An economist’s view of Biden’s $1.9 trillion Covid-19 relief plan
Macroeconomist Kishore Kulkarni on the president’s massive relief proposal, the country’s uneven recovery and the prospects for the post-pandemic economy.
Less than a week into the job, President Joe Biden is making good on his campaign promise to take aggressive action on the Covid-19 pandemic.
While Congress has already authorized $4 trillion for coronavirus relief, the White House says an additional $1.9 trillion is needed for Biden’s plan to pay for a national vaccination program, extend unemployment benefits, provide direct payments to households and increase the federal minimum wage. The proposal is already hitting skepticism in Congress, and administration officials worked through the weekend to bring Republican and Democratic lawmakers on board, Reuters reported.
To make sense of the big picture on Biden’s big ask, RED turned to Kishore Kulkarni, Ph.D., distinguished professor in Metropolitan State University of Denver’s Department of Economics, for his perspective on the relief plan, our uneven economic recovery and prospects for a stronger post-pandemic economy.
How has Covid-19 damaged the U.S. economy?
Kulkarni: We have seen a truly unprecedented challenge and underestimated the necessary response.
In 1933, at the height of the Great Depression, we had an unemployment rate of 25% – that was terrible, but it was also a smaller labor force then. Now, we have a much larger labor force at around 170 million, and the U.S. unemployment rate last month was 6.7%. In Colorado, the December unemployment rate jumped to 8.4% – up from 6.4% in November 2020 but down from its high of 10.6% in June 2020.
The bottom line is that employment – and the economy – is not coming back that fast and (unemployment) is still nearly double where we were prior to the pandemic in February 2020 (3.5%).
What’s in President Biden’s proposed relief package?
Kulkarni: The $1.9 trillion looks to continue unemployment insurance and extend a moratorium on evictions; I think those will help and that Congress will likely go along with them.
What is bothersome, though, is how to ensure where Congress will either stop or drastically lower the spending when we bring the pandemic under control. In 2020, our budget deficit looks to be $4 trillion to $5 trillion; that was probably justified, but it dwarfs the $1.6 trillion from the 2008-2012 financial crisis and any other historical amount.
At some point, we will need to start slowing down (the expansion of our national debt); otherwise, we’re adding to it in a way that it may get completely out of control. We’re already hitting $28 trillion in national debt in 2021.
How do the individual payments impact a recovery?
Kulkarni: From a macroeconomic perspective, the direct payments are actually minor. It’s less about the size of the checks than who’s getting them. The propensity for spending increased income is higher for poorer folks; higher-income households have the luxury to save a greater percentage of income. I think setting a maximum of $75,000 in income (to qualify for relief payments) ensures that the money will go to the people that need it most.
Will a proposed increase of the federal minimum wage to $15 per hour help the economy?
Kulkarni: I think (that part of the proposal) is likely to be favored by Congress because it will keep real wages somewhat constant. However, I believe it might be a bad idea to increase the minimum wage when unemployment is already high; there might be a negative impact on jobs as employers cut costs. Those losses would be absorbed by populations who hold many of these minimum-wage jobs: people of color, the working poor, teenagers.
How would $416 billion for a national vaccine program help the economy?
Kulkarni: Assuming the vaccines work at 95%, it’s a fantastic investment – sending and disbursing the vaccine is so important, both from a health and economic perspective.
We also need to look at getting vaccines distributed globally. Strictly speaking, global exchanges dropped by 18% in 2020 – that’s nearly one-fifth of world trade that just vanished. The way we get it back is through worldwide vaccination.
There’s talk of a “K-shaped recovery.” What does that mean?
Kulkarni: There’s a recovery, but it’s occurring for those already more well-off; the rich are getting richer and the poor, poorer. That’s a constant in any economic crisis – whether the Great Depression, the 1982 stock-market crash, the Great Recession or even right now.
Inequality of income is a relative concept – and unless poor people receive an income at a higher rate than those more well-to-do, that inequality is only going to continue increasing for the foreseeable future.
What are the challenges for the post-pandemic economy?
Kulkarni: I think tax increases for the rich will soon be a necessity rather than a choice.
This isn’t a philosophical approach; it’s an economic one. In FY2019, the U.S. brought in $3.5 trillion in income taxes; in order to meet the expenditure necessary to get us through the pandemic, we’re looking at about $5 trillion. That has to come from somewhere.
Another key point: The idea that the “best government is the one that governs the least” is a misnomer right now. All around the world, you see governments from the U.S. to those in Europe and Asia a lot more active and involved in their economies. For that reason, pure capitalism and small-government concepts are going to be nonexistent, at least for the time being.
Anyone who says they know exactly what will happen in the future is lying to you, however. I do think we are on the rebound, and things are looking brighter, but let’s not forget we expected the same thing in January of 2020, too. The shocks of the future, whether positive or negative, depend on the stage of the future and are responsible for future growth.