Washington’s inability to pass a much-needed stimulus bill ahead of November’s election is expected to inflict further damage on the economy, potentially kneecapping its recovery as the expiration of key benefits looms.
Haggling between House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin has progressed, with Mnuchin saying he is willing to sign on to a $1.8 trillion deal, but the sides say they remain far apart on key issues.
President Trump has zigzagged from calling off talks because Democrats refused to lower their price tag to insisting that he was willing to shell out even more than what Pelosi had on the table.
Meanwhile, despite Trump’s insistence that Republicans are “ready to go” on whatever agreement Mnuchin and Pelosi strike, Senate Majority Leader Mitch McConnell (R-Ky.) has made clear that his caucus is opposed to a large spending package. He is instead moving ahead with a vote on a $500 billion package that seems unlikely to become law.
With the election just more than two weeks away, the gridlock means that businesses and workers crushed by the COVID-19 pandemic are unlikely to see relief until the lame-duck session or possibly the new year. The outcome of the election, which could reshape the power levers in Washington, is poised to scramble the political calculus on each side for a deal and could block one from going forward altogether.
The extended wait for expanded unemployment benefits, aid to small businesses, health efforts to fight the virus, and funding for state and local government is expected to leave lasting scars.
“The consequences could be pretty severe,” said Shai Akabas, director of economic policy for the Bipartisan Policy Center. “It is critical for the economy to get support now, and each day, week, month that passes by is damage that can’t be undone.”
While the economy has started crawling out of the deepest lows of the pandemic-fueled recession, growth remains incredibly weak, and economic forecasts from S&P Global show the world’s largest economy is unlikely to recover to its pre-pandemic level until late 2021, despite predictions from Trump to the contrary.
The prospects for the job market are even more bleak; S&P Global chief U.S. economist Beth Ann Bovino says the labor market is not expected to fully heal until 2024. Both of its forecasts assumed Congress would pass an additional $500 billion in stimulus.
Without the aid, the fragile growth projected for the fourth quarter could dissipate.
“The risk is, of course, that it would be in negative territory,” Bovino said.
The problem is exacerbated by the fact that many key benefits Congress agreed to in March’s critical CARES Act have already expired, and several more are ticking time bombs, particularly in the area of unemployment.
“Even though the CARES Act provided quite generous unemployment insurance provisions, people are now starting to run out of benefits,” said Chad Stone, chief economist for the Center on Budget and Policy Priorities. “There are many folks who are experiencing real difficulty, especially since July when the unemployment insurance ran out.”
The CARES Act created a $600 weekly increase to state unemployment levels, which typically only cover a fraction of previous earnings. That benefit expired at the end of July, leaving the millions of workers who lost their jobs due to the pandemic with an average of $305 in weekly benefits. An executive order from Trump provided an additional, temporary increase of $300 using Federal Emergency Management Agency disaster funds, but that benefit has largely expired.
Fortunately, one of the main critiques of the policy — that it ended up paying low-wage workers more than their jobs — turned out to be a saving grace.
New research from the University of Chicago and the JPMorgan Chase Institute found that unemployed workers saved up the extra money, adding some 120 percent to their account balances while they accrued the additional cash.
That money both helped prop up the economy, as the unemployed increased spending by 22 percent, and helped the unemployed keep paying their bills after the benefit expired. But those extra savings have dwindled, with spending dropping 14 percent in August alone.
“Eventually, without further government support or significant labor market improvements, jobless workers may exhaust their accumulated savings buffer, leaving them with a choice to further cut spending or fall behind on debt or rent payments,” the study found.
Those savings could explain why retail sales and consumer spending remained robust. But that is likely already changing, and the unemployed face new deadlines.
The CARES Act program that extended unemployment benefits to gig workers and the self-employed, which currently has more than 11 million people enrolled, is due to expire on Dec. 31. The workers who lost their jobs earliest may be nearing the end of their 39 weeks of benefits.
Other programs that extended regular unemployment beyond 26 weeks will expire at the same time, a particular problem for the 2.4 million long-term unemployed people the Commerce Department counted in mid-September. Long-term unemployment is defined as people who have been out of work for more than 26 weeks.
Stone says that the people who have been out of work the longest not only will struggle most financially but also will have the hardest time finding new jobs and ultimately slow down the recovery more broadly.
“What we learned in the Great Recession, which had a fairly protracted recovery because we turned to austerity too soon, was that the long-term unemployed were not the quickest people to be hired,” he said.
Another problem that needs to be addressed by year’s end is state and local aid, a crucial sticking point for Pelosi in the talks.
“State and local governments, because they have balanced budget requirements, need to cut spending if they don’t get additional relief,” Stone noted. Those cuts typically mean reductions in services and, crucially, firing workers.
States that have been hoping for cash infusions will have to make tough decisions come January when legislatures come back into session.
“They were holding back in expectation that the next stimulus bill would provide some relief,” Stone said.
The left-leaning Economic Policy Institute estimated that 1.5 million public sector workers — mostly in education — already lost their jobs by July on the state and local level and that a total of 5.3 million would lose their jobs through the end of 2021 without additional aid.
Josh Knauer, an adjunct professor at Carnegie Mellon University, said that suffering businesses are also on the precipice.
“We’re in the rapids right now leading to a waterfall of business collapse,” he said.
The CARES Act and subsequent legislation provided hundreds of billions of dollars in loans to small and medium businesses, largely through the Payment Protection Program. For many, those loans were forgivable.
But that program, which was intended to cover only two months of operations, expired in July and has not been renewed.
“We’ve already seen millions of businesses that are shutting down operations and are ceasing to exist. If we don’t see stimulus in the next month, in the next 30 days, we are going to see millions of businesses stop operations,” Knauer warned.
Larger distressed companies, particularly airlines, have announced plans to lay off tens of thousands of workers since their last round of aid expired.
Among the Democratic caucus, pressure has been building on Pelosi to strike a deal.
“People in need can’t wait until February. 1.8 trillion is significant & more than twice Obama stimulus,” Rep. Ro Khanna (D-Calif.), a progressive leader, tweeted. “Make a deal & put the ball in McConnell court.”
But despite the extraordinarily high stakes and costs of delay, the prospects of new relief passing soon appear ever more distant.
“While there’s plenty of blame to go around, it really is legislative malpractice that we’ve failed to reach something,” said Akabas.