By Brenda P. Wenning
“Act big,” Treasury Secretary Janet Yellen said at her confirmation hearing. And President Joseph R. Biden is doing just that.
During his first day in office, he signed 10 executive orders to expand testing and vaccine availability, reopen most schools within the next 100 days and administer 100 million doses of COVID-19 vaccines by the end of April. (It turns out that the United States was ahead of the 100 million dose goal when President Biden took office, but there have been substantial delays.)
That’s all to the good, if it breaks the government delays that have been holding back vaccine administration.
“We have come to accept a public-performance culture of muddling through,” Daniel Henninger wrote in The Wall Street Journal, “but the vaccination rollout – with the whole country focused on this one thing – is showing people how inadequate and dangerous the status quo is. If government at so many levels can’t do something this straightforward – two injections – what can it do?”
Operation Warp Speed has been an extremely successful public-private partnership, with U.S. pharmaceutical companies developing new vaccines in record time. But the “public” part of the process has not lived up to expectations.
If President Biden’s executive orders don’t change that, perhaps his American Rescue Plan (ARP), which was proposed before he even took office, will. Adding $1.9 trillion in spending, it indeed acts “big,” but, as written, it would add considerably to the federal debt and could hurt, rather than help, the economy, which grew by 4% in the fourth quarter of 2020.
ARP proposes an additional $160 billion for a national vaccine program, including $20 billion for distribution, and an additional $50 billion for expanded testing. The plan also calls on Congress to invest $170 billion in K-12 schools and higher education, including $130 billion for schools to safely reopen.
It also includes stimulus checks of $1,400 for all Americans, an additional $100 to $400 per week in federal unemployment benefits through the end of September, $350 billion in aid to state and local governments, a national minimum wage of $15 per hour, expanded paid leave and increases in the child tax credit.
The sooner Americans are vaccinated, the quicker the economy can reopen. And, when it does, pent-up demand could help ensure a rapid recovery. Last spring the economy began to reopen and the economy grew at a record pace of 33.4%.
But ARP primarily seeks to stimulate the economy by spending lots of money. Keynesians believe that government spending, not private investment, is the key to economic growth. And Keynesian-minded politicians, whose power increases along with the federal budget, are ubiquitous in Washington, so spend we must.
During the financial crisis, the American Recovery and Reinvestment Act of 2009 was passed to stimulate the economy. It appeared to have little impact, as the economy grew at an average rate of 2.3% for eight years.
Keynesians believe the $836 billion spent – which made it the largest spending bill ever at the time – was not enough. In other words, it failed, because it didn’t act big enough.
Congress doubled down on stimulus spending last year with the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES). Other spending appropriations and legislation approved before CARES, such as the Families First Coronavirus Response Act, cost hundreds of billions of dollars. An additional $0.9 trillion relief package was approved in December, bringing the total pandemic-related spending close to $4 trillion.
Isn’t that enough? In comparison, Congress spent $4.17 billion to fight H1N1 in 2009. The Centers for Disease Control estimate 60.8 million Americans had H1N1 with 274,304 hospitalizations and 12,469 deaths. To date, the number of COVID-19 cases in the United States exceeds 26 million with more than 440,000 deaths.
Granted, COVID-19 is even more serious that H1N1, but spending more than $5 trillion on COVID-19 – nearly 1,500 times what was spent on H1N1 – seems excessive, even when you factor in the cost of reopening the economy, which is already recovering.
As states lifted their economic lockdowns last spring, the economy grew at a record rate of 33.4%. It can be argued that CARES spending contributed to that growth, but even if that argument were correct, will more spending have the same impact?
For spending to stimulate, there must be demand for the funds being spent. Yet former U.S. Treasury Secretary Steven T. Mnuchin returned $455 billion in unused CARES funds that had been designated for Federal Reserve facilities and direct loans from the Treasury.
Before spending $1.9 trillion, it’s worth analyzing the potential benefit gained from that cost. One important consideration is that it will bring the U.S. government closer to insolvency.
Even without trillions in new spending, the federal debt will soon surpass $28 trillion. Interest rates are near zero, but it’s costing nearly $400 billion a year to service the debt. We’d have far fewer struggling families if that money were used elsewhere.
What economic growth?
If economic growth is the goal of ARP, handing out checks and raising the minimum wage won’t help the cause much.
Americans have already received checks for $1,200 and $600. The ARP would provide another Economic Impact Payment of $1,400 to most Americans.
Who doesn’t like to receive a check from the government? But sending people checks that will be paid back with much higher taxes has not been found to be very economically stimulating.
“The Economic Impact Payments helped alleviate the financial hardship faced by many Americans due to the COVID-19 pandemic and provided a modest boost to the economy,” according to the Peter G. Peterson Foundation. “However, many of the payments went to higher-income households not financially affected by the pandemic who simply saved the money or used it to pay off existing debt.”
The $600 stimulus check sent out in December included income limits, so it was at least targeted to help Americans who needed the money most. The next check may at least help those who need it, but don’t expect it to do much for the economy.
Hurting small businesses
Higher unemployment benefits and a $15 minimum wage may also help struggling Americans, but will also be harmful to small businesses that have been trying so hard to hang on throughout the pandemic. Restaurants, which are among the businesses hurt most by the pandemic, would be among the businesses damaged further by enhanced unemployment benefits and a higher minimum wage.
Paying more to people who are jobless may be good politics, but it gives them less incentive to look for new jobs and it makes it more difficult for employers, who are also strapped for cash because of the pandemic, to bring back laid-off employees.
The unemployment rate dropped significantly last summer when the federal government stopped paying an additional $600 a week for laid off employees to remain jobless.
In addition, studies have shown that raising the minimum wage destroys jobs. That will especially be true now, given that so many small businesses are still recovering from lockdowns and, in some cases, destruction of property during last year’s rioting.
President Biden’s proposal would more than double the minimum wage from $7.25 an hour to $15, but for tipped workers, it would increase their minimum by more than 600%.
Currently, tipped workers have a minimum wage of $2.13 an hour, but with tips added in they are required to be paid at least the $7.25 minimum. ARP would require that they receive the $15 minimum, not including tips.
Restaurants laid off about six million workers during the first two months of the pandemic and, after limited re-openings, they ended 2020 with 2.5 million fewer jobs than before the pandemic, according to The Wall Street Journal.
A recent study from economists at Miami and Trinity universities found that a $15 minimum wage would result in the loss of more than a million jobs in the hospitality industry.
In Seattle, which adopted a $15 minimum wage, a research team linked to the University of Washington found a 13% increase in the rate of businesses leaving the city or closing as a result of the increased minimum wage. And that was before businesses were hurt by the pandemic.
President Biden said it is essential to use the government’s borrowing power to help struggling families, but businesses are struggling, too. Including both of these business-killing giveaways in an economic recovery bill is not going to help the economy any more than paying farmers not to grow crops.
Brenda P. Wenning of Newton is president of Wenning Investments LLC in Newton. She can be reached at Brenda@WenningInvestments.com or 617-965-0680. For additional information, visit her blog at www.WenningAdvice.com.