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

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By Jonathan Nicholson

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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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