Question

The recently passed Coronavirus Relief package increased unemployment benefits by granting $600 a week (up to 4 months) to an unemployed individual, plus the normal unemployment benefit they would be entitled to (max $360 in Michigan); extended the duration of unemployment benefits another 13 weeks; makes former workers eligible (you need not have been laid off due to the pandemic). All of it is federally funded. Was this a good idea? What affects might there be on the labor markets? On the economy?  

Answer 1

The huge increase in the benefits to the unemployed will definitely impose great fiscal deficits for the US government and pose a challenge to long term growth once the pandemic is taken care of. All else equal, US would be on the long path of austerity post the pandemic to cover for the increased expenses right now. But, it is the correct move. The pandemic itself can have much worse effects on the economy if nothing is done. The rising number of unemployed people lose their incomes and as a result demand less. This acts as a negative demand shock and contracts GDP by a large amount. Further, without any support, they will struggle for basic sustenance and thus increased cost of healthcare and humanitarian crisis. Fiscal policy through money transfer is the best policy as it does not have any leakages and people can fall back on some income to maintain a minimum level of purchasing power. Easing monetary policy simply does not work when supply chains are broken. When dealing with a pandemic like this, the objective function that needs to be minimized is not the fiscal costs in the future but the time taken to eradicate the disease. And all fiscal policy measures should aim at keeping the population healthy and alive. The economic loss from extending the virus to a longer period due to fiscal austerity currently will only do more harm in the long run. In the longer run, if the population is not taken care of, there may be a serious shortage of labor and a constant negative supply shock.