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A Roadmap to Recovery

Since the coronavirus pandemic reached America’s shores, Congress has passed four major pieces of legislation to address the growing crisis. The $8 billion Coronavirus Preparedness and Response Supplemental Appropriations Act funded public health agencies at the federal, state, and local level and set money aside to lower the cost of any eventual vaccine. The Families First Coronavirus Response Act, which cost just under $200 billion, offered medical leave to many of those affected by the outbreak and expanded public support programs such as Medicaid. Finally, the $2.3 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act and a nearly $500 billion supplemental follow-up bill extended loans and grants to businesses, sent stimulus checks to most Americans, expanded unemployment insurance, and offered funding to hospital systems and state and local governments. Together, these laws have provided a powerful response to the crisis — but more still needs done, and leaders from both parties are beginning to consider what to include in the next piece of legislation.

Congress was right to bolster spending on the health-care system, as fighting the virus itself must be our top priority. Increasing production and distribution of personal protective equipment, ventilators, and other lifesaving equipment will help reduce the disease’s spread and death toll. Leaders must also continue to ensure that there are enough affordable tests to effectively track the disease before they gradually reopen the economy. And most importantly, policymakers should clear regulatory and funding barriers that inhibit the development of effective treatments and an eventual vaccine needed to end the pandemic once and for all.

But Washington must also do more to help businesses, people, and governments that are suffering financially. In the short-term, this means providing more “life support” to an economy that has been put into a temporary coma in order to facilitate public health measures. Policymakers must then put in place policies that will help revive the economy when it is safe to do so. This piece outlines a series of steps U.S. policymakers should take to facilitate both phases of this recovery and ensure future prosperity after the coronavirus.

Supporting State and Local Governments

People across the country are turning to their governors, mayors, and other state and local officials for support during this crisis. But many programs that support struggling citizens and are partially financed by state governments, such as unemployment insurance and Medicaid, are already being financially stressed by the economic freeze. State and local efforts to fight the pandemic itself are also expensive, and with much of the economy shut down, states are losing vital sales and income tax revenue. The result is a fiscal squeeze on state and local governments that with few exceptions are required to balance their budgets each year. Without adequate support from the federal government, states and municipalities will be forced to cut services or raise taxes at a time when doing so would undermine national efforts to prop up the economy.

Fortunately, Congress has already taken some steps to ease the financial burden these governments will experience. The first coronavirus bill allocated almost $1 billion to state and local health departments, which coordinate contact tracing, quarantines, and other essential efforts to contain the disease. The second bill increased the federal government’s matching rate for state Medicaid spending. And the CARES Act established a $150 billion fund to directly supplement the budgets of states, territories, tribal governments, and large cities.

But state and local leaders say this is not nearly enough. Over 2100 cities still expect budget shortfalls, and many say they will have no choice but to lay off workers and cut public safety spending this year if they don’t receive adequate financial support. New York City, which has the nation’s largest coronavirus outbreak, is already preparing to cut back on trash pick-up, traffic safety operations, and public transportation. And some governors are warning that they may need to cut teacher pay or lay off teachers before the next school year. Accordingly, the bipartisan leaders of the National Governors Association — Govs. Andrew Cuomo (D-NY) and Larry Hogan (R-MD) — are asking Congress to give states and territories at least $500 billion in additional aid. Depending on the severity of the current recession, PPI estimates that it is possible even more support could be needed over the coming year.

Democrats fought to include $150 billion in additional support for state and local governments in the most recent coronavirus relief legislation to help keep states afloat until federal leaders reach a larger deal, but they were rebuffed by their Republican counterparts. Some Republicans oppose offering federal aid because they believe doing so will make it easier for state and local governments to delay reopening their economies, even though those social distancing guidelines are currently essential for slowing the virus’ spread. Meanwhile, Senate Majority Leader Mitch McConnell has suggested that state and local governments themselves are responsible for their budget crunches because some had pre-existing shortfalls in their pension funds. But the coronavirus and the economic shutdowns required to contain it are imposing an additional squeeze government budgets completely unrelated to any earlier policy decisions. State and local governments, no matter how good their fiscal management before the current crisis began, will need financial help for as long it continues.

There are two main ways Congress can get money to state and local governments. As it did in the CARES Act, the federal government could offer states and localities a lump-sum amount based on a jurisdiction’s population or other metrics of need. For example, a bipartisan Senate proposal would create a $500 billion fund to support state and local governments with grants based on the virus’ spread in each jurisdiction and their lost revenues, in addition to their population size. A lump-sum structure such as this offers financial support immediately rather than as state and local governments spend, and ideally gives governments flexibility in their use of the funds to prevent layoffs or cuts to essential services. Although the CARES Act initially required aid go towards medical equipment and other spending priorities specifically relating to the coronavirus outbreak, Democrats have fought to allow state and local governments to use these funds to plug general revenue shortfalls as well.

