Written by Norman Isaac Mwambazi

U.S. economy needs estimated $4.5 trillion in stimulus to recover, new analysis finds

The COVID-19 pandemic has affected all economies around the world from superpowers of the first world to the already struggling …

The COVID-19 pandemic has affected all economies around the world from superpowers of the first world to the already struggling third world countries. The deaths of hundreds of thousands of people, loss of millions of jobs, and businesses counting losses due to changed consumer behaviour have all harmed the global economy.

To prevent the economy from falling into a recess that would even make matters worse than they already are, numerous governments came up with fiscal measures to keep businesses afloat, keep as many people employed as possible, among others.

The U.S., in particular, passed a $2 trillion stimulus package in April this year that included $600 checks to individuals. In recent months, there have been negotiations and discussions of a second stimulus package between the House, Senate, and the White House but the fruits of such discussions are yet to materialise.

On December 1, 2020, a group of Republican and Democratic US lawmakers unveiled the long-awaited COVID-19 stimulus package worth $908 billion. This stimulus plan came after months of failed negotiations between the two major political parties.

Negotiations on this figure are still ongoing, with Democrats backing it, Republicans led by Majority Leader Mitch McConnell (R-KY) saying it should be reduced to $500 billion, and the White House proposing it should be increased to $916 billion. Congress quickly rejected the White House’s proposal.

The key issues legislators are negotiating on are liability provisions for companies amid the pandemic, aid for state governments, and stimulus checks.

Before the proposed $908 billion bipartisan proposal, the Democratic-controlled House endorsed The HEROES Act, which was worth $3.4 trillion, on October 1, but the GOP-controlled Senate rejected it, with McConnell calling it a “socialist manifesto.”

This ($908 billion) may look like a good figure, but a progressive economic think-tank known as Groundwork Collaborative says that the U.S. economy may need up to five times more money than what lawmakers proposed on December 1 for the economy to recover from the effects of the pandemic and return to pre-pandemic levels.

In their analysis of the current state of the economy, Groundwork Collaborative found that for American businesses and workers to work at their full potential, a stimulus package worth $3 trillion to $4.5 trillion would be required. This would also help the real unemployment rate to fall to 3.5%.

Mark Paul, who co-authored the analysis report said, “We need stimulus, and we need it fast. Every day that we wait, we risk disenfranchising more people from the economy. Every day that we wait, more people are facing evictions and falling behind on bills.”

Yahoo Finance reports that the political economist at the New College of Florida added, “Congress is debating a stimulus package right now that would leave our estimate of true unemployment still hovering around double digits. We have the tools to put the economy back on track. Unfortunately, Congress lacks the political will to act.”

Groundwork Collaborative bases its analysis on current unemployment rate estimates in November to be 13%. This is much higher than the official unemployment rate for November, which stands at 6.7%.

The analysis reads in part:

“Taking 3.5 per cent as the full employment level of unemployment and 13 per cent as a better estimate of actual unemployment gives an unemployment gap of 9.5 percentage points. Taking this gap together with an estimate of current GDP in November of nearly $21.3 trillion implies a potential GDP of more than $25.7 trillion, or an output gap of $4.5 trillion that fiscal policy needs to fill.”

That is how Groundwork Collaborative came to an estimate of between $3 trillion and $4.5 trillion that is required to foster full recovery of the economy.

Cost of going too small outweigh the cost of going too big

Whereas the proposed stimulus package is under a trillion dollars and the Republicans are looking at trimming it even further, Paul says that having a smaller stimulus package will be more costly than Congress passing a bigger stimulus package required by the economy.    

“The most frustrating aspect of this is that the macroeconomic policy community is essentially in full agreement that the costs of going too small on stimulus far outweigh the costs of going too big.

“The worst that can happen is we end up with some additional public parks or hand out a few extra dollars to low and middle-income Americans that haven’t seen a pay increase in a generation,” Paul said.

Jay Powell, the Chairman of the Federal Reserve Bank agrees with Paul, saying, “The risk of overdoing it is less than the risk of under-doing it. Fiscal support at this point will really move the economy along to guard against those downside risks.”

Too small today is better than no stimulus at all

The negotiations for a deal are going on in Congress with the White House involved. The urgency of the matter is well known by lawmakers, and Democratic Party’s Mark Warner from Virginia said, “It would be stupidity on steroids if Congress left for Christmas without doing an interim package as a bridge.”

In case a stimulus deal is not reached by the end of the year, up to 12 million Americans are expected to lose unemployment benefits coverage when two programs enacted under the CARES Act expire on December 26.

Source: Yahoo Finance.

The federal eviction moratorium, paid sick leave, aid to state and local governments, among other relief, also will lapse.

Paul says that a stimulus package that is too small today is better than no stimulus at all.