President Biden’s $1.9 trillion coronavirus recovery package is projected to boost GDP by 0.6% in 2021 but will contribute to a decline in output in the following years and a dip in hourly wages, according to a report from the University of Pennsylvania’s Penn Wharton Budget Model.
The PWBM said that Biden’s proposal suffers from both the amount of debt necessary to finance such a large proposal — the aid is projected to increase the government debt by more than 7% by 2022 — and the package’s timing.
“Unlike the 2020 CARES Act, which was enacted to provide stimulus in relief during a period when output was well below potential, the 2021 Biden plan would provide stimulus in a period in which the economy is closer to its potential output,” the report reads.
“Our goal is to show the tradeoffs associated with any proposal,” Richard Prisinzano, PWBM’s director of policy analysis, told the Washington Examiner. “In this context, that tradeoff is an increase in GDP in the near term versus a slight decrease in GDP due to extra debt in the longer run. The Biden administration has proposed tax increases that would ease the burden of the extra debt, but those have not been discussed in the context of this relief package.”
The debt propping up the relief proposal would take a roughly 0.6% chunk out of available productive capital, according to the report. That translates to a “decline in output per worker” and a roughly 0.2% decline in hourly wages by 2022, with gradual wage losses projected to continue to 2040.
It remains to be seen how those projections would be altered if Congress passes Biden’s proposal to increase the minimum wage to $15 an hour.
The report noted the “peculiar characteristics of this recession” compared to past recessions. The number of restaurants grew during the 2008 financial crisis and continued to grow through the recovery. By 2018, the industry had grown more than 16%, offering low-wage jobs to college graduates and workers who had been laid off in other sectors.
However, this recession has hit restaurants and the leisure industry the hardest. The restaurant industry lost more than 370,000 jobs in December alone. From February through December, the leisure and hospitality industry shed nearly 4 million jobs, about 23% of its workforce.
“Most sectors of the economy now appear to be operating at near pre-recession levels,” the report continues. “Affected sectors, on the other hand, are limited in recovery due to pandemic behaviors and policy restrictions which affect both consumption and production.”
The report found that Biden’s proposal to increase and extend unemployment insurance would yield the strongest boost to the gross domestic product, followed by aid for state and local governments. Other initiatives, including expanding the country’s COVID-19 vaccination program, yielded modest boosts on output but are largely viewed as a vital piece of returning to pre-pandemic economic activity.