Alternatively, Congress could increase the matching rate for existing state and local partnerships, as it did with Medicaid in the Families First Act. Doing so avoids the practical limitations of establishing new channels to move the money and oversee it while incentivizing state and local governments to maintain their pre-existing spending commitments. Tying aid to state programs such as Medicaid that grow with health-care expenses will also target aid somewhat towards the states with the greatest costs. Regardless of the mechanism Washington uses to support state and local governments, it is essential that sufficient aid is provided — and soon.

Strengthening Automatic Stabilizers

The path this crisis will take is unpredictable, so federal action should be designed to last as long as is necessary to protect public health and stabilize the economy. The best way to ensure this is through “automatic stabilizers” — policies that cause spending to rise or taxes to fall automatically when the economy contracts, and vice versa. These policies are responsive to real economic needs and are unconstrained by the political processes that often slow the passage of discretionary stimulus or end it prematurely. Tying relief to real economic conditions can also be politically beneficial because doing so ensures the public feels that federal actions are supportive enough to sustain them through the crisis.

The federal government should use automatic stabilizers to extend its relief measures for as long as the economy needs them. The Payroll Protection Program (PPP), which was established by the CARES Act to support small businesses, required an emergency infusion of funds when it ran out just three weeks after opening. Rather than continuing to provide limited pots of money that will only briefly stem the deluge of layoffs and closings, lawmakers should change the program to grow automatically with eligible business’ needs or replace it with more direct payroll subsidies. Similarly, the CARES Act’s $600-per-week increase in unemployment benefits will only last for 39 weeks, even though there is no guarantee workers can reasonably expect to find a job in that time. Policies such as this one should expire only when certain economic benchmarks are met rather than on an arbitrary calendar date.

Future stimulus packages will also give Congress an opportunity to address structural problems that couldn’t be addressed in their past legislation:

Addressing these shortcomings to the extent possible during a crisis would ensure that relief efforts reach those who truly need them and would help people and businesses weather the economic storm.

Restarting the Economy

In the short term, policymakers should focus on efforts to bolster our public health response and give Americans the economic life support they need while the economy remains frozen. The policies above fulfill these objectives by keeping Americans attached to their jobs, giving them the money they need to pay for necessities and preventing otherwise viable businesses from failing. But policymakers should also begin developing policies that will help stimulate the economy into a robust recovery once it is reopened by encouraging businesses to invest, consumers to spend their money, and employers to hire more workers.

One example of a good “recovery” policy is increasing infrastructure investment. The U.S. already had a $1.5 trillion infrastructure deficit before the coronavirus crisis hit — rebuilding our aging infrastructure would create good-paying jobs, give those workers more money to stimulate the economy through consumption, and leave future generations with a robust public investment that will pay dividends for decades. Both President Trump and Speaker Pelosi have demonstrated interest in boosting infrastructure investment, making it a form of stimulus that in theory at least should have bipartisan support. But timing is everything: there is limited value in putting more people to work at a time public health experts are advising them to stay home, and putting money in their pockets will do little good when they are unable to spend it on anything but basic necessities because so many producers are closed. Creating jobs and encouraging consumption are goals best left for the end of the pandemic rather than when we’re in the middle of it.

Another good way for policymakers to encourage consumption as they reopen the economy is by reducing taxes that ordinarily discourage it. Forty-five states and many local jurisdictions have sales taxes that raise the cost of buying and selling goods. While economists generally favor taxes on consumption because they encourage saving and reduce economic distortions, temporarily reducing sales taxes in a weak economy can help boost demand when it’s most needed. Federal leaders should encourage state and local governments to cut sales taxes and compensate those governments for the lost revenue (states that do not have sales taxes to cut could instead offer refundable tax credits to residents for purchases they make during the crisis, the cost of which would be reimbursed by the U.S. Treasury). The cuts should be tied to economic indicators so that the taxes automatically rise back to normal as the economy improves. The entire subsidy from cutting sales taxes would encourage spending, making this policy an exceptionally potent stimulus tool. Lower-income people would disproportionately benefit from sales tax cuts because they must spend a larger share of their income just to get by.

Finally, after the pandemic has been defeated and our economy fully recovers, policymakers must confront our nation’s dire fiscal situation. The federal government is on track to spend at least $4 trillion more than it raises in revenues this year. The cost of action should not deter policymakers from taking any step necessary to combat this pandemic and its resulting economic damage, but leaders will need to deal with the debt we accumulate now after the crisis passes. The national debt was already on track to grow at an unsustainable rate in the coming years because of wasteful tax cuts, the rising cost of health care, and the strain our aging population will put on social insurance programs such as Social Security and Medicare. Adopting automatic stabilizers will help ensure that stimulus is no more expensive than it needs to be, but the only reliable way to preserve our fiscal capacity to address future economic crises is by adopting comprehensive solutions that close the structural gap between revenues and spending.

No one can predict all the challenges that lay ahead or how long they will take to resolve. Rather than enacting short-sighted solutions that only carry our country through one month at a time, policymakers should develop a comprehensive roadmap to recovery that will adequately meet our economy’s needs at each turn. Supporting state and local governments, strengthening automatic stabilizers, and putting in place a package of policies to stimulate the economy when it’s ready to reopen would put America back on the right track.

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