Stimulus and the economy: When have we done enough? 


January 27, 2021

Congress will soon be thick in the debate over whether to pass President Biden’s $1.9 trillion COVID-19 relief package, known as the American Rescue Planor something like it, or something smaller. 

Opponents are fearful of the size of the package – and let us be clear: $1.9 trillion is a lot of money. 

But proponents of aggressive stimulus say that is precisely the point. We must go big – or our economic recovery will be far slower than it needs to be. And as we’ve experienced in the past, those with the lowest incomes – disproportionately people of color, families with children, and people with disabilities – will have to wait the longest to see an upturn.  

These proponents include Claudia Sahm, a former Section Chief in the Division of Consumer and Community Affairs at the Federal Reserve. Sahm is the author of the Sahm Rule,” which advocates automatically distributing lump-sum stimulus payments to the vast majority of Americans when the first signs of a recession are emerging. 

$1.9 trillion is a lot of money. But we will lose more if we don’t make the investment.

In a recent op-ed published by the New York TimesSahm argued that those who are concerned over how much Biden’s proposal would cost might be asking the wrong question. 

“Many lawmakers seem to be asking ‘How much is enough?’ while ‘When have we done enough?’ is the better question,” Sahm writes. “When those 10 million jobs still missing are back, when the half of families who have lost income from work are made whole and when those who had to leave their jobs because of extra parenting burdens begin to return – that’s when relief should turn off.” 

Back in December, Congress extended much-needed unemployment assistance – but only till March. It extended a moratorium on evictions – but only through February. It expanded SNAP benefits — but only till June. This kick-the-can-down-the-road approach, while moderately helpful, is a bit like trying to extinguish a house fire with a water sprinkler when what one really needs is a fire hose. 

Cartoon by Robert Neubecker (NYT)

“Rather than setting an arbitrary expiration date and banking on yet another 11th-hour scramble for more relief, Congress could base its policy on how people and businesses are doing, not on the passage of time,” Sahm writes. “In policy circles, such tools are known as ‘automatic stabilizers.’ They’re quite simple: If the economy comes roaring back, then the stabilizers put in place turn off; if it takes longer to recover, they stay on.” 

There is recent precedent to support Sahm’s argument – and it is precedent that Biden knows well. He was involved in negotiations over the $787 billion stimulus bill President Obama signed shortly after taking office in February 2009 in the midst of the financial meltdown, Many Democrats wanted a larger package at the time, but Republicans balked; subsequently, many economists have concluded that a larger stimulus bill would have helped the nation climb out of the Great Recession more quickly. 

Last week, during a confirmation hearing for Secretary of Treasury Janet Yellen (who was confirmed this past Monday), Sen. Ron Wyden (D-OR) used his allotted time for questions to plug legislation he filed in May that calls for automatic stabilizers. (Wyden is now chair of the Senate Finance Committee.) Yellen herself endorsed such a concept last summer. 

“The next coronavirus response relief package must include economic triggers so that programs like unemployment insurance run on auto-pilot for the duration of this crisis,” Wyden said in a news release announcing the legislation. “Both the extension and expansion of benefits would be tied to a state’s unemployment rate and phase down gradually. 

Similar legislation is pending in the House and, interestingly, has been sponsored by a number of moderate Democrats. Sahm and other economists have been working with members of Congress for more than a year now to identify what economic indicators to use when it comes to triggers – is it the unemployment rate? Work force participation? Inflation? — and to identify when to start and when to phase out the extra support. 

For her part, Sahm advocates sending direct checks to all families except high-income households now and repeating this on a monthly or quarterly basis until the economy recovers. 

“If another relief package fails to provide households and businesses consistent, predictable support soon, we’ll be doomed to repeat the inefficient, cruel and unorganized cycle of last-minute partisan fights over aid,” she concludes. “Americans deserve more relief; they deserve the peace of mind of knowing that relief will continue as long as they need it.”