Published in Economic Development

Upjohn economist says latest stimulus needed to avoid slow recovery

BY Sunday, March 14, 2021 01:23pm

The Biden administration’s $1.9 trillion American Rescue Plan Act is a big and bold injection into the U.S. economy that critics — such as all GOP members in the House and Senate who voted against it — have called unnecessarily expensive. However, supporters say the broad support for state and local governments and targeted relief to individuals and families will provide both immediate and long-term benefits. Susan Houseman, vice president and director of research at the Kalamazoo-based W.E. Upjohn Institute for Employment Research, said while the latest stimulus reflects Democratic spending priorities, it will also help to ensure a swift post-pandemic economic recovery. Houseman spoke with MiBiz a day after Congress approved the legislation and before it was signed by President Biden.

As an economist, what’s your reaction to the $1.9 trillion American Rescue Plan Act?

Susan Houseman, vice president and director of research at the W.E. Upjohn Institute for Employment Research COURTESY PHOTO

Well, it’s big. One of the surprises for many people coming out of the recession is that, in many respects, the economy has fared a bit better than we expected. One surprise is that revenues to state governments didn’t decline as much as we anticipated. The unemployment rate was higher than we’ve ever seen since the Great Depression in the 1930s, but it came down sharply. Poverty levels have actually declined.

You can do two takes on that: One is that maybe we don’t need this big spending package. The second is that the prior stimulus packages actually worked. If you’re an economist, one big challenge is: How can we smooth over recessions and the natural hits the economy takes for a variety of reasons? How can we get over the hump and minimize the damage? 

Not to minimize what people have gone through, but (the pandemic) is not as bad as one might have expected (economically). That’s the justification for another large stimulus package — the other one is about to run out and there’s evidence that it actually worked. We’re coming out of the pandemic, but things will be bumpy as the economy restarts, so some sort of stimulus measure is still needed.

The Biden administration’s stimulus has drawn comparisons to the Obama administration’s during the Great Recession in 2009 — specifically that it goes farther, albeit because of political realities. But how does this Democratic stimulus compare to 2009?

It’s a lot more aggressive and larger. The unemployment rate and impact of the pandemic was greater than the Great Recession, so it warranted a larger response. If you dial back to the Great Recession, the recovery was very tepid, slow and drawn out. There were long periods of mediocre job growth and relatively high levels of unemployment. That’s what we’re trying to avoid this time.

In addition to direct support for state and local governments, the latest stimulus package is also targeted at workers, families and low- to moderate-income individuals. Previous pandemic relief included targeting specific industries. How will we see this dynamic play out?

It probably reflects to some degree the change in administration and who’s driving the bill this time. If you look at the Democratic priorities, to some degree, they are trying to get anti-poverty measures built into this as well. It’s an agenda that believes there’s a greater need for stimulus and greater need for helping those who are poor and lower-middle class and assisting them through this difficult time. I think there’s a larger agenda here, too, with the child care subsidies but also the child care tax credits that are increasing next year by 50 percent for many families. Those are designed to reduce very high child poverty rates in this country that have broader policy motivations beyond the pandemic.

The new stimulus plan also extends $300 in federal monthly unemployment insurance benefits through the summer. More broadly, what has the pandemic taught us about states’ unemployment insurance systems?

The pandemic has shown that the unemployment insurance system is, as some would characterize, broken. Relatively few people nationwide actually accessed the system and often benefits were not sufficiently generous to tide people over a true, severe recession. The whole experience of unemployment insurance during the pandemic has underscored the need for unemployment insurance reform.

What do those reforms look like?

It takes two sides: We need to make benefits more adequate and need to expand them and get more consistent replacement rates for individuals. It’s expanding benefits but also the extent to which people are eligible to receive unemployment insurance benefits. One thing we saw for the first time ever during the pandemic is that benefits were opened up to individuals who normally did not qualify, including the self-employed. We also saw the take-up of those benefits was huge — we can debate how much of that was fraud.

Of course to have adequate benefits, you have to finance them, and that’s the other side. Most people who advocate for unemployment insurance reform recognize the need to address financing issues. Invariably, that means raising unemployment insurance taxes. People have to be willing to bite the bullet to do that.

Hopefully our experience during the pandemic and Great Recession has underscored the need for unemployment insurance reform. What we did during the pandemic was kind of a Band-Aid.

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