Will the American Rescue Plan Actually Help the Economy?
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The suffering in this pandemic has been monumental, with a death toll of over 3.3 million and a job loss of 15.9 million (Fronstin 2020). While the loss of life cannot be changed, the government can attempt to help with unemployment and financial struggles through stimulus packages. On March 10th, 2021, Congress passed a $1.9 trillion stimulus package, the “American Rescue Plan” (Fronstin 2020). It included $1,400 checks for individuals making under $75,000. After that, benefits dwindle until the income cap of individuals making $80,000 (Fronstin 2020). It also included a continuation of the $300-per week unemployment benefits, an expansion of the child, dependent care, and earned income (for parents with children) tax credits, and an exemption of student loan forgiveness from income taxes (Fronstin 2020). About $450 billion of the stimulus will be used for increased testing, vaccination, contact tracing, as well as to help schools, local governments, and businesses (Fronstin 2020). The Affordable Care Act is also getting a boost in subsidies, and a new program, COBRA (Consolidated Omnibus Reconciliation Act), is running to help people keep the insurance they had before they lost their jobs (Fronstin 2020). It seems like a comprehensive plan that will help us move into a vaccinated world, while helping those who need assistance the most right now. Beyond individual lives, what will be the true economic impact of the American Rescue Plan? To answer this, we need to look at what makes a fiscal stimulus effective, the effectiveness of The Coronavirus Aid, Relief, and Economic Security Act (CARES) from May 2020, and what are the differences between that package and the current one.
According to the Tax Policy Center (2020), the three most important hallmarks of effective stimulus with the least long-run costs are timely, temporary, and targeted. The first one, timely, is one both CARES and American Rescue Plan achieved. Congress had some gridlock, per usual, but we saw some semblance of bipartisanship even at the height of political division in the 21st century under Trump’s presidency. Compared to the Great Depression, when the laissez-faire economic response led to immense human suffering because of the inaction of the government, the speed at which Congress responded with the stimulus showed they learned from the past. While there were other factors at play such as a lack of monetary policy response at the peak of the pandemic via the Federal Reserve Board, it is clear that Congress was able to adopt a much needed Keynesian economic approach (government intervention can stabilize the economy) to one of the greatest economic and public health crises this country has seen. Timeliness can impact fiscal stimulus when it takes too long to decide on a set plan and then enact it, but this was not incredibly relevant for the COVID-19 stimuli. The second is temporary. A permanent policy change of a long-term increase in government spending lowers investment or increases borrowing, lowering economic growth over time (Tax Policy Center 2020). Additionally, the Tax Policy Center (2020) tells us that in the long run, a fiscal stimulus doesn’t increase output, but crowds out other things (instead of increasing output, it replaces output that is no longer made because the stimulus is a substitute). Most of the American Rescue Plan impact comes from the one-time check, but other measures have a set deadline (vaccination funding, tax credit changes, and forgiveness of student loans should all end roughly in the fall of 2021). Therefore, this is mostly a short term, temporary fiscal stimulus, so it will be effective. The final characteristic is targeted. Targeting means that fiscal stimulus should go to those who will spend it and raise GDP in the short run (Tax Policy Center 2020). The American Rescue Plan does achieve this better than CARES by targeting lower-income families and businesses, with an income cap of $80,000 compared to the CARES $99,000 cap, as well as building in poverty-relief (Tankersley 2021).
In terms of the economic impact of the stimulus packages, particularly on GDP and spending, CARES and the American Rescue Plan have significant differences. The American Rescue Plan will be more efficient at increasing spending and GDP than CARES. The effectiveness of the CARES was impacted by those who got it: those with $3,000 or more in their checking account did not change spending behavior (did not stimulate economy), and those with $500 or less in their checking account spent 44.5% of it in 10 days, which would massively stimulate the economy, especially if they spent more of it after the first 10 days (Nikos-Rose 2020). Overall, 40% of CARES was spent, with the other 60% going to savings or debt (Belsie 2020). The CARES income cap was individuals that earned less than $99,000 (Nikos-Rose 2020). Although the CARES Act was marginally effective at stimulating spending and boosting GDP, only 40% of the $2 trillion was actually used in spending.
What about the American Rescue Plan differentiates it from CARES so that it will increase spending and boost GDP? The answer is that it targets lower-income people and minority groups disproportionately affected by the pandemic (bottom-up vs CARES more top-down approach) (Tankersley 2021). The income cap is smaller, meaning those with lower income will receive the majority of benefits. Since we know that the majority of spending under the CARES act came from lower income people ($500 or less in checking account), focusing the stimulus on lower- and middle-income people will produce more spending. A New York Times article said that the American Rescue Plan “… will help power a rapid increase in economic growth by aiming money at people who need help right now to pay their bills, buy groceries and stave off eviction or foreclosure — as opposed to higher earners who would be more likely to save the money” (Tankersley 2021). The New York Times (2021) went as far as saying that the American Rescue Plan, especially due to the tax credit changes, could be one of the most effective poverty-fighting laws in years. Marginalized groups suffered the most in the pandemic, which creates concern that wealth inequality may increase as the rich get richer through saving and paying off debt, while lower-income people are forced to spend their stimulus immediately on essentials. This unequal suffering is evident in the article: “The economy remains nearly 10 million jobs short of its pre-pandemic peak, with women of all races and men of color struggling the most to regain employment. The unemployment rate for Black men remains above 10 percent” (Tankersley 2021). Compared to an overall rate of 6.5% and 5.9% for Caucasians, the scale is clearly tipped (Tankersley 2021). Women and people of color suffered the most in this pandemic, and the American Rescue Plan is targeted to help these communities, which in turn will stimulate spending and GDP growth.
So, will the American Rescue Plan be more effective than CARES? Only time will tell. However, the set-up of the American Rescue Plan lends itself to a larger fiscal multiplier, more consumer spending of the stimulus, and greater GDP growth based on targeting lower-income people and building in poverty fighting measures. This is the most effective way to increase spending, which will increase GDP, meaning the overall economy is better off. Importantly, this is also the most ethical plan. By using a bottom-up approach, the American Rescue Plan could prove to be a step in the right direction toward undoing some of the income inequality that has been exacerbated by the pandemic.
Sources
Belsie, Laurent. 2020. “Most Stimulus Payments Were Saved or Applied to Debt.” National Bureau of Economic Research The Digest, no. 10 (October). https://www.nber.org/digest/oct20/most-stimulus-payments-were-saved-or-applied-debt.
Fronstin, Paul, and Woodbury, Stephen. 2020. “How Many Americans Have Lost Jobs with Employer Health Coverage During the Pandem ic?” Commonwealth Fund, https://www.commonwealthfund.org/publications/issue-briefs/2020/oct/how-many-lost-jobs-employer-cover age-pandemic.
Nikos-Rose, Karen. 2020. “Did the $1,200 Stimulus Payment Boost the Economy?” UC Davis, May 2020. https://www.ucdavis.edu/curiosi ty-gap/did-1200-stimulus-payment-boost-economy.
Tankersley, Jim. 2020. “To Juice the Economy, Biden bets on the Poor.” New York Times, March 8, 2021. https://www.nytimes. com/2021/03/06/business/economy/biden-economy.html.
Tax Policy Center 2020. “What characteristics make the fiscal stimulus most effective.” Tax Policy Center, May 2020. https://www.taxpolicy center.org/briefing-book/what-characteristics-make-fiscal-stimulus-most-effective.