Key Components of House and Senate Economic Recovery Packages Would Boost the Economy and Provide Needed Relief to Struggling Families

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By Edwin Park, Sharon Parrott, Dottie Rosenbaum and Chad Stone

September 26, 2008

Congress is properly focused on designing an appropriate measure to address very serious problems in the financial markets, which many experts persuasively argue is essential to help avert a meltdown in the financial markets and a potentially severe recession. The problems in the financial sector, however, are not the only ones the economy faces. And addressing the problems in the financial sector does not obviate the need for additional stimulus legislation that could inject more demand into the economy and thereby help to lessen the depth of the downturn, while also providing relief to some of the families now facing tough economic times.

The tax rebates that Congress enacted in February played an important role in supporting the economy for a number of months, but their effects have now largely worn off and the economy has proven weaker than was expected earlier this year. The economic stimulus packages unveiled in the last 24 hours in both the House and Senate contain three provisions that experts rate highly for their “bang for the buck” in stimulating a faltering economy and that also are well targeted on people in need: (1) additional weeks of unemployment benefits, (2) a temporary boost in food stamp benefits, and (3) resources for states that are facing deficits as a result of falling revenues and consequently confront a need to cut programs or raise taxes, actions that would further slow the economy.

Each of these three provisions is projected by Mark Zandi of Moody’s Economy.com to increase economic activity by more than $1 for each $1 spent. (See Figure 1.) These are among the most highly “stimulative” policies available to Congress, primarily because they concentrate relief on those most likely to spend the money quickly, pumping dollars into an economy that needs more demand.

  • Additional weeks of unemployment benefits: The House and Senate proposals would extend the number of additional weeks during which unemployed workers may receive unemployment benefits. Currently, as a result of a measure Congress enacted earlier this year, unemployed workers whose regular unemployment benefits have run out may receive 13 weeks of additional benefits, if they continue to look for a job but are unable to find one. Under the new House and Senate proposals, such workers in all states who have been unable to find a job would be eligible for an additional seven weeks of benefits, with workers in states with unemployment rates of 6 percent or more made eligible for another 13 weeks on top of that, for a total of 20 additional weeks of benefits. Currently, 17 states and the District of Columbia have three-month average unemployment rates at or above 6 percent. More states will join them if the economy continues to shed jobs.

    Such a measure is needed now because large numbers of unemployed workers who are currently receiving the 13 weeks of additional benefits Congress provided earlier this year will start exhausting those benefits on October 5. Labor market conditions in many states have deteriorated in recent months, and many workers who were out of a job in July when the 13 weeks of additional benefits started have not been able to find new employment. The National Employment Law Project estimates that 775,000 workers will exhaust their additional unemployment benefits in October, and a total of 1.1 million unemployed workers will lose benefits between October and December, unless Congress acts.[1]

    Recent data underscore the weakness in the labor market. In August, the unemployment rate reached 6.1 percent, with 9.4 million people out of work. One in every five of these unemployed workers had been out of work for at least six months. On September 25, the Labor Department reported that initial claims for unemployment benefits totaled 493,000 for the week ending September 20, the highest level since September 2001.

  • Temporary Increase in Food Stamp Benefits to Counteract Rising Food Prices: The House and Senate stimulus proposals also provide for a temporary increase in food stamp benefits. The Senate calls for a 10 percent increase, which would boost benefits by about $5 billion over the next year, while the House would boost benefits by about $2.6 billion.

    A temporary food stamp increase would help buffer low-income families from the continued sharp rise in food prices. Food stamp benefits are adjusted every October for food price inflation, but the adjustment is based on food costs in the previous June. Thus, the data on which benefits are based is already four months out of date by the time the benefits begin to take effect and 15 months out of date by the time the fiscal year ends the following September 30. During periods of rapid food price inflation, benefits can fall well behind what poor families need to obtain a nutritionally adequate diet.

