The Impact of COVID-19 on America’s Economy


The $2.2 trillion CARES Act stimulus package and historic unemployment rate during the coronavirus pandemic is placing a strain on our economy.

Rachel Greszler, research fellow in economics, budget, and entitlements at The Heritage Foundation, joins the podcast to explain the effects of record high unemployment on the economy and how Americans can successfully get back to work after COVID-19.

Greszler also shares the intended purpose of the Paycheck Protection Program and what Congress can do to resolve the program’s shortcomings.

Also on today’s show, we talk with Neal Harmon, co-founder of the family-friendly streaming service VidAngel, about the platform’s original series “The Chosen.”

Listen to the podcast below or read the lightly edited transcript.

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Virginia Allen: I am joined by Rachel Greszler, research fellow in economics, budget, and entitlements at The Heritage Foundation. Rachel, thanks so much for being here.

Rachel Greszler: My pleasure. Thanks for having me, Virginia.

Allen: Today we’re talking about our economy and what are some of those variables that we’re seeing right now in the economy and what some of those effects are of COVID-19.

Quite frankly, I really wish that this could be a cheerier conversation, but I’m really glad that you can join us today and share a little bit of your expertise on this subject and just give us a glimpse into America’s economy now and what it might look like in the future.

Let’s begin by talking about unemployment. You wrote in a recent article that unemployment rates are close to 20%. Twenty percent, that’s unbelievable. Just in the past four weeks, we’ve seen about 26 million Americans apply for unemployment benefits.

Now, the government’s response to these high numbers has been to not only provide the normal unemployment benefits to Americans, but also to give all recipients an additional $600 a week. What was the rationale behind, not only offering those unemployment benefits, but tacking on that additional $600?

Greszler: In a normal situation, the unemployment program, it doesn’t cover everybody. It doesn’t cover people like the self-employed or part-time workers or gig economy workers.

It also only provides about 50% of people’s previous earnings. You also have to be fired from a job. You can’t quit or choose to leave your job.

But under these unusual circumstances, when businesses were forced to shut their doors and workers lost their job, through no fault of their own, tens of millions of workers, Congress wanted to do something to bridge the gap in a better way so that we could give people a higher portion of their earnings so that they could maintain their living standard, pay their bills, and then be able to be ready to come back to work as soon as it’s safe to reopen businesses.

The goal there was to try and get people closer to what they had previously gotten from their paychecks, in the form of unemployment insurance check.

The problem there was, they just said, “Well, let’s do $600 for everybody because for somebody who makes about the average, this would help bring them up to 100%. But the reality is, a majority of Americans will be getting more from unemployment insurance than they would from their normal paycheck.

That creates a lot of bad incentives, including ones that go against the grain and are going to defeat the funds and the programs that Congress has set up, that do try to keep people employed.

Allen: Let’s talk more about that, because you wrote that the extra $600 a week could increase unemployment benefit claims by 13.9 million and reduce the nation’s output by up to $1.49 trillion between May and September. Can you just explain this domino effect a little bit more?

Greszler: Yes. My colleague Drew Gonshorowski and I have a report … and we use some modeling in the Center for Data Analysis to look at what the impact would be, considering that more people will file for unemployment insurance benefits because more people are eligible to obtain them and they will also tend to be on them for longer because they’re making a higher portion of their earnings than they otherwise would have.

So, we said, we see this as being really problematic and we want policymakers to know what the implications will be.

We ran it through our labor models and found that the total amount of unemployed could peak at about an extra 14 million people in about May, and that is a result of people not working and staying at home instead of coming back when they’re able to, otherwise, the output will decline by somewhere between $955 billion and $1.5 trillion between May and September.

We used a lot of economic research, elasticities, to model this, but we’re starting to see the real-world implications of it from businesses that are reporting that they’ve had to close their doors, even though they want to be able to stay open and provide things to people like first responders or maybe it’s restaurants that some of those states now … allowed to start reopening and they aren’t able to get their workers to come back because some of them might be making 50% more on unemployment than they would if they went back to work.

Even just for the median earner, they can make an extra $2,300 over four months of unemployment, compared to being employed.

This is particularly true for the lower you go down the income scale. Somebody who’s at about the 25th percentile of earnings would get an extra $5,000 over this four-month period that the additional benefits are available.

So, clearly, it’s in their financial incentive to not come back to work once their employer says, “We’d like to rehire you.” That’s going to create all sorts of problems in terms of not being able to get the economy going again, once it’s safe to do so.

Allen: Rachel, you’re saying that if, let’s say, I work as a receptionist, it may be an auto part shop or something like that, and I go to my employer and I say I feel unsafe working right now during the pandemic, then I can quit. But I can still, under the CARES Act, receive unemployment, the regular unemployment benefits, plus that $600, and probably be making even more than I would be making from my employer.

