President-elect Joe Biden’s $1.9 trillion stimulus plan announced last Thursday is both big and comprehensive, but direct payments could be better targeted to those in need, according to experts at Wharton.
Taken together with the $900 billion stimulus program that President Trump signed on December 27, the combined outlay is “a significant amount,” said Richard Prisinzano, director of policy analysis at the Penn Wharton Budget Model (PWBM), a nonpartisan, research-based think tank focused on analyzing the fiscal impact of public policy. The specific components of the Biden bill “are all good measures to get things moving again,” he added. Prisinzano shared his views on the Biden bill on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the podcast at the top of this page.)
Debate Over Direct Transfers
The most controversial feature of the latest bill relates to the direct cash transfer of $1,400 to each taxpayer. “[Direct transfers] are the most important because that’s the quickest dollars to people,” said Prisinzano. That will be on top of $600 the Treasury department began sending out in December, and $1,200 approved last March. Biden’s bill also increases weekly unemployment benefits from the $300 approved in December to $400 a week until September 2021. That would replace about 86% of lost wages for the average worker, according to a CNBC analysis of labor department data.
However, Wharton emeritus finance professor Richard Marston questions the targeting of direct transfers. “The $1,200 checks in the CARES Act made no sense last spring because they were not targeted towards those in need,” he said. “The December 2020 bill and the Biden proposal just perpetuate this bad public policy. Help the families who have lost employment or need child care or are otherwise adversely affected by the pandemic. Why send checks to those who are still getting their regular paychecks?”
Wharton finance professor Jeremy Siegel agrees. “I don’t know why people who are working and maintaining the income need to get another $1,400,” he said. “That could be better targeted, especially to businesses related to live events that have been totally shut down.”
“[Direct transfers] are the most important because that’s the quickest dollars to people.” –Richard Prisinzano
Wharton finance professor Nikolai Roussanov said that he would favor more targeted transfers, especially because the pandemic recession had “a very unequal impact” on different groups of people. “Those who can work remotely or whose jobs have become more ‘essential’ have accumulated savings, and giving them extra cash is not the most effective use of resources,” he said. “Those who are out of a job or have their hours reduced by lack of demand in retail, restaurants, travel, etc., could use the extra help. Similarly with proposals of student loan forgiveness — those are unnecessarily broad and should be more targeted, focusing on those who are struggling.”
Prisinzano highlighted as important two specific proposals in the bill that are aimed at providing relief to lower-income households: an increase in the child tax credit from $2,000 to $3,000 this year ($3,600 for a child under 6), and an expansion of the Earned Income Tax Credit for childless adults from $530 to $1,500. The child tax credit would be fully refundable for the 2021 tax year. These proposals are significant, Prisinzano said, because they allow low-income households to plan ahead, “knowing that they’ll get some of that money back.”
According to an analysis by Columbia University’s Center on Poverty and Social Policy, these tax policy changes along with the other components of Biden’s proposal, including the expansion of unemployment and SNAP benefits, could cut child poverty by half.
During his campaign, Biden prioritized reopening schools and called for those decisions to be “based on science and in consultation with communities and tribal governments.” Reopening schools will ease the pressure on households with two earners where one has dropped out of the workforce to take care of children at home.
Prisinzano noted that the bill’s allocation of $170 billion to facilitate schools’ reopening will “help … make sure the kids stay healthy and the teachers stay healthy.” He noted that school closures have impacted women the most, “because they tend to be the ones taking care of children at home.” Significantly, the Biden plan has allocated $25 billion to enable the hardest hit child-care centers to reopen and grants totaling $15 billion to help essential workers meet childcare costs.
“Children need schools to be open,” said Marston. “Vaccinate the teachers so that we can get our kids back in the classroom.” Added Roussanov: “Reopening schools is absolutely the right goal – besides helping parents, it is essential to minimize the damage to students’ learning, which is going to have an important effect on their future prospects and, potentially, economy-wide growth.”
How those plans to reopen schools pan out depends on the degree of success in the vaccine rollout, Prisinzano pointed out. The Biden plan calls for $415 billion to bolster the country’s response to the virus, including free vaccines, increased pharmaceutical production capacity, wider distribution, expanded testing and new awareness campaigns.
“Vaccinate the teachers so that we can get our kids back in the classroom.” –Richard Marston
“The pharmaceutical firms have performed miracles in developing the vaccines,” said Marston. “Let’s spend money to accelerate the production and distribution of these vaccines.”
While the focus on vaccine distribution is the central issue, funding will also be needed for research to investigate the vaccines’ effectiveness against the newer strains of the virus, said Roussanov. “Testing, too, will need to be expanded if schools are to open fully, since children are not getting vaccinated and a lot of the adults might not, either.”
Support for Small Business
The Biden plan continues the Paycheck Protection Program and has allocated more than $284 billion for loans to small businesses.
“Helping small businesses, especially those without employees, is a good idea, and indeed they were largely left out before,” said Roussanov. “The question is how this aid will be distributed. There were many issues with unequal access to PPP loans [under the CARES Act], and I worry that this will be similar.”
Also included is a proposal to provide $175 billion in low-interest loans to finance small businesses, and $15 billion in grants for small business employers, according to a Bloomberg Tax report.
The earlier $900 billion stimulus package of December included the Save our Stages Act, which allocated $15 billion in relief for live music and theater venues, independent movie theaters and other cultural institutions. A New York Times critic laid out a case for how the Biden administration could do more to support the arts industry, which has been among the hardest hit over the past nine months.
“There were many issues with unequal access to PPP loans [under the CARES Act], and I worry that this will be similar.” –Nikolai Roussanov
City and state governments will also get a lifeline in the Biden bill, with $350 billion in emergency aid allocated to help them buffer the impact of the pandemic on their revenues and budgets. States typically have some latitude in where they spend that money, and many may use it to pay employees, to expand their own unemployment insurance benefits, and on infrastructure for the vaccine rollout, said Prisinzano.
Congress and the Deficit
The Biden administration has two options to see its stimulus package through Congress, Prisinzano said. One is to shepherd it through the so-called reconciliation process, where it would need only a simple majority instead of securing 60 votes in the Senate. However, given the Biden administration’s stated goal to secure bipartisan support, it would try to muster the 60 votes, said Prisinzano, noting that going that route could involve some trade-offs. “They’ll need 10 Republicans to buy in. So it will be interesting to see, through that process, what gets dialed up or dialed down.”
According to Roussanov, the Biden plan “would add significantly to the deficit,” and the entire $1.9 trillion cost of the package is probably “a good approximation” of how much that might be. “The question is how it will impact the U.S. government’s cost of borrowing, and, in the longer run, inflation expectations.” He noted that long-term Treasury yields are now at record lows, and are in fact negative in real terms, in part due to the actions by the Federal Reserve — both traditional interest rate policy and quantitative easing. “The question is, how much new government debt can the markets — and the Fed — absorb, without raising [long-term Treasury yields] substantially?”
Prisinzano noted that future analyses by PWBM could look at how Biden’s proposal would impact the deficit. However, some economists suggest those worries should be placed on the back burner for the time being, according to The New York Times. Biden himself stated that although his plan is expensive, avoiding these measures will cost more in the long run. “The very health of our nation is at stake,” he said.
Learn more: Nikolai Roussanov teaches in Wharton Executive Education’s Wharton on the Markets, a 12-week speaker series designed to help you understand what to pay attention to, and plan for, in today’s unprecedented environment.