Congress and the president are on the verge of enacting a third “stimulus” bill, costing taxpayers $1.9 trillion. The “American Rescue Plan” comes on the heels of a second “stimulus” passed in December, which cost about $1 trillion, and the first one in March that amounted to $2.2 trillion. But this latest enormous bill is about helping politicians, not about helping the country.
The bill’s first offense is that it will not stimulate the economy in a meaningful way — and will even negatively impact workers’ wages in the long run. Second, it does not qualify as aid because it plunges the US deeper in debt to provide checks to households with six-figure incomes. Third, the bill is a wet kiss to the Democratic Party and their special interest patrons. Americans will be hard-pressed to find a bigger bill with fewer redeeming qualities in recent history.
The packaging of it as a “stimulus” is the weakest rationale for the bill — which is no small feat. Keynesian economists argue for increased government purchases and transfers during economic downturns brought on by a fall in “aggregate demand”: spending. But the COVID-related downturn is not caused by a typical fall in spending that can be relieved by lots of transfers. It’s caused by a pandemic that prohibits people from working and spending on large swaths of the economy.
Leading left-of-center economists like former Clinton and Obama official Larry Summers understand this and have criticized the bill. The roughly $900 billion for transfer payments will not be forcefully spent, because people are not yet willing or permitted to spend a significant fraction of their income on travel and leisure. That’s one reason the Penn Wharton Budget Model estimates the fiscal multiplier — that is, the economic “bang for the buck” — for this proposal is very low. If the bill were meant to be stimulative amidst COVID, there should be a lot more infrastructure spending to generate economic growth.
Putting as many people back to work as possible is key to recovery, alleviating poverty and increasing long-term wages. Fortunately, the unemployment rate has already halved from its peak. But, as economist Kyle Pomerleau has pointed out, the bill will reduce work by imposing marginal tax rates over 100 percent on many workers. In other words, for every additional dollar of wages that a worker earns, he or she is at risk of losing more than a dollar in taxes and government payments.
According to economist Casey Mulligan, the full package of transfer payments in the bill would eclipse the incomes of 85 percent of Americans. Households with unemployed adults could take in more in state and federal benefits under this bill than they would take home on a market income above $100,000.
That will put many people in a very difficult situation when they have to decide whether it’s a good idea to return to available work and stunt the economic recovery for everyone.
The enormous increase in debt will also crowd out valuable economic investments. Capital that should go to investing in factories, equipment and technology that would raise worker productivity will instead go to buy government debt. That’s why the Penn Wharton model projects the proposal will reduce worker wages for years into the future.
Nor is this bill a relief bill. If it were, they wouldn’t be sending $2,800 to childless households with $150,000 in income. Already, the average American’s income reached a record high in 2020 due to two COVID bills and a resilient economy. Personal income is now 13 percent higher than a year ago. Despite that, Americans spent 3 percent less in the fourth quarter of 2020 compared to a year prior. Yet, the largest portion of the bill is mortgaging their future in order to cut checks for upper-middle-income people.
At the same time, several million Americans are still unemployed or underemployed due to the pandemic and public health restrictions. They need our help. The bill should focus aid on topping off, extending or improving the benefits created in the first two relief bills on the workers and small businesses most adversely affected. Yet less than a fifth of the bill could be considered highly means-tested and targeted at those worst affected.
To add insult to injury, the extreme and excessive borrowing will destroy future jobs and wages. Some relief.
The two groups the bill clearly benefits are Democrat-controlled state governments and their chief benefactor, government employee unions. The second-costliest section of the bill is transfers to state and local governments amounting to $350 billion, or 116 times more than the entire revenue shortfall for all state governments. Due to the increases in personal income, state revenues barely changed in 2020, falling less than 0.2 percent. Spendthrift Democrats on the state level are being given license to indulge.
State aid is allocated disproportionately to states with higher unemployment rates, which would seem reasonable if job loss was random across the country. In fact, blue states are experiencing much higher unemployment because of policy decisions they’ve actively chosen. Each of the 10 states with the highest unemployment have unitary Democrat state governments.
The bill allocates an additional $130 billion for spending on K-12 schools, presumably mostly for COVID mitigation and reopening. However, those schools still haven’t spent more than $10 billion of $63 billion allocated for school reopening going back to the CARES Act in March. And if you needed more evidence this provision is a sleight of hand, half of it will not be spent until 2024 to 2028.
The American Rescue Plan makes Washington Democrats look busy while satisfying profligate state politicians and their special interests. The middle class in America will be left holding the bag. The bill is $1.9 trillion of new debt with practically zero justification that will make American workers poorer for decades to come. Hopefully, the president or Senate will stop it before they make a historic mistake.
Ryan Fazio was a GOP candidate for CT state senate in 2020.