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Here’s the Stimulus the U.S. Economy Needs to Avoid Disaster

States are reversing reopenings as virus cases are rising. Recovery isn't as fast as expected. More stimulus is needed to avoid a disaster.

  • Key stimulus measures will expire this month.
  • At least $1 trillion in additional stimulus is needed to support the U.S. economy.
  • Local and state governments need more help.

The pandemic shook the U.S economy, as millions of Americans lost their jobs. Businesses across the country have closed as part of a planned shutdown.

In March, Congress passed the CARES Act, an ambitious $2 trillion stimulus package to try to rescue the economy. The plan was to give the country time to get the virus under control and start reopening safely.

Recovery Isn’t V-Shaped

Things didn’t go as planned. Amid reopenings, virus cases are increasing across the country. Many states are reversing their course. There are signs that the ongoing recovery is fading. Spending is slowing down.

After rising sharply when the U.S. started to reopen, consumer spending is slowing down. More stimulus could prompt Americans to spend more. | Source: J.P. Morgan

Many of the stimulus measures that have helped Americans to keep paying their bills in recent months are about to end.

In March, President Trump signed the CARES Act, an unprecedented act of fiscal policy by the U.S. government. It included an extra $600 in unemployment benefits, $1,200 in stimulus checks to most Americans, and billions of dollars in forgivable loans to small businesses.

At the end of the month, the additional $600 per week in unemployment insurance will expire, potentially affecting some 33 million workers.

With the pandemic worsening the economy’s slowdown, the government may have no other choice but to provide further stimulus to households and businesses. This will worsen its balance sheet, but it’s essential to prevent things from getting worse. Economists say at least $1 trillion is needed to avert disaster.

The Senate has started talks this week on a second stimulus for Americans.

Here’s The Stimulus The U.S. Needs

Three stimulus measures are the most crucial to prevent the U.S. economy from falling off a cliff: a new round of direct payments, especially for those with low income; some extension of extra unemployment benefits; and a sizable chunk of aid to state and local governments, which were neglected in the CARES Act.

The first two are likely the most effective ways to replace lost income and purchasing power until more Americans return to work.

Harvard professor Jason Furman, a former chief White House economist under President Barack Obama, said:

We’re trying to avoid a vicious spiral where people lose their jobs and don’t spend as much, and that causes more job losses and less spending. Arresting that vicious spiral can’t wait.

With more money in their pockets, Americans will have an easier time paying their rents and mortgages. Many have missed housing payments in July. If nothing is done, we could see several evictions in the coming months.

As for local and state governments, the legislation has made $150 billion available to fight the virus specifically, but not to plug holes in their budgets.

What we learned from the Great Recession is that belt-tightening by states and local governments can mitigate the effects of fiscal and monetary stimulus.

In just three months, local and state governments have already laid off around 1.5 million workers, and more cuts are underway. In addition to the impact on policing, infrastructure maintenance, and a whole range of essential services, this will hold back overall spending and growth.

Julia Coronado, president and founder of MacroPolicy Perspectives, argues that increased funding to states and local governments could also help them open schools safely. That would also benefit working parents and businesses that need them.

She says:

School reopening is the underappreciated issue here. If parents can confidently send their kids to school and focus on their work, then the labor market will function better.

Congress needs to act quickly and provide more stimulus, or the U.S. will face an economic catastrophe.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

Last modified: September 25, 2020 8:41 PM

Stephanie Bedard-Chateauneuf

Stephanie has been writing about stocks and financial markets for several years. Based in Canada, she has written for The Motley Fool and Seeking Alpha. She received an MBA in finance and worked for the National Bank of Canada. Check out more of her experience on LinkedIn + and follow her on Twitter. Reach her at stephanie.chateauneuf (at) gmail.com.