Investor Alert

Oct. 29, 2020, 12:02 p.m. EDT

Democrats push for generous state aid and jobless payments but data not as bad as expected

By Jonathan Nicholson

Throughout the failed fiscal stimulus talks of recent months in Washington, House Speaker Nancy Pelosi hammered home two demands – the need for more aid to states to pay “the heroes,” like health care workers, and top up state jobless benefit payments with federal add-ons.

But the data since the onset of the coronavirus pandemic in early 2020 have not borne out the worst fears on those fronts.

States have taken a sharp fiscal hit, but the strength of the economic rebound as business lockdowns were eased has helped their budgets partially recover. At the same time, the jobless rate has improved at faster pace than predicted even a few months ago.

Those improvements undermine the case for Democratic demands for generous state aid and unemployment add-on payments, some analysts say.

“It’s the same thing for state and local and unemployment,” said Marc Goldwein, senior vice president and senior policy director with the anti-deficit Committee for a Responsible Federal Budget. “Those needs have declined.”

Goldwein cautioned he still would like to see another fiscal stimulus package be passed to help support the economy, just that the needs in those two areas were less than had been expected.

Aid for state, local and tribal governments was a major stumbling block in negotiations between Pelosi and U.S. Treasury Secretary Steven Mnuchin on a sequel to March’s $1.7 trillion CARES Act.

Read more: Senate closes up shop after Supreme Court vote, ending hope for new pandemic relief before Nov. 3 election

The original House proposal passed in May provided $915 billion in direct aid to state and municipal governments. In the revised version of that bill, passed Oct. 1, that provision was cut to $436 billion.

That’s still way above $250 billion the administration offered and would be on top of the $150 billion in direct aid approved in March.

As for the labor market side, the Congressional Budget Office as recently as July projected the unemployment rate would be 10.5% in the fourth quarter and would only improve to 7.6% by the fourth quarter of 2021. Instead, the rate fell to 7.9% in September, a far faster drop than many had expected.

The decrease rekindled the debate among economists over how generous assistance to the unemployed should be. While the CARES Act passed in March included a $600 a week federal add-on to state jobless benefits, which can vary widely in amounts, some Republicans and the Trump administration said that level was too high and discouraged looking for work.

While some research showed those concerns were likely overblown when the jobless rate was higher, as the rate has fallen, concern has grown. Jason Furman, chairman of the Council of Economic Advisers under President Barack Obama, recently voiced his support for a $400 a week boost, “given the economy.”

Unlike the amount requested by House Democrats for state and local aid though, Democrats doubled down on the $600 a week add-on, including it in their revised $2.2 trillion Oct. 1 bill. The White House offered $400 a week, the same as Furman proposed, in August.

A Democratic leadership aide said recently the add-on issue was still unresolved, but the disagreement was over how long to extend the add-on payments, not their size.

Keith Hall, a former director of the Congressional Budget Office and former commissioner of the Bureau of Labor Statistics, said the official unemployment rate probably overstated the degree of improvement in the labor market, because of the number of people who have dropped out of the labor force and thus are not included in the calculations.

Still, he said the higher the add-on amount, the more likely it is to be a disincentive to hunt for a job especially as the job market recovers.

“This is something kind of different. This is not extending it, this is something that’s really quite a high unemployment insurance number,” he said.

At $600 a week, the add-on would result in some low-wage workers getting more from not working than in their old job.

“That’s probably a situation that you don’t want to have. Especially if the economy continues to improve, we’re going to want people to get back to work,” he said.

For states, the lockdown hit budgets hard but maybe not as hard as had been expected for revenues. Also, unlike in the 2007-2009 recession, states were more likely to have prepared by building up their so-called “rainy day” funds ahead of time.

According to the Pew Charitable Trusts, many states had more in cash on hand before the pandemic hit than they did before the 2007-2009 recession , giving them a bigger emergency cushion.

Much of that cash was in rainy day funds, which hit a record $75.2 billion in fiscal 2019, the last budget year before the pandemic hit. That allowed 10 states to tap those funds to close their budget gaps in the 2020 fiscal year that ended on June 30 for most states. Seven more states made withdrawals or planned to do so to prep for the pandemic, Pew said.

“One of the ways that we measure that I think is helpful is whether or not a state has more less funding available going into the pandemic compared to what they had available going into the Great Recession. When you look at it that way, you can see that 33 states had more funding available,” said Justin Theal, an officer at The Pew Charitable Trusts.

A Brookings Institution paper in September put tax revenues losses to states at $155 billion in 2020, well below the $436 billion bundle proposed by House Democrats and billed as “one year’s worth of assistance” to state, local, tribal and territorial governments.

The CRFB’s Goldwein noted the Democratic bill in May also included separate monies for education and Medicaid, two often big-ticket items in states’ budgets. Federal money that replaced state money used for those would also help shore up state budgets, he said.

There are reasons, though, to be wary of skimping on aid for states and the jobless. Theal noted states likely face a multi-year drop in revenues and extra expenses related to the coronavirus, not just a one-time hit.

“About three-quarters of states that have issued their updated revenue forecasts for the remainder of 2021, and most are projecting declines worse than what they experienced in 2020,” he said.

Brookings also estimated states will see revenues gaps of $167 billion and $145 billion in 2021 and 2022, respectively.

Furman, the former Obama White House economist, said states should get about $450 billion in aid, close to the Democrats’ state aid-only House figure. He arrived at that by taking the Brookings figure, subtracting money already approved in March and doubling what was left to account for increased COVID-19 state spending.

As for the jobless benefit, one argument is that the $600 a week , in addition to helping the unemployed, helps keep consumption from collapsing. U.S. retail sales rose 1.9% in September , more than analysts had been expecting and a fifth straight monthly gain. Economists worry those gains will be lost without continued new aid.

“Blocking more stimulus is not just cruel, it’s terrible economics. For example, the spending made possible by the extra $600 in UI was supporting millions of jobs. Letting the $600 expire means  cutting those jobs ,” wrote Heidi Shierholz, senior economist and director of policy at the liberal Economic Policy Institute in a recent blog post.

“Not providing stimulus in the form of aid to state and local governments will also  cost millions of jobs ,” she wrote.

After the Great Recession of 2008, many Democrats said the lesson to be learned was to err on the side of providing too much government support, as too little would leave the economy with a slow upward grind over several years.

Goldwein said that makes some sense, but the help has a decreasing rate of return eventually.

“Erring on the side of too much versus too little makes sense, but it doesn’t mean you double or triple what you need,” he said.

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