    For example, because the monthly food stamp benefit for a family of four in August 2008 was based on food prices back in June 2007, the maximum food stamp benefit in August 2008 was $60 below the actual cost in that month of the Agriculture Department’s lowest-cost nutritionally adequate diet plan, which food stamp benefits are supposed to enable poor families to purchase. This pattern will repeat itself in the year ahead. Food stamp benefits from October 2008 through September 2009 will be based on the cost of this minimum diet in June 2008; but by August 2008, the cost of that diet already was $15 above the June level.

    A temporary increase in food stamp benefits will help reduce the shortfall caused by sharply rising food prices. The larger increase in the Senate proposal would make it more likely that food stamp benefits would be adequate to purchase a basic diet throughout the coming fiscal year.

  • New Resources for Struggling States: The House proposal includes $14.4 billion in fiscal relief for states; the Senate package includes $19.6 billion. These proposals, which provide for a temporary increase in federal funding for state Medicaid programs, are designed to help states avert budget cuts and tax increases that they otherwise will have to institute to balance their budgets — and that will make the economic downturn more severe, by withdrawing demand from the economy.

    States must balance their operating budgets each year, but state revenues are stagnating or declining at the same time that the need for various services is increasing as people lose their jobs. States are being forced to cut services and raise taxes in order to balance their budgets. Some 29 states and the District of Columbia had to institute measures to close budget gaps for their current state fiscal year, which began July 1. Moreover, half of these states have already seen new budget holes open up just a couple of months into the new state fiscal year, due to further deterioration of the economy.[2]

    A recent Goldman Sachs report notes that analysts there see a significant risk of a longer recession caused by a number of factors, including “a drag from weaker state and local spending.”[3]

    The House and Senate fiscal relief proposals differ in various ways. The Senate provides more total resources for state fiscal relief, but it provides the same percentage increase in federal Medicaid funding to all states, without regard to the condition of a state’s economy. The House proposal appropriately targets the bulk of the resources it provides on the states that have been hardest hit economically (and are facing the greatest pressure to cut programs and raise taxes), an approach that makes it more effective as stimulus on a “bang for the buck” basis.

Both the House and Senate proposals also include funding for various other programs and activities, including increased funding for infrastructure projects in areas such as schools, transportation, clean water, and public housing. Infrastructure spending can act as stimulus if the projects can be launched quickly; projects that take a long time to get underway will not be as effective as stimulus. More broadly, a question that should be asked about the stimulative impact of any program funding included in a stimulus package is whether the resources will be used quickly and boost aggregate demand for goods and services in the economy on a timely basis. The three measures discussed here meet that test with flying colors. It is not clear all other elements of the House and Senate packages do.

Stimulus Provisions in the Budget Context

Some may raise concerns about the impact of such legislation on the budget deficit and the economy’s long-term growth prospects, particularly in light of new budget concerns stemming from the problems in the financial markets. It would be preferable if Congress paid for the stimulus package in years after the economy has recovered. But as long as the stimulus spending is clearly temporary, as the proposals discussed here are, the impact on the budget deficit and long-term growth should be modest, compared with the benefits of keeping the current economic slump as short and shallow as possible.

The economy faces many challenges — including a significant disruption in the financial markets and weak aggregate demand, both of which are affecting the economy and jobs. Congress should address both problems before heading home.

End Notes:

[1] “States Hard Hit by Rising Unemployment and End of Federal Jobless Benefits: Nearly 800,000 Workers Left Without Assistance Soon After Congress Recesses,” National Employment Law Project, Updated September 19, 2008, http://www.nelp.org/docUploads/EUC-Revised.pdf.

[2] See, “State Budget Troubles Worsen,” Center on Budget and Policy Priorities, September 26, 2009, http://www.cbpp.org/9-8-08sfp.htm.

[3] Goldman Sachs US Economic Research, “Financial Conditions: Tighter than They Appear,” US Economics Analyst, August 29, 2008.

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