Greszler: That’s exactly right. Under this new eligibility criteria, it really is more in workers’ hands to decide whether or not they’re going to keep working or to file for unemployment insurance.

Say you’re that receptionist, maybe making $600 per week coming into the office. You would be making $900 per week from unemployment and those additional benefits are available until July 31, so there’s going to be a big incentive for people to not go back to work until at least July 31 and we certainly hope that Congress doesn’t extend those benefits beyond July 31.

Allen: What about the Paycheck Protection [Program]? Because my understanding of the Paycheck Protection [Program] was that it was really put in place in order to keep employees attached to their employer, so that now, employers could keep paying their staff and we wouldn’t end up in a situation where so many people were filing for unemployment.

Greszler: Yes, and that was exactly the goal of the Paycheck Protection Program.

It’d aimed at smaller businesses, but it’s a resource for them to be able to keep all their workers on their paychecks, even if they’re not actually coming into work or maybe they’re only doing a few hours from home, to keep those connections so that workers don’t lose their health insurance, and that when it’s able to get things up and running again, everybody will be in place and able to resume more quickly.

But the problem is that these are competing with one another now. We’ve heard cases of a spa owner in Washington State, who went out and got a Paycheck Protection Program loan and she was announcing it to all of her employees on one of these Zoom calls and they got angry with her and they thought that she was taking something away from them by wanting them to remain employed and get their usual paychecks because they could have gotten more from unemployment insurance.

Similarly, a wood mill in Arkansas, they polled their workers and said, “Would you rather keep coming into work and keep your paychecks or do you want the unemployment insurance?” Because they had already heard from among the ranks that a lot of people didn’t really want to keep working.

They decided that they were going to lay off half of the people at one of those plants because they didn’t want to have that animosity in the workplace of people thinking, “I’d rather be at home and collecting these benefits.”

Allen: What should Congress have done differently? How could the Paycheck Protection [Program] been implemented in a way that it actually really was helping small businesses instead of hurting them?

Greszler: It was really an easy fix, and this was something that a group of senators provided an amendment for that just would have said the total amount of unemployment benefits … cannot exceed what you were previously getting in your paycheck.

This is very commonsense, but there was pushback against that.

Some people said it would make it harder to implement, but the reality is, the states already have formulas, whether it’s 50% or whatever it is, and so to just say that that new formula is going to be kept at 100% would not have been that much more administratively burdensome to implement.

It certainly would have helped prevent these situations where workers are being incentivized to quit.

Employers are being incentivized to lay workers off, instead of go through the application process of getting a loan, which were difficult to do and I know the money did run out there at one point. It’s an easy fix and, hopefully, Congress will still be looking at this and consider putting that fix into place.

Allen: Let’s talk about the long-term economic impacts from COVID-19—and these were really generous unemployment benefits.

Let’s say we get to July or August and businesses across America are given the green light to reopen. Are you worried that businesses are going to face challenges of actually getting employees to come back to work and that it’s going to be really challenging to actually get Americans off of unemployment?

Greszler: I think it is, especially before July 31, when this additional $600 per week runs out and, unfortunately, it’s going to be hardest to get those people back in the industries that have been hardest hurt—like restaurants, hotels, tourism, and travel—because then these tend to be the lower-paid workers and they are the ones who take home the biggest benefit by this additional $600 per week coming through to them.

In some ways, we can’t fault them if they’re able to collect more money from unemployment and save that up. That makes sense for them individually. But it might not actually make sense in the long term.

Also because we know that the longer people are unemployed, the lower their opportunities and incomes are in the future. But also just in the short term, in terms of getting the economy going again and having us be productive and, in particular, being able to meet some of the needs.

We’ve already seen supply shortages in certain companies that are not able to deliver things or [make] what’s needed to be made as quickly as possible to meet the demands from COVID-19.

So that’s going to be an increasing fear going forward, especially as this is going to remain an issue into the fall flu season. We want to have the companies be prepared to be able to respond to COVD-19 in the ways that we need them to.

Allen: Yeah, and one of the other issues that we’re hearing a lot about in the news right now is state bailouts. There’s a great deal of controversy here. Is there a world where the federal government should consider baling some states out?

Greszler: Not a bailout. There’s definitely a role for the federal government to provide help for COVID-19-related expenses and we’ve already seen an unprecedented amount of money go toward that and the federal government is covering almost all the health care costs.

They’ve provided $150 billion in direct grants to the states, up to $500 billion in new lending. That is unprecedented, coming from the Federal Reserve.

But what the states are asking for now is unrestricted funds to use for whatever purpose they want, essentially, including if their revenues have gone down, which is something that states are supposed to plan for, and that’s why they have rainy day funds, and also covering things like pension obligations that they haven’t funded for decades.

Illinois sent a letter to Congress asking for $40 billion, including $10 billion to cover their unfunded pension obligation. That has nothing to do with COVID-19.

