Moreover, with control of the Senate, Democrats have a way to do this. While Senate rules require most legislation to receive 60 votes to avoid a filibuster, one bill, the annual budget reconciliation bill, can pass with 51 votes, provided all matters contained therein have a non-incidental impact on the budget and that the bill does not increase the deficit beyond a 10-year window. This second condition is usually met by scheduling a phase-out of tax breaks close to the end of the 10 years and then extending them in a future reconciliation bill.

Because no budget has yet been approved for the current fiscal year, which started last October, Democrats effectively get two bites of the apple this year in using reconciliation bills to pass their proposals. They will presumably try to use one to pass the rescue plan and one to pass the recovery plan. For the rescue plan, Democrats should be able to muster 50 votes for most of President-elect Biden’s proposals, although there is the potential for some pushback from one or two centrist Democrats or the possibility of some horse-trading to secure votes.

It should be noted that raising the federal minimum wage to $15 may have to be omitted from a reconciliation bill based on Senate rules. If this occurs, Democrats could reintroduce it as a standalone measure, talthough it would likely have a hard time gaining the 60 Senate votes it would then need for passage.

Economic Impacts
Even without a minimum wage increase, the Biden rescue plan would have significant impacts on the economy in 2021.

• The aid to state and local governments would bolster employment in an area that has shed 1.4 million jobs since February.

• Extended, expanded and enhanced unemployment benefits through September should significantly reduce poverty until the pandemic winds down. Importantly, however, a $400 weekly supplement, as opposed to the $600 supplement in the CARES Act, would give most laid-off workers a financial incentive to return to work when possible.

• New checks of $1,400 per person, up to certain income limits, would further support those suffering financial hardship from the pandemic as well as many who have remained relatively unscathed from a financial perspective. This would support consumption over the next few months and could lead to a spending boom in the fourth quarter when many families will have opportunities to spend on services that are shut down right now.

• Additional spending on vaccination, testing and contact tracing could hasten the end of the pandemic while reducing its future death toll. This, combined with more spending on getting schools ready for the fall would further stimulate the economy.

The overall macroeconomic impact of the plan would be dramatic because of its size and the speed with which it is likely to be implemented. We estimate that nominal GDP in the fourth quarter of 2020 was $21.5 trillion annualized and that, before the Biden rescue plan, nominal GDP was on track to rise by 6.4% year-over-year by the fourth quarter of this year, comprised of a 4.4% gain in real GDP and a 2.0% increase in the GDP deflator.

In a conservative simulation of the impact of the plan on the economy we assume that (a) the final cost of the Biden plan as passed is $1.5 trillion, (b) $1.2 trillion of this is disbursed between now and the end of September, and, (c) that the total multiplier impact of this spending on GDP is 0.8, allowing for some saving until the end of the pandemic and splurging thereafter.

In this simulation, the Biden rescue plan could boost nominal GDP growth to 11.4% year-over-year by the end of this year—most of which would come in the form of stronger real GDP growth, although it would likely also result in higher prices, as hyped-up demand confronted a limited supply of services. This could push consumption deflator inflation above the Fed’s 2% target and cut the unemployment rate to below 5% by the end of the year.  

The phasing-out of these effects would, of course, slow economic growth in 2022. However, this could be offset by extra infrastructure spending from the recovery plan later this year.

Impacts On The Budget Deficit And Monetary Policy
While the Biden plan would likely lead to accelerated GDP growth and a faster return to full employment, it would, of course, come with a budget price.

Last September, the Congressional Budget Office projected a budget deficit for the current fiscal year of just over $1.8 trillion assuming no further coronavirus relief measures. The $900 billion package passed at the end of 2020 would have boosted that number to just over $2.5 trillion. If, as assumed earlier, the Biden rescue plan is $1.5 trillion in total, with $1.2 million being spent in this fiscal year, the deficit could rise to $3.7 trillion for the current fiscal year before falling very sharply in 2022. The debt in the hands of the public could rise to over 106% of GDP by the end of this fiscal year from just over 100% of GDP at the end of fiscal 2020.