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Should We Really Be Worried About Too Much Covid Relief?

Should We Really Be Worried About Too Much Covid Relief?

Tuesday, 23 February, 2021 - 05:30

President Joe Biden’s $1.9 trillion Covid-19 relief bill is an ambitious piece of legislation. Not only would it mail out $1,400 checks to a large segment of the American populace and provide generous benefits to people who lost income during the pandemic, it would raise the minimum wage to $15 an hour and expand America’s welfare state with a substantial child tax credit.


Given its bold nature, it’s not surprising that it's drawing criticism from many quarters. But none of those critics has scored a knockout blow so far because there are easy answers to many of the objections.


The minimum-wage hike has received the standard pushback from those who worry it would be a job killer. Those objections come from some business groups and from some economists. In general the fears are overblown, but in some low-cost states and cities it's true that $15 could be a little too high. The simple solution is to allow low-cost areas to slowly phase in the new minimum wage, and halt it if unemployment rises substantially.


Some are also worried about the extension of special unemployment benefits — sometimes known as Pandemic UI. Biden’s plan would provide a $400 a week benefit for those who lost jobs or income due to Covid-19, on top of normal UI payouts. My colleague Michael Strain says that this “will have the perverse effect of hurting the labor market, leading to more joblessness,” and calls it “an act of substantial economic self-harm.”


But should we really be worried? Biden’s version of Pandemic UI would be only two-thirds as big as the $600-a-week given in the Cares Act last March. And studies show that the Cares Act had no negative effect on employment at all! This makes theoretical sense — holding down a job is more valuable in the long run than taking a few months of government checks.


Still, it’s worth being cautious. With Covid cases dropping fast and vaccination set to cover a substantial portion of the populace by the end of May, Biden’s benefit may outlast the pandemic itself by several months. Once the physical danger of the virus has passed, people should be encouraged to go back to work as quickly as possible. So Biden’s bill could be modified to give Congress the option of tapering off the special benefits sooner if Covid is vanquished in the spring and early summer.


So those are a couple of minor tweaks to Biden’s plan that could effectively eliminate the risk of excessive government intervention. Other critiques, however, are less compelling.


For example, Scott Winship, a scholar at the American Enterprise Institute, a think tank, has been claiming that Biden’s tax credit of up to $3,600 a child would cause parents to drop out of the workforce. But as economist Lyman Stone has shown, Winship’s evidence just doesn’t support his conclusions at all. Meanwhile, a similar (but smaller) program in Canada was found to have reduced the amount that married mothers work by a small amount, but increased the amount that single mothers work by a slightly larger amount. And a well-known paper by economists Damon Jones and Ioana Marinescu found that cash payouts from the Alaska Permanent Fund didn’t reduce employment at all. So the risk of people dropping out of work to live off of their child allowances seems low.


The $1,400 checks, meanwhile, are the subject of a bitter political battle. Some on the partisan left claim that the checks represent a broken promise; Biden vowed to send out $2,000 per person, they say, and adding $1400 to the $600 given in the December relief bill doesn’t cut the mustard. Meanwhile, Republicans predictably claim the checks are too large, and mainstream Democrats want to make the checks more targeted to low-income people.


The mainstream Democrats are probably right here -- the number of higher-income people who suffered major losses from the pandemic, but who failed to claim the special unemployment benefit, and who would be substantially helped by a $1,400 check is probably very small. Raising the checks to $2,000 would be fine, but would hardly satisfy leftist lawmakers like Rashida Tlaib, who is demanding that every American get a $2,000 check every month.


As for Republicans, if they want to cut something from the bill, they should focus on aid to states. Biden’s bill involves a huge $350 billion payout to state and local governments, despite the fact that many states’ budgets are looking pretty healthy. Though cities generally suffered from the pandemic, many states’ tax revenues held up fine; California is reporting a $15 billion budget surplus. The generosity of the Cares Act and the follow-up December relief bill fed through to state tax revenues, which were also helped by the stock-market boom. So if anything gets cut from Biden’s bill, it should be the big bailout to states who don’t need it.


Overall, Biden’s bill is a good one that will help the country recover more rapidly from the pandemic while bolstering the country’s rickety welfare state for those most in need. A couple of the provisions could use a few tweaks, and state aid could be safely reduced, but overall it’s exactly what America needs right now.


Bloomberg


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