Congress now has roughly one week to come to an agreement on a COVID relief package, a subject it has been debating since April. For most of that time, House Democrats insisted on a bill that had no chance of passing the Senate. Senate Republicans, meanwhile, struggled to find consensus on any proposal at all.
Fortunately, House Speaker Nancy Pelosi this past week finally abandoned her caucus’s bloated multi-trillion-dollar package in favor of a $908 billion proposal offered by a bipartisan group of senators. Republicans should take the deal.
It’s easy to understand why some are reluctant. First, the U.S. economy has bounced back from its collapse earlier this year faster than expected. Despite dire warnings to the contrary, household savings are in good shape and most (though not all) states have seen far less loss of revenue than expected.
And from a political standpoint, Republicans are being asked to spend almost a trillion dollars to buoy incoming President Joe Biden. It’s not a prospect they look forward to, though it’s worth noting they could have helped President Donald Trump’s re-election chances by approving a similar package last fall, as he asked them to, instead of passing a $500 billion package.
Regardless, the simple fact of the matter is that with a vaccine on the way, failure to act decisively now would put millions of jobs and thousands of small businesses at risk. Before the pandemic hit, the U.S. economy was experiencing nearly unprecedented success. After decades of disappointment and stagnation, living standards were finally rising for working Americans.
A few months ago, when Americans were grappling with the possibility of several rounds of lockdowns, it made sense to be pessimistic that the U.S. economy would return to its pre-pandemic levels anytime soon. Now, however, it’s not only likely that the pandemic will be conquered by the middle of next year. It’s also conceivable that the economy could make up all of its lost ground by early 2022.
The possibility of a full rebound exists only because last March’s legislation prevented lasting damage to businesses and workers incapacitated by the pandemic. And a strong recovery will remain a possibility only if Congress extends that same level of protection for the next several months.
Nonetheless, some senators may be worried that piling on more debt now means higher taxes and a weaker economy later. The opposite is likely to be true. Slow growth is self-reinforcing. Businesses that go under may take years to be rebuilt, depressing both employment and tax revenues through 2022 and beyond. States that have seen budget shortfalls are just as likely to reach for tax increases as spending cuts, further slowing down growth.
Republicans might worry that any state bailout, no matter how well-intentioned, will reinforce the idea that the best way for governors and state legislators to deal with their problems is simply to wait until a crisis occurs and then come running to the federal government.
That would have been a valid fear had Congress approved the trillion-dollar giveaway that Democrats were advocating over the summer. The funding for state and local government in the bipartisan deal is far more modest, however, and moral hazard can be further reduced by allocating the money based solely on state unemployment rates rather the complex formula envisioned in the House bill.
In the spring Republicans refused to uncritically accept apocalyptic forecasts used to sell that House bill, insisting that aid be based on real-world data. That was prudent. Now the data is in — and it’s clear that more relief is needed.
The political case is equally compelling. A failure to return to the broadly shared prosperity of 2018 and 2019 could increase demands for the Trump tax cuts to be repealed and for new taxes to be levied on businesses and entrepreneurs. If that happens, it will further slow wage growth, and voters may see it as confirmation that the economy is rigged against them — and that ever greater redistribution is the only way to support struggling families.
Do Republicans really want that? Far better to have a virtuous cycle of rapid business expansion and rising working-class incomes that puts America back on its feet and restores faith in the economy.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
