BERKELEY – November brought welcome news from Pfizer, Moderna, and AstraZeneca, each of which is reporting high levels of effectiveness for its COVID-19 vaccine. Hopes that vaccine distribution will begin by early December have pushed stock-market indexes to near-record levels. But the stock market does not necessarily reflect the Main Street economy. Without additional fiscal stimulus, the partial, uneven, faltering economic recovery now underway is in serious danger. With the long-feared winter wave of COVID-19 now upon us, and with unemployment rising, we are witnessing what has aptly been described as “the most unequal recession in modern US history.”
Owing to record-shattering fiscal and monetary stimulus earlier in the year, the economic recovery initially progressed faster than expected. But overall economic activity and employment remain well below pre-pandemic levels, and as key components of fiscal stimulus expire amid the latest epidemic wave, the recovery is losing momentum. Without legislative action, crucial stimulus policies – Pandemic Emergency Unemployment Compensation and Extended Benefits, Pandemic Unemployment Assistance, the national eviction moratorium, and forbearance on federal student loans – will expire by the end of December.
Moreover, many cities and states that are already facing historic budget shortfalls now must re-impose restrictions on economic activity in response to the latest surge in COVID-19 cases. Because state governments are constrained by balanced-budget laws, the end of federal fiscal support could not come at a worse time.
To shore up the faltering recovery, Congress urgently must pass a new fiscal stimulus package that includes support for the unemployed and adversely affected workers, state and local governments facing major budget shortfalls, and small businesses on the brink of bankruptcy. And in the longer term, the US will need additional funding and new programs to help permanently displaced workers (who already number around four million) navigate the transition to new jobs and sectors.
The first priority, though, is to restore unemployment benefits and extend the window of eligibility for those who have been put out of work by the pandemic. Unemployment insurance is one of the most powerful countercyclical tools available. By boosting consumption and aggregate demand, it can provide a strong tailwind for a recovery that needs all the help it can get. According to the US Bureau of Labor Statistics’ latest jobs report, 11.1 million people are currently unemployed – nearly double the pre-pandemic total, and not including the additional 13.9 million people who have left the labor force or experienced a cut in hours or pay. Overall, at least 15% of the workforce has been hit by the recession and the slowing recovery.
Beyond extending unemployment benefits and eligibility, a new fiscal stimulus package should include better-targeted direct cash payments to households. As a recent open letter by economists put it, this is one of the “quickest, most equitable, and most effective ways to get families and the economy back on track.”
Congress also needs to increase funding for the Supplemental Nutrition Assistance Program, the largest food assistance program for low-income Americans. The long lines at food banks around the country paint a bleak holiday picture for the 23% of households – and 27.5% of households with children – currently experiencing food insecurity and shortages.
Similarly, there is an urgent need for more affordable and flexible lending to small businesses before a fresh wave of bankruptcies crashes down on the economy. Already between January and November, the number of small businesses in operation fell by 29%, and small-business revenues declined by 32%. Small businesses are particularly exposed to the effects of renewed restrictions on gatherings and commerce. Small local retailers and hospitality businesses like restaurants were counting on a robust Christmas season to help offset a dreadful year. Now, the outlook heading into 2021 is increasingly grim.
Finally, it is incumbent on the federal government to provide more generous and flexible funding for state and local governments. Governors and mayors across the country are pleading for help ahead of a challenging winter. Most states and cities have exhausted rainy-day funds and are facing a collective shortfall of $400 billion or more, according to the most recent estimates.
Because most state and local governments cannot legally spend more than they receive in revenues, they need federal funds to cover their growing fiscal gaps. Without such support, they will have no choice but to raise taxes or cut essential services and employment in health, public safety, and education, as many are already doing. Either option will undermine the countercyclical effects of federal stimulus, thereby weakening the recovery.
Until now, emergency programs from the US Federal Reserve have been stabilizing municipal-securities markets and providing state and local governments with short-term loans to manage cash-flow pressures. But these measures rely on support from the US Department of the Treasury, and for no apparent reason other than spite, the outgoing Trump administration says it will end most of the Fed’s emergency lending facilities. In response, the Fed issued its own statement making clear that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” The Treasury should heed the Fed’s counsel.
As policymakers map out additional stimulus measures, they must remember that the crisis has fallen hardest on the most vulnerable, with women and workers of color suffering disproportionately. The California Policy Lab reports that more than 80% of black workers have sought unemployment benefits during the pandemic – a rate nearly twice the state average.
Despite significant funding gaps, California and many other states and cities are working on plans to ensure a more equitable, sustainable, and prosperous future once vaccines are deployed and the virus is contained. These governments can look forward to coordinating with the Biden administration as it pursues an ambitious policy platform to “build back better” in 2021. But Biden will not take office for almost two months, and the time for additional fiscal stimulus is right now. The longer Congress dithers, the greater the risk to the recovery, and the greater the pain for the millions of Americans least able to bear it.
Laura Tyson, former chair of the US President’s Council of Economic Advisers, is Professor of the Graduate School at the Haas School of Business and Chair of the Blum Center Board of Trustees at the University of California, Berkeley. Lenny Mendonca, Senior Partner Emeritus at McKinsey & Company, is a former chief economic and business adviser to Governor Gavin Newsom of California and chair of the California High-Speed Rail Authority.