So, there is not a need and there’s no real excuse that the federal government would bail out states. That just sets a terrible precedent, going forward, that you’re going to penalize states who have acted in a responsible way fiscally and reward those who have been reckless.

Allen: Senate Majority Leader Mitch McConnell said that states maybe should consider declaring bankruptcy if they really need to.

His exact words were, “I would certainly be in favor of allowing states to use the bankruptcy route.” McConnell has received a lot of backlash from this statement.

Do you think that the bankruptcy route is something that some states might need to consider?

Greszler: I think the important takeaway behind Sen. McConnell’s statement is that the federal government’s not responsible for states’ budgets.

So, to the extent that there have been states like Illinois or New York coming and saying, “We absolutely need you to give us this money or we’re not going to be able to operate,” that’s not true. You don’t get into a bankruptcy-like situation unless you have had decades worth of fiscal mismanagement.

The issue of bankruptcy itself, the states are actually not allowed to declare bankruptcy right now.

States can allow their cities or the municipalities to declare bankruptcy, but going forward, this is an issue that will remain something for Congress and the states to consider, because the reality is, there are some states that, prior to COVID-19, were already in a situation where they’re pretty rapidly approaching insolvency, and Illinois is the best example of that.

I really don’t see a way forward for that state to either raise taxes enough or cut services enough that they will be able to pay their debts and fulfill their pension obligations. So something will have to be done there.

Whether or not that’s a bankruptcy-type situation or if the state sits down and negotiates with its debtors and with its public employees, something will have to be done.

But I think that the issue of COVID-19, that in and of itself would not cause a state to become insolvent. I think that’s the point that was trying to be made here, is that “We will help you with the expenses related to this health pandemic, but we’re not going to cover those things that are your own responsibility to budget for.”

Allen: I see. That makes sense. Speaking of debt, America’s national debt now is over $24 trillion, last time I checked. That is higher than it’s ever been before and, frankly, a number that’s just … really hard to wrap your mind around.

Our federal government is spending a lot of money right now on these various stimulus packages. Where is this money coming from?

Greszler: It’s coming from you and me and the future, from our children, from anybody that’s working today on out into how many years, we don’t know because we don’t know when our debt becomes unsustainable.

Looking back decades ago, we would have said, “How could we ever get over $23 trillion in debt and have a single year in which we have $4 trillion in debt? That’s not possible.” And yet it seems like it’s possible now.

The problem is you just don’t know when these debt crises hit. Puerto Rico didn’t anticipate the timing of when there’s [hit], Greece, other countries.

When you get to the situation where creditors just decide that they’re not going to lend to you anymore at an unreasonable rate, that’s when you don’t have time to make the more rational decisions to pare back on certain expenses that you otherwise would have been able to if you acted sooner.

We’re already at a situation in the U.S. where each household in America owns about $187,000 worth of America’s debt, and that was before COVID-19, and now we’ve added on about another $27,000 per household. This is clearly an unsustainable level and a huge burden for future generations.

Allen: Is it possible to actually pay off that much debt?

Greszler: … It’s possible. You have to do it over time. It’s going to take a level of fiscal restraint that we’ve never seen before.

What we don’t want to get to is a situation where you have enormous tax rates that lead to a smaller economy and then it results in a downward spiral and you are more likely to face a bankruptcy-type situation or having the Fed need to print its way out of debt. That’s certainly not something that we want it to come to.

Allen: Yeah. What does need to happen next? How can we come out of the coronavirus situation and really ensure that, like you say, we’re leaving our kids and our grandkids a prosperous America that has the same opportunities that you and I have enjoyed?

Greszler: I think, starting with the current crisis, is evaluating what’s been done to date and how has it worked or not worked.

There’s just constant urge by Congress to pass more and more stimulus bills, to try and have more assistance and aid and relief, and yet, we don’t even know.

Some of the money hasn’t gone out the door and we don’t know what the impact has been. We don’t know what it’s going to be like as states start reopening their economy.

I would say the first thing is, … unless it’s an absolute immediate need, directly-related to COVID-19, we shouldn’t be considering spending more money yet. We need to wait and see and hope that things will start reopening and rebounding.

Then, going forward, just as any time when a household would run out of its rainy day funds or have to take on debt, you have to budget in the future to account for that. You have to eventually pay that back.

Unfortunately, the U.S. has not ever been paying things back. It’s like we have an interest-only mortgage and we just keep increasing that mortgage every single year and never paying anything down.

We actually have a proposal at The Heritage Foundation called the “Blueprint for Balance” that we’ve put out each year, and we show how you could actually start balancing our annual budget within 10 years and get to a more sustainable pathway going forward.

Allen: We’ll be sure to link the “Blueprint for Balance” in our show notes so our audience can check that out. Rachel, we really appreciate your time today and your expertise on this subject.

Greszler: Thanks so much, Virginia.





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