President-elect Biden has said that the recently passed COVID relief package was only a down payment, that more would need to be done. Any doubt that this was true, was eliminated when the U.S. Bureau of Labor Statistics reported that the decline in payroll employment (140,000) reflects the recent increase in COVID cases, and efforts to contain the pandemic (mandated closures). The December, job losses were primarily confined to the leisure and hospitality sectors.
There will be those in Congress who will object to any additional economic assistance efforts on the grounds that the government simply cannot afford it, that the Treasury does not have the needed tax revenue. A statement like this incorrectly suggests that tax dollars are used by the federal government to make purchases from the private sector or make transfers to households. In fact, tax dollars are used for only one purpose, to pay off Treasury securities when they come due. The entire federal budget (unlike state and local governments) is funded by simple money creation, with the sale of government bonds occurring only after the fact for reasons of interest rate control.
These facts were specifically addressed when the President-elect last spoke to the public. In his address he made it clear that state government whose constitutions require annually balanced budgets, cannot deficit spend, whereas the federal government is not only capable of deficit spending, but it required to, if its goal is to restore the economy to full employment and maximum production. With Biden’s explicit recognition of the power of fiscal policy and his commitment to use it, what should a Biden relief package like? For starters it should be more focused and of longer duration than the recently passed package.
One of the biggest failures in the current rescue package was the failure to address the implications of extended eviction moratoriums. These moratoriums, while preventing families from eviction, do nothing for the accumulated rents or mortgage payments due when any moratorium is lifted. For many families the accumulated amounts could sum to $10,000 a sum few families could absorb.
Another flaw of the current rescue package what the failure to include a specific “carve out” for restaurant entrepreneurs and their employees. The Labor Department’s December Employment Situation report revealed that losses in the leisure and hospitality industries were partially offset by gains in professional and business services, retail trade, and construction. While some firms in certain industries are on the verge of bankruptcy, other industries are not being seriously affected.
Any new rescue package must include robust and long-term assistance to the owners of small businesses in the leisure and hospitality industries, along with significant increases in the duration and the amount of unemployment compensation for unemployed workers. Since the virus, and not general economic conditions will dictate when these industries will return to full production, assistance to both the owners and their employees should be open ended.
Assistance to state government’s has been a bone of contention between Democrats and Republicans. State revenues decline in time periods with significant levels of unemployment. Without additional revenue, cuts in spending caused by balance budget requirement will, will only worsen the employment situation in industries currently not much affected by COVID virus restrictions. Republicans fear assistance to the state’s will be used to shore up underfunded pensions. An easy compromise would be to lend assistance for current operating budget deficits ignoring any previously existing deficits in the state’s capital budget.
One additional item that needs to be addressed, one that everyone in the past has paid lips service to is investment spending. American industry has an unhealthy and unproductive fascination with short-run financial gains, to be more specific, to their stock’s price. In the 1970s companies invested fifteen times what they gave their shareholders in dividends. Between 2003 and 2012, 449 of the S&P 500 companies used only 9 percent of their profits for investment, the rest went to stock buy backs and dividends. By 2016, the value of stock buy backs and dividends returned to shareholders by S&P 500 companies exceeded all of their operating profits.
Government spending on investment is called infrastructure spending. With the business sector essentially abandoning investment, Biden has to find a way to incorporate infrastructure spending into any future rescue package. Possibilities include a fossil fuel free electric grid, electric auto charging stations, or expanded community health centers. With the possibility that some firms, or some industries may not be returning after the current recession ends, a focus on new facilities for health care or a new green economy may be a way to bridge the gap between short-run economic assistance and long-run economic growth, one that has the potential to maximize employment.