U.S. needs estimated $4.5 trillion in stimulus to recover, analysis argues

December 12, 2020 Yahoo! Money

The economy may need up to five times more money than what lawmakers are considering to return to pre-pandemic levels, according to a new analysis.

The Groundwork Collaborative, a progressive economic think tank, found that a stimulus package worth $3 trillion to $4.5 trillion would be required for American businesses and workers to work at their full potential and the real unemployment rate to fall to 3.5%.

“We need stimulus, and we need it fast,” Mark Paul, a political economist at the New College of Florida and co-author of the report, told Yahoo Money. “Every day that we wait, we risk disenfranchising more people from the economy. Every day that we wait, more people are facing evictions and falling behind on bills.”

The $3.4 trillion HEROES Act passed the Democratic-controlled House on October 1 but was never considered by the GOP-controlled Senate after Majority Leader Mitch McConnell’s (R-KY) called the legislation a “socialist manifesto.”

The latest bipartisan stimulus proposal would cost $908 billion, though negotiations are in disarray as House Democrats, Senate Republicans, and the White House continue to disagree on key issues such as stimulus checks, aid for state governments, and liability provisions for companies amid the pandemic.

Democratic leaders are backing the $908 billion proposal, McConnell stands by a roughly $500 billion proposal, and the White House floated a $916 billion proposal that was quickly rejected.

“Congress is debating a stimulus package right now that would leave our estimate of true unemployment still hovering around double digits,” Paul said. “We have the tools to put the economy back on track. Unfortunately, Congress lacks the political will to act.”

The analysis is based on an estimate that the current unemployment rate in November is 13%. While the official unemployment rate for November is 6.7%, economists warn the true number is much higher if adjusted for the fall in labor force participation since February.

“Taking 3.5 percent as the full employment level of unemployment and 13 percent as a better estimate of actual unemployment gives an unemployment gap of 9.5 percentage points,” the analysis asserts. “Taking this gap together with an estimate of current GDP in November of nearly $21.3 trillion, implies a potential GDP of more than $25.7 trillion, or an output gap of $4.5 trillion that fiscal policy needs to fill.”

Source: "How Much Emergency Relief Will it Take to Revive the US Economy?"
Source: “How Much Emergency Relief Will it Take to Revive the US Economy?”

‘Costs of going too small … far outweigh the costs of going too big’

The highest price tag of a Republican stimulus proposal was their $1 trillion proposal from July, while the White House’s highest proposal was around $1.9 trillion before the election. Both of those proposals are no longer being considered.

“The most frustrating aspect of this is that the macroeconomic policy community is essentially in full agreement that the costs of going too small on stimulus far outweigh the costs of going too big,” Paul said. “The worst that can happen is we end up with some additional public parks or hand out a few extra dollars to low and middle-income Americans that haven’t seen a pay increase in a generation.”

And the risks of spending less than needed on stimulus are higher than spending more, economists warn.

“The risk of overdoing it is less than risk of under-doing it,” Federal Reserve Chairman Jay Powell told the Senate Banking Committee last week. “Fiscal support at this point will really move the economy along to guard against those downside risks.”

‘Too small today is better than no stimulus at all’

If no stimulus deal is reached by the end of the year, up to 12 million Americans are expected to lose unemployment benefits coverage when two programs enacted under the CARES Act expire on December 26. The federal eviction moratorium, paid sick leave, aid to state and local governments, among other relief, also will lapse.

“We’re looking at critical programs that are just going to be running out of money,” Paul said. “These are just simple policy choices that are fully avoidable.”

Both the Pandemic Unemployment Assistance (PUA) and the Pandemic Emergency Unemployment Compensation (PEUC) programs are set to expire on December 26 unless Congress reaches a stimulus deal.
Both the Pandemic Unemployment Assistance (PUA) and the Pandemic Emergency Unemployment Compensation (PEUC) programs are set to expire on December 26 unless Congress reaches a stimulus deal.

Both McConnell and House Speaker Nancy Pelosi (D-CA) have said that if they reach a deal now, they can continue discussing another stimulus package after President-elect Joe Biden’s inauguration.

But the packages offered by Republicans have become progressively smaller in size as the economy appears to be recovering, even though millions of Americans are being pushed to the financial brink.

“I’m deeply troubled by the current bill on offer,” Paul said. “But I do think a stimulus that is too small today is better than no stimulus at all.”

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