Potential COVID-19 Package Should Not Contain Bailouts Or Expanded Unemployment Payments

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Posted by Tom Hebert on Thursday, December 3rd, 2020, 2:45 PM PERMALINK

Lawmakers are in the process of negotiating the details of a new Coronavirus relief package. 

While an agreement has not yet been reached, a recent $908 billion framework released by lawmakers in both parties contains two concerning provisions that should be removed from the final bill. 

First, the current package contains $160 billion in bailout cash for state and local governments. Lawmakers should not use this crisis as an excuse to bail states out for past mistakes unrelated to the pandemic. 

Congress has already provided funding for states and localities to be reimbursed for pandemic-related expenses. The CARES Act created the Coronavirus Relief Fund (CRF), a $150 billion fund to help state and local governments with unplanned pandemic-related expenses like testing, acquiring and distributing personal protective equipment, and payroll expenses for first responders and other essential employees.

Blue state lawmakers want to use new bailout money to shore up their mismanaged pension systems. In 2017, the state pension gap was $1.28 trillion. This means that states would need $1.28 trillion just for their pension systems to break even.

Federal bailouts in times of crisis have historically led to expansions in state spending, creating a moral hazard and disincentivizing decision-makers from being prudent stewards of taxpayer resources. Following a $20 billion federal bailout for state budgets after a market downturn in 2003, state spending rose by 33 percent in the subsequent five years and state debts increased by 20 percent in the following four years.

Second, the framework provides $300-per-week in additional unemployment payments through March. These payments are on top of regular unemployment compensation that displaced workers receive from states. 

Expanding unemployment payments have historically kept Americans out of work. On the heels of the Great Recession, Congress and President Obama expanded unemployment several times, eventually topping out at 99 weeks of payments. 

Analysts from the New York Federal Reserve estimated that the unemployment rate would have been 2.2 percentage points lower in 2011 and 3 percentage points lower in 2010 if Obama’s benefit expansion did not exist. This means that the disincentive to work the benefit expansion created kept approximately 4 million Americans out of a job during the slowest economic recovery in modern history.

Democrats are pushing to revive the Pelosi temporary $600-per-week federal pandemic unemployment compensation (FPUC) benefit. Before the FPUC expired in July, it created a situation in which 68 percent of Americans got paid more on unemployment than in the workplace. 

The subsidy of welfare over work will have lasting impacts on the economy that will only worsen if brought back, either at the $300 or $600 level. A recent study conducted by the Heritage Foundation found that the FPUC will reduce GDP by between $955 billion and $1.49 trillion. 

While workers who have been displaced by the pandemic deserve a safety net, expanding these payments will endanger our economic recovery and discourage Americans from safely reentering the workforce. 

Even if lawmakers reach an agreement in this lame duck session, President-elect Joe Biden has said that  “any package passed in a lame-duck session is lucky to be at best just a start.” If lawmakers fail to hold the line now on wasteful spending, it will empower Democrats to spend trillions of dollars more in 2021. 

As lawmakers continue to hash out the details of a potential new Coronavirus relief package, they should remove the $160 billion in bailout cash and $300-per-week in expanded unemployment payments from the final bill.

Photo Credit: Tim Rawle

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