Economists see the uncertainty as devastating for state budgets.
It’s now been more than six weeks since the House passed the HEROES Act, its latest take on additional stimulus as workers, businesses, and states continue to grapple with the economic fallout of the coronavirus. The Senate, however, wants to wait two more before considering a bill of its own.
Both chambers of Congress have officially left for a two-week July Fourth recess and Senate Republicans have said floor consideration of stimulus legislation won’t happen until they’re back. “A month from now we should be in the final stages of getting that bill together,” Sen. Roy Blunt (R-MO) told reporters earlier this week. (The House is focused on committee work in the interim.)
Democrats have argued that this delay could have serious consequences, as states stare down budget cuts and households across the country deal with layoffs and upcoming rent and mortgage payments. Republicans, meanwhile, have noted that some of the previous stimulus funding is still being distributed and emphasize that they’re waiting to see how the economy performs as some states reopen.
The updates, so far, have been mixed: This past week, a monthly report showed an influx of 4.8 million jobs in June, a seemingly promising boost, but data collected more recently also revealed that more than 1 million new unemployment claims were filed last week. Additionally, the current unemployment rate remains one of the highest the country has seen in years, at 11.1 percent. Another complicating factor: Some recent gains are a result of states reopening businesses, a move that some have had to reverse as coronavirus cases have spiked.
Economists tell Vox they’re particularly concerned about the limbo states are left in as a result of the Senate’s stimulus timing. While many have rainy-day funds, the delays of additional support make it tough for states to plan how well they will (or won’t) be able to provide public schooling, support for higher ed and Medicaid payments as they keep fielding sharp dips in revenue. For many states, their fiscal year budgets began on July 1, which has now come and gone.
“States are making decisions every day about what services they can provide and where they are going to need to lay people off, and, if they don’t know for sure that more funding is in the pipeline, they are going to err on the side of caution,” says Harvard Kennedy School economics professor Karen Dynan, a former chief economist for the Treasury Department. “That can’t be good, particularly when we are seeing cases surge in some places and all the more need for good health care and aggressive public health policy.”
Democrats’ legislation would have allocated more than $900 billion to states and localities to help cover some of the revenue shortfalls they’ve experienced, in addition to the $150 billion that’s already been set aside to help address coronavirus-related costs in the CARES Act. In the past, however, Republicans have chafed at providing more federal aid to states, with Senate Majority Leader Mitch McConnell dismissing such efforts as a “bailout” that could be used to address “preexisting” problems. He’s since noted that more funding is likely needed but shied away from the amounts Democrats have proposed.
It’s unclear whether Democrats and Republicans will be able to reach an agreement on the boost in state funds and next steps on other important programs, including pandemic unemployment insurance, which is due to expire at the end of July. For now, it’s a question the Senate won’t be addressing for a few weeks.
State funding and pandemic UI are immediate areas where more action is needed
Additional state funding and an agreement on pandemic unemployment are among the areas where there’s an urgent need for more action.
As Vox’s Emily Stewart has reported, state and city budgets have faced immense strain throughout the pandemic as they’ve seen massive declines in both sales and income tax revenues, as well as growing costs associated with addressing the coronavirus. Before the coronavirus outbreak, “Arizona expected a $1 billion surplus and is now staring down a $1.1 billion deficit,” she writes.
Some states, including Michigan, have already proposed significant cuts to the budgets for the next fiscal year, including more than $450 million in reductions to schools and universities. According to Pew, state and local governments have temporarily laid off or furloughed 1.5 million workers as of June.
“Assuming that this is just a delay and that Congress eventually passes a bill, I think the most immediate impact is on state budgets,” says UC Berkeley public policy and economics professor Jesse Rothstein. “States have been kicking the can down the road, hoping that the federal government gets its act together. … The longer that is delayed, the worse off we will all be.”
At this point, it’s uncertain if Senate Republicans will be on board with much state funding even after they return to the Capitol: Top leaders including McConnell have signaled more openness to the idea but have been reluctant about an expansive package. If states don’t get the support they need — fast — more layoffs and budget reductions could add to the current economic fallout.
“When you cut the budget, you have to cut positions for workers, and that further compounds the recession that we’re having right now,” says University of Kansas economics professor Donna Ginther. “This is the exact wrong time for state governments to fend for themselves.”
A July 31 deadline is also looming over the expanded unemployment insurance that was included in the CARES Act. Slated to sunset at the end of the month, this policy adds another $600 per week to the unemployment support that individuals receive.
Given the ongoing nature of the pandemic, and the layoffs that have persisted at many businesses, Democrats have argued that this support should continue. As Cecilia Rouse, a former economic adviser for the Obama administration, previously told Vox, ideal pandemic response policies would help put the economy on pause and tide workers over, while the country resolves the public health crisis.
Republicans, though, have argued that state reopenings will provide a key boost and worried that extending the increased UI will deter people from returning to work as businesses rehire. The Labor Department’s most recent unemployment report, which saw an additional 1.4 million people file last week, however, made clear that many people are still dealing with job losses.
If the expanded UI benefits end by August, this change could have a notable impact on consumer spending and households’ ability to cover living costs including food and rent. “Everything I’ve seen suggests that unemployment is going to come part of the way back, but not all the way,” says Ginther.
Lawmakers have a narrow window to approve stimulus in July and August
Now that it’s off for recess, the Senate won’t be back until Monday, July 20 — when lawmakers will have a narrow window to strike a deal on the next package, before they’re due to leave once again for their next recess on August 10.
The upcoming UI deadline is among the notable dates putting pressure on Congress to work something out — both to ensure individuals continue to have the support they need and so that states can have the time to update their approach to UI distribution if that’s required.
Complicating the issue, as usual, is the White House. “The shape of any kind of package is very much up in the air,” White House economic adviser Larry Kudlow said Thursday, while noting that the administration opposes the pandemic unemployment insurance.
Experts emphasize that more stimulus is sorely needed, especially as cases of the coronavirus are spiking again in several states including Arizona, Texas, and Florida.
“The health crisis — and thus the economic crisis — show no signs of slowing down, and now is not the time to scale back on support to those who need it most,” says Natasha Sarin, a law professor at the University of Pennsylvania.
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