Trump’s $1 trillion rescue plan is too small to save America’s faltering recovery

Linda J. Dodson

It is this sort of delayed reaction to output shocks that can cause downturns to metastasise, and it is why countercyclical stimulus must be maintained until the economy reaches escape velocity.

Yet, by curse of timing, the $3 trillion relief package rushed through Congress in March with rare bipartisan comity is running out. The first fiscal cliff hit last Saturday with the expiry of weekly cheques worth $600 to some 30 million people unable to work.

It has been a remarkably generous subsidy that comes on top of normal state unemployment benefits and renders two-thirds of recipients better off than they were before the pandemic, but it is also remarkably expensive.

House Democrats have already passed a fresh $3.5 trillion package that extends these blanket payments until January, but Washington is once again an ideological battleground as the election nears.

The Republican Senate and the White House have countered with a skinny $1 trillion plan that slashes jobless cheques by two thirds to $200 and limits total support to 70pc of former earnings, an impeccable decision if you are worried about moral hazard and bad incentives but a contractionary fiscal twist if new job openings do not exist.

The Republican plan unveiled last night offers no pandemic relief for states and local governments that cannot run deficits and are in dire shape. They need a $1 trillion rescue of their own, and will soon be forced into procyclical austerity cuts without it. The $660bn fund to help small firms hold on to staff gets a modest top-up but is essentially in run-off.

Even this skinny package is too much for Texas Senator Ted Cruz and a chunk of the Republican base, which will make it very hard to reach a cross-party compromise. “There is significant resistance to yet another trillion dollars,” he said.

Appetite for further giant rescues is fading as the budget deficit explodes to 18pc of GDP this fiscal year and the debt ratio surpasses the peak seen during World War Two. Mismanaging Covid-19 is proving as costly as general mobilisation and the defeat of Fascism.

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