Experts: Stimulus Will Bring Fast Relief After Worst Year For Job Loss Since 1930s
Times (Munster, IN)
Mar. 21—The $1.9 trillion coronavirus relief bill will result in aid for most Americans and for businesses, restaurants, schools, local governments and others hit hard by the ongoing pandemic.
Professors from Northwest Indiana and across the state said the influx of cash likely will offer immediate relief and needed stimulus for the economy, helping struggling families, anxious small business owners and cash-strapped local governments. But they had questions, such as how some of the money would ultimately be spent, if it's targeted to those most in need, and if some people could be disincentivized from returning to the workforce.
Only about 9% of the funding — or between $123 billion and $160 billion — will go to virus prevention measures such as COVID-19 testing, vaccine production and distribution, said Kevin Mumford, associate professor of economics in Purdue University's Krannert School of Business and the Kozuch Director of the Purdue University Research Center in Economics.
"Most of the rest of the $1.9 trillion is going toward things that I would broadly characterize as responding to the recession caused by the pandemic, not addressing the virus itself," Mumford said. "That includes $410 billion in direct stimulus payments, $350 billion in expanded unemployment insurance benefits, $170 billion to schools, $110 billion to expanding the child tax credit, $60 billion to small businesses, etc."
Congress has already approved coronavirus relief bills of $1.7 trillion in March and $915 billion in December, as well as other legislation in response to COVID-19.
"Not all of that money will be spent," Mumford said. "The money designated for one specific purpose might be more than is needed because they overestimated, while money designated for another specific purpose might be too little, and yet the rules say that they cannot move money from one purpose to another without new congressional action. So, in areas where they overestimated the cost — which often happens — not all the money will be spent. An example of this is that we actually had fewer unemployment insurance claims paid out than we thought there would be and so the money designated for unemployment insurance in the first two stimulus packages has not all been spent."
Mumford said he's sympathetic to views that the stimulus package is coming too late in the pandemic, the overall amount is too high, and the relief could be more targeted to those who need it most.
"My own view is that while there are things that I don't like about this new stimulus package, I think it provides positive net benefits," he said. "The costs of borrowing are very low and the benefit from stimulus is still high. While not a popular opinion, I believe that the direct payments are the least effective major provision of this package."
Help for struggling households
The coronavirus relief bill includes a child tax credit that is supposed to cut child poverty by more than half, $300 a week in extended unemployment, $28.6 billion for restaurants and $7.25 billion for the Paycheck Protection Program.
"This relief package targets benefits directly to those households, businesses and industries that have suffered economically the worst," said Micah Pollak, an assistant professor of economics at Indiana University Northwest."It will likely have an immediate and significant effect for struggling households and the wider economy of Northwest Indiana as well as play an important role in helping to jump-start economic recovery."
Every American who earns less than $75,000 a year is getting a direct payment of $1,400, as well as $1,400 for each dependent child. That would mean $5,600 for a family of four.
"That is a significant amount, especially for a family where one or more adults may have lost their job," Pollak said. "It is difficult to say whether it is enough, but it will certainly help. For many households this will likely be used to cover the cost of necessities like food, child care, rent and health care."
Unemployment in the Region spiked at 19.4% in April near the onset of the pandemic, shattering the previous record of 12% during the Great Recession. While joblessness in Northwest Indiana has been declining as the pandemic has dragged on, it remains relatively high, Pollak said.
"The unemployment rate has dropped back down to 6.6%, but this is still the highest rate for January in the last five years," he said. "In addition, as many people face discouragement and challenges associated with long-term unemployment, they have been dropping out of the labor force, which makes the unemployment appear lower than it truly is."
The extra income households will get from the direct stimulus checks and the enhanced unemployment should benefit businesses throughout the community, he said.
"Most consumer spending occurs within the community in which the consumer lives at places like grocery stores, gas stations and restaurants," Pollak said. "Many of these dollars will be spent at local businesses, which, in turn, will help support these businesses. Even for households that have found ways to survive financially until now, this stimulus will increase disposable income and allow households to make purchases they may have otherwise put off or managed to do without."
The legislation also is likely to address the persistent problem of child poverty that has worsened during the pandemic and prevent children from getting infected by the virus, Pollak said.
