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Here's the economic reality behind the rhetoric on U.S. aid bill

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With $1.9 trillion in coronavirus relief on the line, President Joe Biden and fellow Democrats are depicting an economy still in the grips of widespread crisis, while Republicans see the ingredients in place for a solid recovery that needs only limited additional aid.

The reality is somewhere in between. Payrolls and unemployment filings remain far worse than pre-pandemic levels, a situation that Friday's jobs report is likely to reinforce. Yet some indicators such as retail sales look fine, and near-record stocks and surging Treasury yields represent a resounding vote of confidence from investors.

Even so, the partisan divergence illustrates why passage of the stimulus bill in the Senate -- which could debate the measure through the weekend -- depends on Democrats ensuring zero defections from their 50-member caucus, since no Republican has voiced support for the legislation. Vice President Kamala Harris would provide the tie-breaking vote.

Here are questions about major components of the aid package, with key points in the debate over each one and what the reality reflects from data and research.

- Are extra jobless benefits still needed?

The claims: Democrats want to boost special federal unemployment benefits to $400 a week, from the current $300 (it was $600 under last year's Cares Act) and extend them through August or September, arguing that the pandemic's economic hit was harsh and state programs are often insufficient. Republicans say the extra benefits create a disincentive for people to find work; some have proposed keeping the payments at $300 through June.

The reality: The payments disproportionately help lower-wage earners, while the extra benefits, in aggregate, don't discourage the unemployed from looking for jobs.

Job losses have been concentrated among the lowest earners. A Federal Reserve analysis found that the unemployment rate for the lowest-paid workers is likely above 20%, compared with below 5% for top earners.

Republicans say higher benefits provide the jobless with more money than if they were working, which has been the case for some. The National Employment Law Project says that state benefits average $340 a week, or 44% of an unemployed person's weekly wage, so the supplements won't necessarily bridge the full gap.

Businesses have seen mixed effects. Many small firms reported challenges in convincing former employees to return to work, though this was also tied to health concerns and childcare issues.

Companies in states with higher benefits experienced slightly lower demand for jobs, yet such states experienced milder declines and faster recoveries.

- How badly are states and municipalities hurting?

The claims: Democrats say states and municipalities need $350 billion to preserve services and prevent further layoffs. Republicans say that states are doing fine and they're characterizing this component as a bailout of Democrat-run states like New York.

The reality: The proposed funding is much bigger than the gap in state finances, and revenues for the last nine months of 2020 declined just 1.8% from a year earlier. Much of that cushioning was thanks to federal aid through earlier stimulus programs that helped Americans continue to pay taxes.

But states and municipalities aren't out of the woods. The majority of states have slashed their forecasts for tax revenue in fiscal 2021, and local governments are also facing revenue constraints paired with pandemic-related costs.

At the state level, jobs continued to vanish even as private-sector payrolls started rebounding in May. For local governments, employment levels are hovering near the lowest in two decades, and outside of education, the pandemic has erased five years of job gains.

- Who should get a stimulus check, and aren't savings high already?

The claims: Democrats want to send households checks for $1,400 -- or more if they have children -- to help cover expenses and pay bills. Republicans want to narrow eligibility, saying some payments would end up going to well-off Americans. (Biden on Wednesday agreed to a change to lop off some higher earners.)

The reality: Some checks would likely go to people who don't need them. At the same time, it's nearly impossible for the government to calibrate the stimulus perfectly, since it's using older IRS data and many higher-earning households saw a drop in income.

It's true that the overall saving rate remains elevated at nearly triple the pre-pandemic level, signaling some recipients aren't immediately spending the funds, and a number of recent studies show that Americans with higher earnings tend to pocket the funds. In other words, the checks can act more as financial aid rather than economic stimulus.

But stimulus payments helped about 66 million Americans meet their spending needs just last month, and the most recent funds helped lower the poverty rate in January.

Also, 9 million households are behind on rent, and about 1 in 10 Black homeowners aren't caught up on mortgage payments.

The checks also act as a safety valve. More than 9 million people applied for and didn't receive unemployment benefits; about half had kids at home.

- How much of a risk is inflation?

The claims: Democrats say risks of inflation from the relief bill are low compared with the risk of failing to act because Americans are still hurting from the pandemic. Republicans say harmful price increases are a worry with consumers already raring to use their pent-up savings and federal spending set to add to the budget deficit.

The reality: Several key indicators show the economy is gaining steam, covid-19 cases and hospitalizations have fallen substantially in recent weeks, and roughly 2 million Americans are now getting vaccinated against the coronavirus each day.

While former Obama economic adviser Larry Summers says that indicates additional stimulus could overheat the economy -- and bond yields have surged -- most expectations by investors and economists of future inflation remain at levels that are historically nonthreatening. Federal Reserve officials repeatedly say they're not concerned.

Why? One reason: The package is largely short-term, as the expiration of benefits later this year limits the long-run macroeconomic impact.

Also, Goldman Sachs analysts estimate the economy is 6% to 7% smaller than it would have been without the pandemic, indicating plenty of slack before inflation is triggered. But even in early 2020, when the economy was arguably at full capacity with unemployment at a half-century low, inflation missed the Fed's 2% target.

 

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