A $1.9 Trillion Bill Having Very Little to Do With Stimulus or COVID Relief

Last week, President Biden signed the American Rescue Plan Act, which is the $1.9 trillion plan that purportedly is to provide pandemic-related relief. To be sure, Biden will claim this as a policy victory early in his presidential term. If we scrutinize that claim, we will see that this Act scantly has anything to do with actually providing economic stimulus or COVID-specific relief. The Peter G. Peterson Foundation provides a high-level summary (see below). Let's dig a little further into some of the finer points.

• Direct Payments ($411 billion). Included in the Act is a third round of direct payments to individuals making up to $75,000 annually (or couples up to $150,000). I asked in December as to whether we needed another round of economic stimulus payments. My answer is what it was then: "No!" The earlier checks issued in this pandemic had a low rate of return. Additionally, 25.9 percent of the money spent on this recession's checks was used for consumer spending. Direct payments in the Great Recession also proved inadequate in terms of boosting aggregate demand, which is the whole premise of stimulus under Keynesian economic theory. These poorly targeted payments will do very little to "stimulate" the economy.  
• Aid to State and Local Governments ($362 billion). When I criticized such aid last year, I made two main points. One is that such funds continue to reward fiscal mismanagement. The second is that past bailouts have created greater and more inefficient government spending. Let me throw another one into the mix: these local governments do not need it. The Tax Foundation found that the state and local aid is 116 times the states' revenue loss.
• Expansion of Unemployment Benefits ($203 billion). One the hand, it might seem nice to be not-so-dismissive of unemployment insurance (UI) benefits. After all, these benefits are better targeted than direct stimulus checks since the money goes to those in greater need. The UI system is already in place and does not have the same levels of fraud that direct payments do. At the same time, I pointed out an important criticism of UI benefits back in April, a criticism that applies even in these difficult times: the benefits offered are too generous. Relief in an economic context is meant to provide an ease or mitigation of financial suffering. Expanding the federal supplemental unemployment insurance from $300 to $400 per week goes well beyond that. Per a preliminary calculation from the American Action Forum, up to 50 percent of beneficiaries could make more on unemployment than working. As we saw in the Great Recession, lavish unemployment benefits only seek to delay economic recession because they disincentivize people from going back to work. After all, why work if you could make more not to work? With unemployment continuing to decline, the argument for such unemployment benefits diminishes. 
• Education Emergency Funds ($126 billion). The Act provides emergency funds to school districts to help with reopening. Here's the catch. According to the Congressional Budget Office, $6.5 billion in funds are to be allocated this fiscal year. Another way of putting it is that 95 percent of the funds are not to be allocated before October. This relief is supposedly to help reopen schools. Why isn't that money made immediately available? This lack of immediate spending on this line item is all the more perturbing given the costs of school closures. 
• Union Pension Bailout ($83 billion). On top of other non-relief measures, the Act includes $83 billion to bail out union pensions unconditionally (CBO). As the Heritage Foundation points out, issues with these multi-employer pension systems predated the pandemic. Aside from being irrelevant to pandemic relief, this bailout also has nothing to do with COVID relief or economic stimulus. 

Conclusion: If you want a more thorough analysis on the ridiculousness of this Act, you can read an analysis from the Cato Institute or from the American Action Forum. What I will say is that the Heritage Foundation is right: Any government spending in the name of stimulus or relief should be targeted and temporary. Yet none of the major provisions of the bill truly provide economic stimulus or relief from this pandemic. You know it's bad when Lawrence Summers, who was the Chairman of Obama's National Economic Council, expresses concern that such spending would likely backfire and cost us dearly. If President Biden and the Democratic Congress have succeeded at anything, it is exacerbating the federal debt situation which will only become more unmanageable over time.