"While improvements at local schools, like better ventilation and smaller class sizes, will take time and may not be in place until the fall, that may be precisely when they are needed the most. Kids under the age of 16 are not yet eligible for vaccination for COVID-19 and may not be until after classes begin in the fall," Pollak said. "These improvements may help limit or even prevent the spread of the virus in the fall, especially if few school-aged kids are vaccinated at that point."
Schools also need the funding because of projected revenue shortfalls, said Subir Bandyopadhyay, a professor of marketing at Indiana University Northwest.
"I believe a substantial amount of the stimulus money is allocated for the K-12 schools and public universities," he said. "Given the expected low enrollment in local universities and colleges this fall, the stimulus money will be very helpful in mitigating the shortfall from tuition fees."
While local governments also face the prospect of diminished revenue, many do not yet have specific plans for how to spend the money, Bandyopadhyay said. He believes the stimulus checks may have more of an impact as they could circulate through the economy right away.
"The situation may be similar to the implementation plans for the Obama stimulus plan — there were not many worthwhile 'shovel-ready' projects," he said.
Bandyopadhyay anticipates the individual stimulus payments will mostly used for basic needs like rent, utility and other outstanding bills.
"It will benefit the local economy if people use the money for outstanding home and auto repairs, buying consumer durables and dining out," he said.
'The Great Subtraction'
The coronavirus relief package will have many beneficiaries, including people and families who suffered employment or income losses because of shutdowns or capacity restrictions, small business owners, local governments hit hard by reduced revenues, and public schools that will be in a better financial position to reopen sooner and more safely, said Anthony B. Sindone, a forensic economist and clinical associate professor of finance and economic development at Purdue University Northwest.
"The $1,400 will all be spent by those at the lower end of the income scale, obviously. As we move up income levels, we will see less spending as a percentage of their income," Sindone said. "We have evidence that during that last relief package, higher-income earners who have not been negatively impacted by the COVID shutdowns had either paid down their debts or had saved a larger portion of the so-called stimulus check."
The $300 a week in unemployment benefits will help struggling families but could hurt businesses looking to fill vacancies, Sindone said, by providing a disincentive to some potential workers by increasing their "reservation wage" — "the level of wages that the prospective employee must receive to induce them to work for a particular employer."
"However, for those who cannot work, the $300 will provide some temporary relief until the labor market approaches something close to the pre-covid conditions," Sindone said.
While unemployment spiked extremely high during the pandemic, it's partly because more people dropped out of the workforce, he added.
"The labor force participation rate has dropped off precipitously," Sindone said. At 64% before the pandemic, by April to July last year, it dropped to 61%.
"Much of this could be attributed to the discouraged worker effect as well as our voluntary shutdowns during this time," Sindone said. "I call this time 'The Great Subtraction.' It was a self-imposed removal of economic activity. Thus a subtraction."
Another concern is that the stimulus package could result in inflation, Sindone said.
"If productivity comes from the stimulus, then there might be little to fear with respect to inflation. However, if this spending does not create the production policymakers are counting on, then we might see the spending power of dollars to be reduced due to inflation," he said. "Again, let us revisit this question in the fall. It will take that long for the ripple effects to be noticed on the marketplace."
The economy has been recovering but it will take time, Sindone said.
"As we approach the second quarter of 2021, we are seeing signs of recovery, albeit a slow recovery. We continue to see some discouraged workers and reluctant business owners from reentering the market until our society feels some level higher level of safety," he said. "As more people get vaccinated, we will see more opening of our economy. It will take at least another two quarters for us to observe an economy that will resemble the pre-covid economy of 2019."
Long road to recovery
The February jobs report was the best since October but the national labor force has lost 9.2 million workers over the past 12 months, with 2020 marking the worst year of employment losses in the United States since the 1930s, said economist Michael Hicks, the director of the Center for Business and Economic Research at Ball State University.
"The pandemic continues to play havoc with the certainty of the data, but a few recent trends make clearer the path of the recovery," Hicks said. "As the disease wanes through vaccinations, employment lost in the leisure and hospitality sectors is recovering. To make clear the economic damage the nation has sustained, it will take a full 26 months at the current employment growth rate to get us back to February 2020 levels of employment.
"If job growth continues at the average rate of the past quarter, we will not return to February 2020 levels of employment until August of 2027. This does not account for an additional 6 million new workers who should enter the labor force by that time. So, this possible re-awakening of labor markets should be welcomed, but there is no evidence here to signal the economic damage of COVID is anywhere close to being fully recovered."
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