This upcoming COVID-19 fiscal relief package will likely be the last one Congress passes before the election, so it’s important lawmakers get it right. The size and the shape of the package should not be pulled out of thin air or based on political wish lists, but rather designed to meet the needs of this crisis. While there is still a lot of uncertainty about how much more time and resources it will take to fight the virus and recession, lawmakers have a lot more economic data than they did in March to target those resources efficiently.
Current projections are that the economic output gap due to the recession will be about $750 billion over the next six months. Looking out two years, the output gap could total $2 trillion — though the longer one looks out, the more uncertainty there is.
Thus, the right starting point is to decide how much of that gap to fill in, over what time period, and how best to do so, rather than starting a political bidding war with lawmakers trying to outdo each other with how much they can spend.
The next step is to determine the most pressing needs and most effective policies. One thing to consider is that every dollar wisely invested in mitigating the effects and spread of the pandemic, and finding a cure is potentially more effective than anything else would be. So if there are COVID-19-related healthcare needs, they should be met, including better and more testing, contact tracing, and vaccine development.
For individuals, despite the economic contraction, we’ve managed to avoid a drop in incomes — in fact, incomes are up 5% to 7%. This is in large part due to expansion of unemployment benefits and distribution of Economic Impact Payments. While the current additional $600 per week unemployment insurance benefit isn’t sustainable or advisable in the long-term, without some form of extension or new round of direct payments, incomes will fall substantially in August and further damage the economy. It is possible to use those dollars elsewhere, but they shouldn’t be abruptly pulled from the economy.
We also need to ensure productive businesses are able to stay afloat and pay their employees. The Paycheck Protection Program helped boost small business liquidity, but these companies face a similar income cliff in the next few weeks. Finally, and importantly, we should fill in state and local budget gaps to avoid widespread layoffs or cuts in services that counteract efforts to boost the economy. Tying this aid to some reforms in how states budget would certainly be reasonable as well.
Here is what we should not do: We should not litter any package with political handouts that aren’t targeted to helping the immediate situation.
No, we should not repeal the $10,000 cap on the state and local tax deduction — one of the strongest features of the 2017 tax law. Its repeal would mean sending millionaire families $50,000 per year, compared to about $10 per year for a more typical household.
We should not give tax credits that encourage risky behavior such as eating in restaurants or traveling. Nor should we cut capital gains taxes, which would mistarget resources to the wrong parts of the economy.
And we should not expand Social Security benefits for seniors who didn’t even experience job loss and have actually seen their portfolios return back to normal.
Fighting the pandemic and supporting those harmed by the resulting recession are the top priorities. But we also can’t ignore that our national debt is set to reach 100% of the economy in a matter of moments. We should not be foolish in how we deploy these resources. So let’s be sure to think about what the economy, not the politicians, need as we finalize the details of the next economic package.
Maya MacGuineas (@MayaMacGuineas) is the president of the Committee for a Responsible Federal Budget.
