Washington Wednesday - Economic stimulus gluttony

MARY REICHARD, HOST: It’s Wednesday, January 27th, 2021.

You’re listening to The World and Everything in It and we’re so glad you are. Good morning, I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. First up, government spending.

REICHARD: Yeah, and then some. It is Washington Wednesday, after all.

EICHER: Well, it is and it’s time to analyze the latest Covid relief package likely to be coming out of Congress—as we’ve reported—the dollar figure being bandied about is $1.9 trillion.

REICHARD: Some of the items in that legislation are directly related to pandemic relief: $160 billion for the national vaccination effort, $170 billion to prepare schools to reopen. But the rest? It’s mostly for tangential matters and because it far exceeds tax revenue coming in. It will of course dramatically increase the debt burden for people not yet born. 

Joining us now to parse all those enormous numbers is Brian Riedl. He is a senior fellow with the Manhattan Institute. 

Good morning, Brian!

BRIAN RIEDL, GUEST: Good morning. Glad to be here. 

REICHARD: Let’s start with the so-called stimulus checks. At the end of last year, Congress approved sending $600 to most Americans. That was on top of the money sent out in the spring. President Biden wants to add another $1,400 per person to that total. That proposal was popular among politicians on both sides of the aisle. But you say it’s not necessary or even helpful for the economy. Why is that?

RIEDL: Yeah, it’s pretty easy for politicians to be in favor of handing out money to people. Everybody loves checks. Everybody’s really grumpy about the shutdown and feels like the government owes them a lot of money for it. The problem with the checks primarily is that they’re not targeted. The checks go to everybody, every family up to a very high income whether you’ve lost a dollar or not. And the reality is that most of the people receiving the checks have not lost a dollar of wages or income during the pandemic. That is just not a good use of stimulus dollars. It’s $600 billion added to the national debt that really serves no policy purpose.

And some say, well, this will stimulate the economy. It will get people to spend. Well, the last stimulus checks were almost entirely saved. In fact, the savings rate hit the highest level ever in America last spring because they were largely saved. And that was in a weaker economy. This time around, the economy is even a little bit stronger than it was a year ago when we did the last rebate checks, so this is all going to be saved, too.

See, the problem right now in the economy is not that people don’t have money to spend, it’s that certain industries have been shut down so you can’t spend the money at these industries. You know? Airlines, hospitalities, restaurants. Giving everybody more money without actually opening the industries to spend the money isn’t really going to help the economy at all, it’s just going to increase the savings rate. 

REICHARD: How might this be better done, then? Maybe just targeting to people who really need the help in the form of unemployment benefits? Would that be better? 

RIEDL: Yeah, I think right now the primary role of government in terms of the economy after we try to get the vaccine and reopen the schools is to help those who have lost income. It’s to replenish lost income. Unemployment benefits are extremely important right now and Washington at this point is being very generous with them. They’re replenishing 100 percent of the lost wages for the typical person who’s lost their job. There’s also grants to distressed companies to make sure they don’t lay people off. I’m not sure that there’s a policy purpose to write thousands and thousands of dollars of checks, though, to families making $200,000 a year who haven’t lost a penny. I don’t really know what policy purpose that serves, other than everybody likes free money so it’s popular. 

REICHARD: The president also wants to increase the federal minimum wage to $15 dollars an hour. Restaurants and small businesses are already struggling. What’ll happen to them if this becomes law? 

RIEDL: Yeah, minimum wage is another policy that sounds good in the abstract because everybody wants workers to get paid more. But the reality is when you raise the minimum wage too high, instead of getting wages, people just get laid off because their employer can’t afford to pay them that wage. The Congressional Budget Office said that even if you raise the minimum wage gradually over five years during a booming economy, it would still cost 1.3 million jobs or as many as 3.7 million at the top range. But starting it off during a recession is even worse, when employers are already struggling to stay open, raising their costs is just going to get people laid off. It’s not going to get them raises.

And the craziest part is raising the tipped minimum wage, what those like waiters and waitresses make, from $2.13 all the way to $15. So, when you think of restaurants suffering right now, millions of restaurants have gone out of business, the industry is teetering on the brink of collapse, and Biden wants to increase their minimum wage for waiters and waitresses by 600 percent? That’s economic malpractice.

It’s the worst possible time to do that. It’s going to drive a lot of these teetering businesses, particularly restaurants, on the brink of bankruptcy right out of business. Some places can afford a higher minimum wage. San Francisco, Seattle, New York, maybe, can afford $15 an hour, but places like Biloxy, Mississippi, Puerto Rico, where the average wage is lower and prices are lower, they’re going to drown. It’s going to kill jobs. It’s the worst time to do this. 

