“He that will not work, shall not eat.”
Some of you may recall from your grade school days a lesson about the English settlement at Jamestown, Virginia and Captain John Smith, who supposedly straightened out the chaotic colony by demanding that everyone perform physical labor or starve. This anecdote, like most historical tales, lacks a good deal of nuance and backstory, but the central precept which we internalized was clear—America was built by the labor of its people, and everyone needed to work to provide the necessities and extras which we needed and wanted.
The fiscal response to the coronavirus disruption, however, has exposed a curious rift in this work = money equation. Washington has created and distributed sizable amounts of money in order to keep American incomes somewhere around pre-crisis levels while the production of goods and services (as measured by GDP) has taken a historic tumble. Are many of the goods and services produced by our economy superfluous, and only vital for the income they provide to businesses and workers? To put it in Captain Smith’s terms, do we all really need to work in order to eat?
The idea behind the CARES act, passed in response to the pandemic, was that Washington would replace lost wages and salaries for workers who were unable to perform their jobs due to virus restrictions—either by paying business owners to keep them on payroll (the forgivable loan program) or by enhancing unemployment benefits so that most workers would receive at least as much as they would have made by working (the extra $600 per week). In this way, a long-term economic downturn could be avoided even if the Gross Domestic Product took a big hit. This is an implicit recognition that maintaining American consumption is more important than keeping up American production (outside, one supposes, of toilet paper, hand sanitizer, and chicken thighs). And so we find ourselves in a situation where Washington is sending out $25 billion per week (an equivalent of $1.3 trillion annually!!) in unemployment compensation—money conjured from nowhere in exchange for nothing. (The bills for the forgivable loans and corporate handouts will come later—right now they are still technically loans and therefore not spending–yet.)
The enormous money creation engendered by the CARES act has, in the aggregate, replaced the income that underutilized workers and businesses would have earned under normal circumstances. We should emphasize that this is only true of the country taken as a whole–income replacement has been unevenly applied and many Americans have missed out and are suffering. But the Congressional Budget Office estimates that 5 out of 6 workers stood to make more from the enhanced unemployment benefit provided by the CARES act than they would earn from their regular jobs. This display of profligacy has, of course, inspired the harsh condemnation of those in power who would prefer that Washington’s deficit spending continue to accrue largely to their own interests.
Currently the extra $600 week in unemployment benefits is set to expire at the end of July. This leaves Congress and the Administration with a vital policy decision: do they continue with the enhanced benefits until the end of 2020 and possibly beyond? Proponents suggest that without the extraordinary payouts, demand will crater as normal UE benefits only make up for 30 to 50% of most people’s income. Opponents point out that paying people more to not work is harmful to economic production and strikes at the root of our assumptions about the necessity of working for money. Both sides have valid arguments, and the outcome has larger implications for the future of the federal budget. It should be clear to everyone at this point that Washington can, at least in the short run, create and distribute money widely without detrimental financial effects (rather the opposite if one considers asset prices). The decision to spend money, then, becomes one of politics rather than of necessity—whose economic pain, and what level of it, requires a response?
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