnell blamed the states’ fiscal woes on pension plans that, he said, provided excessive benefits for unionized workers. The proposed bill would allow Democratic-run cities and states to solve “problems that they created for themselves with their pension programs”, according to McConnell.

McConnell even suggested that states and cities struggling with the fiscal burdens caused by the pandemic consider filing for bankruptcy. McConnell apparently was encouraging them to take that drastic step to reduce their pension obligations.

In fact, states cannot file for bankruptcy, and they have to balance their budgets, as a matter of law. Cities can declare bankruptcy, but they have done so only in extreme cases, because of the hugely disruptive effects.

The Pandemic, not Pensions, Ruined Democratic States’ Finances

In any event, McConnell’s attack was a red herring.

New York, California and most other large Democratic-led states and cities were in sound fiscal shape before the pandemic. Many do provide generous pension benefits, for teachers, police officers, and firemen, as well as bureaucrats. But most of these entities levy the taxes required to fund their programs. Unlike the Federal government, states cannot run deficits.

When Covid-19 hit, sales and income taxes and other revenues plummeted for state and local governments. Meanwhile, their expenses soared, as unemployment claims rose and municipal hospitals dealt with waves of coronavirus patients. Their finances deteriorated very quickly.

One prime example, New York City, was particularly hard-hit. The city’s municipal hospitals handled waves of Covid-19 cases as it became the first epicenter of the outbreak in the U.S. The public transport system, the MTA, saw its ridership plummet and its deficit soar. These financial troubles were caused by the pandemic, not by poor pension funding practices.

This Relief Program Falls Short

The final $900 billion relief package reflects numerous compromises:

A 50% cut in relief funds for individuals
No liability shield for businesses against employees’ Covid claims
No direct financial assistance for state and local governments, except for a small amount for public transit

Unemployed Americans will receive a one-time $300 payment and weekly supplemental unemployment benefits of $300, but only until April. That's a 50% reduction from the first relief package.

We should be thankful that at long last Congress provided more aid for millions of Americans. However, it was a mistake to cut the amounts so sharply and to phase them out in April. With the recent surge in Covid cases, we should not expect the economy to recover in a mere three months. It's magical thinking to expect those 10 million Americans to find jobs quickly.

The bill allocates a paltry $14 billion for public transit agencies, with $4 billion for New York's MTA. The agency has estimated that it will face an $8 billion deficit through 2024 even after receiving these funds.

The Republicans’ refusal to provide any significant aid to state and local governments is not just vindictive; it’s bad economic policy.

Why Should the Feds Help the States? It’s the Economy, Folks.

Normally, the Federal government does not step in to shore up state and local governments' finances. But these are not normal times. Providing Covid-related relief to them is like helping a coastal town in Florida that has been hit by a hurricane, through no fault of its own.

If Congress does not help state and local governments, that will slow down the economic recovery. These entities are typically a large source of stable employment, which helps to support consumer spending. However, they have already laid off 1.3 million workers since March, about 10% of Covid-related unemployment, and they will make deeper cuts soon.

Providing aid to state and local governments to offset the pandemic is also an efficient way to boost the economy. In September, the Congressional Budget Office evaluated the initial $2.2 trillion relief program and estimated that the relatively modest portion ($150 billion) allocated to state and local governments had the largest “multiplier effect”. The CBO calculated that the aid generated 88 cents of GDP growth for every dollar of cost, which was considerably higher than other programs like the small business loans.

So rather than funding a wasteful “bailout”, taxpayers got a good return on their money.

Blue Cities and States Help Drive the National Economy

Major Democratic cities and states are powerful engines of growth for the whole country. New York, Chicago, Los Angeles, Houston, San Francisco and other cities are centers for industries and services that generate ripple effects throughout the U.S. economy. Several play key roles in international trade. If these cities and their states stagnate, because their governments cannot provide reliable public transportation or keep the streets clean, the entire nation will suffer economically.

McConnell and his ilk don’t seem to understand this key aspect of our economy. Perhaps these legislators, like many of their constituents, resent many Democratic cities and states because they are more prosperous than many Republican-led states. That is not a sound basis for shaping economic policy.

In 2009-10, the Senate Republicans' refusal to back programs that would boost the economy led to a painfully slow and drawn-out recovery. It looks like they are making the same mistake this time.

The Wall Street Democrat

Ryan O’Connell