With the announcement of a new stimulus plan by President Joe Biden, which will cost about $1.9 trillion, many economists are debating its effectiveness in helping the U.S. recover from the crisis. While it is true that by simple arithmetic, such a massive fiscal stimulus by the government will cause the gross domestic product (GDP) to grow, its consequences may discourage the medium and long term.
This Friday, the Senate passed the $1.9 trillion budget for Biden’s stimulus plan. Through a special procedure, Democrats began voting for passage of the budget on Thursday afternoon and finished Friday at 5:30 a.m. The House of Representatives will have to review the budget, which passed its own budget resolution the same week.
Biden’s stimulus plan is the third major public spending plan in less than a year passed in the U.S. to address the pandemic; the other two were former President Trump’s Cares Act and the December Congressional stimulus.
With the new budget for the stimulus plan approved, the U.S. Government adjusts spending of more than $5 billion to address the pandemic and the consequences of quarantines imposed in several states.
The 2020 Cares Act
With the arrival of the pandemic in the United States, Donald Trump’s administration anticipated the shutdowns that the quarantines would cause and signed the Cares Act, which poured $2.2 billion into the U.S. economy. Although there was some debate in Congress, after less than a week of discussions, the leaders of both houses supported Trump’s plan.
Initially, the Cares Act provided an economic impact payment to American households of up to $1,200 per adult whose income was less than $99,000 (or $198,000 for a household) and $500 for each child under 17 to $3,400 for a family of four.
Besides the Cares Act, former President Trump’s stimulus package also enacted the Coronavirus Relief and Response Supplemental Appropriations Act of 2021, which authorized additional payments of up to $600 per adult and up to $600 per qualifying child.
In addition to direct assistance to households, the Care Act targeted $659 billion in aid to small businesses. These funds provided funding for eight weeks of payroll and other expenses for entrepreneurs. In addition, the Federal Reserve lowered the interest rate back to 0 to facilitate credit and cash flow in the economy.
Both the Cares Act and all of the programs allocate a budget for education assistance, healthcare transfers and pandemic care money including mass testing programs.
Despite government stimulus packages, the pandemic cost the United States more than 22 million jobs, approximately 10 million of which have not yet been recovered. Some analysts estimate that it could take up to four years to recover.
Congress’ stimulus plan
The Congressional stimulus proved far more problematic than the Trump stimulus, as it was fraught with intrigue between the two political parties and for a time it appeared that Democrats and Republicans would be unable to agree on the amount and how it would be spent, at a time when the number of contagions was again peaking and several states were resuming quarantines.
While Democrats pushed for the stimulus to include a $1,200 check for each adult and an additional $500, Republicans supported a check of no more than $600. The subsidy amounts were not the only differences between the two parties, as Democrats refused to accept the small business insurance demanded by Republicans against pandemic-related lawsuits, while Republicans were opposed to accepting a package of federal transfers to the states of the Union because many of the Democratic states were broke before the pandemic.
As a political strategy, the Democrats also refused to accept any concessions from the Republicans, as elections were looming. Democratic reluctance was such that even Nancy Pelosi, Speaker of the House of Representatives, rejected a government proposal on the $916 billion stimulus plan that included transfers to the states and legal insurance for businesses.
In the end, the bipartisan committee proposed that both parties accepted a $908 billion deal, which ended up including both legal protection for businesses and transfers to the states.
The relief package directed $300 billion for small businesses through the Paycheck Protection Program, $240 billion to help states and local governments, and $180 billion to extend unemployment benefits with a $300 per week check for those who lost their jobs. Pelosi relented on this deal, as Biden pledged to push through a $1.9 trillion stimulus plan as soon as he took office.
Biden’s stimulus plan
On January 14, President-elect Joe Biden announced a new $1.9 trillion stimulus plan for the U.S. economy, which includes a $1,400 direct payment to all Americans, raising the transfer to $2,000 per adult when taking into account the $600 pass-through of the plan already approved by Congress. President Biden also took the opportunity to sneak into the stimulus package to imposition a $15 an hour federal minimum wage.
The President’s plan also includes an additional $400 unemployment insurance payment and proposes to expand paid leave payments and child tax credits for children in the home. Direct transfers to households total half of Biden’s proposed stimulus plan.
There will be $1 billion for federal unemployment assistance and benefit checks, $440 billion for business assistance to state and local governments, and an additional $400 billion to address the pandemic. Under this new stimulus plan, tax credits will be extended from $2,000 to $3,000, and there will be an additional $600 for children under age 6 in the poorest households.
The new stimulus plan’s effectiveness rather than the amount will depend on how the relief money is allocated, as the U.S. economy does not appear to have been as affected by the second lockdowns as it was by the first. While there was an increase in unemployment claims and a resurgence of bankruptcies, these events occurred on a much smaller scale than during the spring and summer of 2020.
Republicans have called the plan too costly and premature and say that raising the minimum wage to $15 an hour is unrelated to addressing the pandemic. A group of ten Republicans led by Senator Susan Collins of Maine presented their own $618 billion stimulus plan, one-third of Biden’s, which includes targeted transfers to Americans earning less than $50,000 per year with a $1,000 payment to Americans with an additional $500 per child.
For the time being, negotiations between the two parties continue and Biden has said he is open to the stimulus checks reaching a smaller group than his original proposal, which basically covered all Americans.
On Tuesday, in a meeting with Democratic members of the Senate, Biden called on lawmakers in his party to approve his stimulus package. At Wednesday’s meeting between President Biden and Congress on Capitol Hill, the President expressed a willingness to limit pandemic assistance checks to a smaller group of people.
On Friday, the budget passed the Senate and only needed approval by the House of Representatives. On top of the $5 trillion of the government stimulus plans, the costs of the lockdowns to the economy are incalculable as millions of jobs were lost and thousands of businesses went out of business. The new stimulus plan’s effectiveness will depend on how well targeted it is. Will this new plan be a bailout for those who lost their jobs and businesses to the lockdowns or a new check for free money on behalf of the federal government for everyone?