The standoff over pandemic relief measures in the U.S. is winning new support for an old idea: that fiscal stimulus should be tied to the state of the economy, not left to the whims of politicians.
Spending programs that kick in automatically when the economy turns bad and phase out as it recovers, without any need for lawmakers to pass new bills, are known as “automatic stabilizers.” Democrats have backed a bigger role for such policies during the coronavirus slump.
Their presidential candidate Joe Biden, who leads polls ahead of next week’s election, says he wants to apply them in future recessions too, though the party would likely need to sweep Congress as well as the White House to get that done.
Unemployment insurance is the most important stabilizer in the U.S., and it’s been central to the deadlock in Congress. The extra $600-a-week benefit introduced early in the crisis expired in July -- an arbitrary date that helped win bipartisan approval for the plan, but left millions of jobless Americans facing a sudden drop in income while the economy was still weak.
"July 31 is the reason that we should have automatic stabilizers,” says Claudia Sahm, a former Federal Reserve economist who’s done pioneering work on the topic. “That was when Congress broke down in terms of the discretionary process of sending out more relief.”
“When the sky is falling, Congress will act,” she says. But in the recovery phase, when the economy is in “a slow grind out of a big hole” -- like now -- political disputes can get in the way.
Benefit ‘Triggers’
For months, both parties have said they want some kind of supplemental benefits to continue -– but partly because they couldn’t agree on what kind, or how much, the stimulus dried up. That’s exactly the outcome automatic stabilizers seek to avoid.
One Democratic proposal was to gradually reduce the $600 federal benefit by $100 at a time, pegged to the decline in unemployment rates back toward pre-pandemic levels.
Biden’s economic platform takes a similar approach, promising to keep the expanded benefits in place and set up “automatic triggers based on economic and public health conditions” that will determine when they’re phased out. It also says the benefits should be “renewed in future crises.”
One big question, often raised by President Donald Trump’s Republicans, is how to pay for such plans. The U.S. has already run up a record $3.1 trillion budget deficit this year fighting the coronavirus slump.
Unemployment insurance systems are run at the state level, often with creaky machinery. And states can’t inject much cash in a downturn because that’s precisely when they’re short of spending power. Unlike the federal government, states can’t create money and typically have to balance their budgets.
Even though the federal government funded the $600-a-week supplements this year, states still ended up footing some of the bill. They’ll probably pay about $4 billion more as a result of the top-up, which made benefits more attractive and encouraged people to apply who might not have done otherwise, the Congressional Budget Office estimates.
‘Workers Pay’
With the increased demand, “state payroll taxes are going to have to rise in the long run,” says Matt Weidinger, a fellow at the American Enterprise Institute whose research has focused on safety-net policies. “Workers pay the cost of that in terms of lost jobs and lost wages.”
There are other proposed fixes to the U.S. social safety net that have more cross-party support.
One of them is known as short-time compensation, or work sharing. It pays pro-rated benefits to offset lost wages for employees whose hours have been reduced -– helping companies avoid layoffs and keep people in their jobs. That’s a similar goal to the Paycheck Protection Program, one of the hastily rolled-out pandemic measures.