A Phase-Four Flop The latest proposals have everything but a growth agenda.
https://www.wsj.com/articles/a-phase-four-flop-11595547924?mod=opinion_lead_pos1
As Washington debates how many more trillions of dollars to borrow and spend, we are in a familiar political spot. Democrats want to spend as much as they can on everything, while Republicans have no idea what they want. Guess how this is likely to turn out?
Democrats are united behind the $3 trillion Heroes Act that passed the House in May. This is on top of the nearly $3 trillion that Congress has already passed. Much of the latter hasn’t even been spent so far. But we are told Congress must double that amount or the economy will fall off a cliff on Aug. 1 when extra federal jobless benefits expire.
Yet the economy is recovering, albeit from a deep second quarter hole. The rapid jobs rebound of May and June has slowed as the virus swept through the South and West, and partial business shutdowns have resumed. But the economic free fall of the spring is over. The Federal Reserve’s financial backstops have reduced what some feared would be a surge of bankruptcies. All signs are that if the virus can be better contained, the economy can continue to recover through the end of the year.
In any case there’s almost nothing in the “phase four” proposals that would spur faster growth. The Senate GOP’s draft proposals contain Covid-specific liability protection for businesses that reopen. That would help, assuming it isn’t watered down in negotiations with Democrats. More money for testing and health care is arguably pro-growth if it helps Americans feel more secure in returning to work and school. That’s about it on the supply-side.
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The rest of the GOP proposal is a $1 trillion spending bonanza on all and sundry. Public schools would get tens of billions whether they reopen or not. The White House on Thursday dropped its support for a payroll tax cut, which would have reduced the cost of hiring.
Instead the GOP wants another round of payments to individuals like the previous $1,200 checks. This is hugely expensive but does nothing for growth. The savings rate is already above 20% and most consumers have money. What they need is the economic confidence to spend it, which means the sense that the economy is growing and businesses are hiring again.
The worst idea is to extend the federal unemployment bonus for several more months. The GOP at least wants to cut the bonus from the current $600 a week that pays millions of workers more to stay at home. But the GOP draft still refers to a formula that could pay workers up to 100% of what they make by working.
This is a good way to keep the U.S. jobless rate above 8% or higher going into the election. The smarter policy is to revert to the normal jobless-benefit formula run by states that offers workers a safety net. The feds can extend the duration of the benefits for people who can’t find jobs easily. But paying people as much not to work and expecting more employment is a form of economic insanity.
Nearly all of this spending is a form of income maintenance, replacing private incomes with government payments. The goal is to keep the public feeling good about the politicians who are writing the checks. But the good feeling will expire when the money runs out, and then people will want either more checks or a stronger economy that is creating private jobs. Even the U.S. can’t borrow forever to replace the incomes lost from a buoyant economy.
This $1 trillion GOP offer comes before they even sit down to negotiate with Democrats. It includes no money for state and local governments, but Speaker Nancy Pelosi will demand hundreds of billions. By the time this is over, the bill is likely to be closer to $2 trillion. Democrats will be happy, but we have our doubts that conservative voters will feel the same.
The larger problem here is that Republicans in the age of Donald Trump don’t know what they stand for on economics. Treasury Secretary Steven Mnuchin is a Keynesian whose idea of compromise is half of whatever Mrs. Pelosi wants. And Mrs. Pelosi’s bill is essentially a down payment on her election agenda. She’ll take what she can get now and campaign on the rest and more.
Republicans have no discernible economic agenda beyond paying people to feel better during the pandemic. They need to offer voters alternative policies that would return the economy in 2021 to its pre-Covid prosperity. That should be their phase-four offer. If Democrats reject it, as they probably would, then take it to the voters. As of now Republicans are running as Pelosi Lite.
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