President Joe Biden's case for the American Rescue Plan (ARP) was simple: Americans needed economic relief, and they needed it fast. Government spending—in the form of $1.9 trillion worth of deficit-financed programs and checks—was necessary to kick the economy into high gear. "Big, bold action" would "change the course of the pandemic and begin economic recovery." The real risk wasn't in doing too much. It was in doing too little.
As it turns out, however, there were risks in going big—risks that were both predictable and predicted. And now, even as the pandemic shrinks from view, those risks are turning into very real threats to the recovery. Instead of kick-starting the economy as promised, Biden's Rescue Plan is holding it back.
The most obvious way in which the ARP is holding back the recovery is through boosted federal unemployment benefits. The recovery legislation extended a $300-per-week bonus payment through September. Because that $300 bonus comes on top of state-based unemployment insurance, which varies by state but on average runs a little over $300, a typical beneficiary now gets the equivalent of more than $15 an hour to stay home, which is more than many would earn at work. For many, then, the straightforward economic incentive is to avoid work and collect checks instead.
It's not that there aren't jobs available. On the contrary, right now there are more job openings than there were prior to the pandemic in 2020. Indeed, according to a report this week from the Bureau of Labor Statistics, there were 8.1 million job openings at the end of March, the highest number ever recorded. America is awash in demand for labor. What it lacks are willing workers.
There is a school of thought on the left that sees these numbers and shrugs. Some research has found that an even larger federal unemployment insurance bonus last year didn't reduce employment. But that research was conducted in the early days of the pandemic when firms were shedding jobs and employment opportunities were unusually scarce. It also found that the bonus payments reduced the intensity with which job-seekers looked for new work.
Which almost certainly helps explain why this month's jobs report was the biggest miss in decades: Given the intense demand for workers, the expectation was that the jobs report would show more than a million new jobs. Instead, the figure was a mere 266,000; job gains from the previous month, meanwhile, were revised downward.
Biden's recovery plan paid people not to work. So it is hardly surprising that they are now not working. And depending on how long this persists, some of those jobs may simply not come back, leaving employers, consumers, and workers worse off.
It's not that this effect was unusually difficult to predict: Back in February, as the ARP was being put together, Michael R. Strain, a right-of-center labor economist at the American Enterprise Institute, warned in congressional testimony that an extended, expanded unemployment supplement "would [prolong] the period of labor market weakness by incentivizing unemployed workers to remain unemployed."
"Many major components of the plan," he said, "are either unnecessary or would hold the recovery back."
This is not a matter of strict partisan opinion. Some more sober left-leaning economists also see the stimulus as having negative labor market effects. For example, Jason Furman, who chaired President Barack Obama's Council of Economic Advisers, cautioned this week that the unemployment bonus was likely slowing job growth.
"If I were in a state with a 3.5% unemployment rate," he told Bloomberg, "I'd be thinking seriously about whether paying people more to not work than to work was a good thing to continue doing." And he criticized the total size of the ARP this week as unnecessarily large. "It's definitely too big for the moment," he said. "I don't know any economist that was recommending something the size of what was done."
And yet congressional Democrats and Biden collaborated to pass something that was, even at the time, obviously wasteful, irrelevant to the crisis, and likely to hold back the recovery.
And there may be further consequences yet: Inflation is ticking up, with consumer prices growing at a faster rate than they have in a decade. Some of this may just be temporary noise from time-limited events, like a computer chip shortage making it harder to manufacture cars. But as Strain notes in a new column, "Any period of sustained inflation is likely to begin with aberrant economic phenomena." Before the dinosaur arrives, you see ripples in the water glass.
Yet Biden doesn't seem remotely interested in changing course, and neither do his Democratic allies in Congress. He and Speaker of the House Nancy Pelosi used the release of the underwhelming jobs report to argue that the Rescue Plan was working—and to make the case for doubling down on its approach.
Biden has already proposed an additional $4 trillion in federal spending, above and beyond the $1.9 trillion in the Rescue Plan. Like the Rescue Plan, the two packages are larded up with preexisting Democratic priorities that have little to do with the pandemic or the recovery. But they would fund handouts to a number of Democratic constituencies, particularly labor unions.
There is something more than a little bit unsavory about all of this. Biden championed giving four-figure checks to families with stable jobs and six-figure incomes as part of an economic "rescue" plan that is now stalling the economy in ways that could have negative long-term consequences for lower-wage workers. But that's not stopping Democrats from pushing ahead with more of the same.
Reacting to last week's jobs report miss, Pelosi said, "The disappointing April jobs report highlights the urgent need to pass President Biden's American Jobs and Families Plans." Based on what Biden's economic rescue plan has done for the economy, I'm none too excited to see what his jobs and families plans do for jobs and families.