What a 'Phase Four' Stimulus Package Must Provide

In the last two weeks, nearly 10 million people applied for unemployment insurance. The March jobs report revealed a loss of 701,000 jobs--the first monthly job loss in nearly 10 years and already one of the worst monthly losses on record. Further, March's job loss numbers are just the tip of the iceberg, as they do not capture the entire month of March, but only refer to the payroll period containing March 12, before the shutdowns accelerated significantly.

How policymakers respond now will determine the level of pain working families experience and the speed at which the economy can get back on track after the shutdown period is over. The relief and recovery packages passed since the crisis began included many good measures, but they are still too little and some provisions in these packages represent policy missteps. More relief and recovery aid will certainly be needed.

The biggest misstep taken in the earlier relief and recovery packages was allocating so much of the aid to financial rescues of large firms with insufficient conditions to ensure that jobs and wages of workers were saved. Policymakers approved over $450 billion in direct fiscal aid to this effort, with more potentially forthcoming in subsidized loans from the Federal Reserve. Yet this aid (apart from the stronger stipulations for the airline industry) is largely not tied to preserving rank-and-file workers on payrolls.

Another large tranche of aid ($350 billion) was better targeted in preserving the payroll of small firms. But this aid will likely underperform in actually saving jobs because the administrative capacity of the Small Business Administration and banks servicing small and medium-sized firms are too poor to ensure the full amount of aid reaches employers and preserves payroll.

These two tranches of aid could have been bundled and made into more direct and better administered financial relief that hinged entirely on the willingness of employers to preserve workers on payroll with the federal government financing their pay during the shutdown. This would have allowed workers to remain in the jobs they held before the coronavirus shock, and this would have helped ensure a rapid economic recovery once the public health crisis had subsided.

Even given this initial misstep, however, the relief and recovery packages passed to fight the coronavirus shock have contained valuable provisions. Policymakers should now take additional steps to mitigate the disaster, including, but not limited to, directly tying any additional industry aid to preserving workers on payroll. Democratic leadership has made it clear that they are committed to working on another relief measure to address the economic impact of the pandemic. This bill must be passed quickly and must be sufficient in scope and magnitude to address the severity of the economic and public health crisis we are experiencing.

Any additional relief bill must:

Provide substantially more aid--and aid that is more open-ended--to state and local governments: So far, the aid provided to state and local governments in relief and recovery legislation has not been large enough and too much of it has required states to use it for direct coronavirus-related expenses. But the collapse of economic activity will cause a collapse in state and local revenues, even apart from demands for new spending imposed by the public health crisis. When the economy is ready to restart in a few months, state and local budget shortfalls will lead to large drags on recovery absent federal action. New aid should be at least $500 billion by the end of 2021 to avoid this drag on recovery.

Make additional investments in unemployment insurance (UI): The CARES Act included a $250 billion expansion of unemployment insurance, including an increase in the level of benefits and the creation of a Pandemic Unemployment Assistance (PUA) program that will be available to many workers who are not eligible for regular unemployment insurance. These provisions are very important and will help millions of people. However, the end dates of both the additional compensation and expanded eligibility criteria are arbitrary. The phase four bill must include triggers that allow the expanded UI programs to phase out slowly and only as economic conditions warrant. This is particularly pressing given that the additional $600 per week in PUA compensation expires at the end of July 2020. For reference, it should be noted that the Goldman Sachs macroeconomic forecasting team estimates that the national unemployment rate will average 14.7% in June, July, and August of 2020. This is almost 50% higher than it reached at its peak during the Great Financial Crisis of 2008-2010, and yet the additional UI compensation in the CARES Act is set to turn off automatically during this period. The expanded eligibility criteria in PUA turn off at the end of 2020. Yet Goldman Sachs estimates that unemployment in the first three months of 2021--after the expanded criteria expire--will average 8%, or well over double what unemployment averaged in the first three months of 2020.

Further, the PUA eligibility expansions still leave some workers falling through the cracks. This should be fixed by expanding eligibility to undocumented immigrants and new labor market entrants unable to find work. Finally, new money to help states quickly build up their UI system administrative capacity is crucial for ensuring the key elements of UI (like the ability to compensate workers for hours that have been cut due to the economic downturn) are used to maximum effect.

Disburse another direct cash payment: Even with expanded PUA, some households facing economic distress due to the coronavirus shock may fall through the cracks, and recovery may be delayed if households feel insecure about their financial situation. To help remedy this, the CARES Act provided for a one-time direct cash payment to the bottom 93% of U.S. tax units. But this cash payment is insufficient to carry all households through the relief period unscathed and to ensure a robust recovery once the all-clear sounds. Further, it is too restrictive about which households are eligible to receive it. Another direct cash payment should be provided, and it should be available to all income-eligible households regardless of tax filing or immigration status.

Provide full funding for testing, treatment, and front-line worker personal protective equipment (PPE): While substantial money for medical investments has been allocated in previous relief and recovery bills, an open-ended commitment by the federal government to fully fund any testing and treatment of coronavirus expenses should be made. Further, a similar commitment should be made to purchase and disburse PPE to front-line workers (including but not limited to health care workers).

Include strong worker protections: This crisis has revealed the lack of power far too many U.S. workers experience in the workplace. Many workers are required to work without protective equipment. They have no effective right to refuse dangerous assignments and are not even being granted hazard pay, despite working in difficult and dangerous conditions. Policymakers must include enhanced protections for all workers performing essential work during this crisis.

Beyond the next relief bill, a number of policymakers have indicated that infrastructure investments need to be made to promote economic recovery. There is some real economic sense in this, particularly in the service of ensuring that recovery in the year following the coronavirus shutdowns is rapid and broad-based.

However, to maximize effectiveness, the infrastructure investments need to meet the following criteria:

They should largely be deficit-financed. If policymakers want to shore up the long-run dedicated revenue source for the Highway Trust Fund (HTF) as part of an infrastructure package, that would be welcome. But for new infrastructure investments over and above the baseline HTF spending, the most sensible source of finance would be debt. Infrastructure spending is an investment that provides long-lived economic benefits--it is exactly the sort of spending that debt is meant for. Further, even before the coronavirus shock, ample evidence existed that a chronic shortfall of economywide spending relative to productive capacity was a restraint on economic growth. Financing infrastructure spending with debt is the best way to relieve this constraint.

The investments should be financed by public spending and be democratically accountable. Public investments should be directed toward priorities decided upon by democratically accountable policymakers, not private financial markets. In short, they should be financed with public money and not involve the use of private-public partnerships (PPPs), or they should use limited amounts of federal money to "leverage" private investment or money from state and local governments.

A substantial portion of the investments should be "green." A particular emphasis should be placed on investments that mitigate the emissions of greenhouse gases. Recent months have shown decisively that planning for future crises is hugely important. The crisis we all know is building is the climate crisis. We should get out in front of this crisis, unlike the coronavirus. Further, until an internationally harmonized increase in the price of greenhouse gas emissions is imposed, the private sector will radically underinvest in mitigating these emissions. Public investments do not have to wait for a price signal from private markets--they can be put to work right way in greenhouse gas mitigation.

Child care services should be considered infrastructure. These services provide future benefits by preparing children better for success in schooling, but also provide immediate benefits in boosting the labor market participation opportunities of parents (particularly women). Due to the public health requirements associated with "social distancing," child care providers have been profoundly damaged by the recent shutdowns. In the debate surrounding the CARES Act, some have suggested $50 billion in investment to aid child care providers. This funding was not included in the final act--but should be included in any phase four legislation.