REICHARD: This is supposed to be a temporary relief measure, but as you’ve noted, most massive Washington spending plans have a way of becoming permanent. What are some of the elements of this proposed package that could end up sticking around for a long, long time?

RIEDL: You know, we saw this in the last time when we had the trillion dollar stimulus bill in 2009, there were a lot of expansions to the earned income tax credit, the child credit, the American opportunity tax credit that were all supposed to be temporary and once you create that benefit, politicians don’t want to take it away, so they end up making it permanent. In this case, we have another EITC expansion—Earned Income Tax Credit. There’s another expansion of the child credits. There’s childcare subsidies. SNAP benefits.

They’re all listed as temporary, but realistically, when they expire a year from now, there’s no way members of Congress are going to let them expire. They’re going to build their own constituency and everyone’s going to say keep the expansion of the child credit, keep the expansion of the EITC, don’t take it away. And Congress will just keep renewing it. And the cost could be enormous. The one year expansion of the child tax credit will cost about $120 billion. But if you make that permanent, then over the decade, it’s $1.2 trillion instead of $120 billion. Which means the whole Biden stimulus package really won’t cost $1.9 trillion over the decade, it really will cost closer to $3 trillion over the decade, once these policies take on a life of their own, build a constituency, and get renewed.

Now, I’m not saying we can’t increase the child credit, but let’s do this outside of the stimulus at a time where we can actually look at the long term budget, look at other competing priorities, find ways to pay for it, and not do it as a temporary emergency when we know this is just a backdoor way for a permanent program. 

REICHARD: So if it passes, what would this proposal do to the already staggering federal deficit? The debt load per person already stands at roughly $80,000 dollars. What’s that mean for the average American?

RIEDL: Well, the deficit numbers are pretty scary. We’ve already spent $3.4 trillion on the pandemic in the last year. A lot of it has been necessary. You need to find a cure, you need to help those who have suffered. But because they’ve gone somewhat excessive, if we do this $1.9 trillion bill, that will be over $5 trillion. To put that in context, by the time this bill is spent, about a quarter of the national debt will be the result of the pandemic. [laughs] A quarter of the entire national debt will have occurred in the past year because of the pandemic. Deficits of $3-4-5 trillion. We’ve never seen this before.

I was worried before the pandemic hit that the deficit was about to hit $1 trillion a year on its way to $2 trillion in a decade. Well, now we’re looking at $3-4 trillion a year for repeated years. And even when the pandemic ends, we’re looking at deficits of $1-2 trillion a year as far as the eye can see. The numbers get really scary because as the debt gets bigger, the interest costs get bigger for the federal government. And we’re already facing all sorts of budget problems with Social Security and Medicare, to the point that within a couple decades, the biggest part of the federal budget is going to be interest on the debt. In fact, we’re going to get to the point where half of all your federal taxes just pay the interest on the debt, which means it’s not paying to defend the country, Social Security, Medicare, or roads. Half of your tax dollars are going to pay interest. And even that’s under an assumption of low interest rates.

If interest rates rise, you could have two-thirds of your taxes eventually paying the interest on the debt. Like I said, you want your tax dollars to go to things that benefit you, not pay interest. That’s why we have to pay attention to these deficits that go into the trillions of dollars as far as the eye can see. 

REICHARD: This proposed stimulus package seems unlikely to pass in its current form, because the Democrats don’t have the 60 votes they need in the Senate. Is any part of this likely to win bipartisan support?

RIEDL: They’re not going to get 60 votes, you’re correct, for the current package because $1.9 trillion is too much and Republicans are not going to support a $15 minimum wage during a recession. The two options for Democrats are to either shrink the policy down to the bare bones that are the most important, such as funding the vaccine, reopening schools, the Republicans might agree to the rebates, and having a skinnier package that can get 60 votes. Or doing it through this reconciliation process that can pass with only 50 votes.

But even then you’re not allowed to raise the minimum wage in a reconciliation bill, so they would have to take out the minimum wage. And, even then, they’d have to get every Democrat in the Senate to support it because they only have 50 Democratic Senators.

So, you still — even then, if they go the reconciliation route that only requires 50 votes, the package will still probably shrink somewhat to get everybody on board, and they won’t be able to do the minimum wage. That’s probably the path forward right now is to use this reconciliation measure that can pass by 50 votes but then have to kind of throw a few of the provisions overboard.

REICHARD: Brian Riedl is a senior fellow with the Manhattan Institute. Thanks so much for joining us today.

RIEDL: It’s been a pleasure. Thank you.

(AP Photo/Evan Vucci) President Joe Biden delivers remarks on COVID-19, in the State Dining Room of the White House, Tuesday, Jan. 26, 2021, in Washington. 

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