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Nicklaus: Stimulus checks won't work. Unemployment boost is more effective

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Trump's team on Capitol Hill as virus aid talks deepen

In this April 23, 2020, file photo, President Donald Trump’s name is seen on a stimulus check issued by the IRS to help combat the adverse economic effects of the COVID-19 outbreak, in San Antonio. There were just a few hundred coronavirus cases when Congress first started focusing on emergency spending in early March. By the end of that month, as Congress passed the massive $2.2 trillion Cares Act, cases skyrocketed above 100,000 and deaths climbed past 2,000. (AP Photo/Eric Gay, File)

David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

With coronavirus infections rising instead of falling, the struggling U.S. economy clearly needs more support and needs it fast.

Democrats and Republicans seem to agree on that much, but they’re far apart on how much to spend and where to spend it. In a pandemic that has shut down some industries while leaving others relatively unscathed, where the money goes is more important than ever.

Senate Republican leader Mitch McConnell said this week that he favors another round of payments similar to the $1,200 that most Americans got this spring. The White House has been pushing to cut payroll taxes rather than hand out checks, but dropped the idea on Thursday.

Either Republican approach would put money in people’s pockets before Election Day, but neither would be very effective at stimulating the economy. The aid would go mostly to people who are still working and haven’t seen their incomes reduced by the pandemic.

They’ve reduced spending because theaters and concert halls are closed, or because they don’t feel comfortable getting on an airplane, not because of a lack of cash.

“For many of us, the $1,200 isn’t going to do much to stimulate our spending,” said Steven Fazzari, an economics professor at Washington University. “We should focus the money on the unemployed.”

In terms of bang for the buck, we’d do better by continuing the enhanced unemployment benefits that are due to expire July 31, providing money to help state and local governments avoid layoffs and beefing up COVID-19 testing. All those measures were part of a $3 trillion bill passed by House Democrats in May.

Sharon Parrott, senior vice president at the Center on Budget and Policy Priorities, argues that the next stimulus package should contain even more help for low-income families, including housing aid and a beefed-up Supplemental Nutrition Assistance Program.

“Targeted measures helping those who are actually struggling to get by are more effective at reaching two important goals,” Parrott said. “They’re more effective at reducing human hardship, and they’re more effective dollar for dollar at increasing consumer demand.”

She’s right. The laid-off workers getting an extra $600 a week in unemployment benefits are spending the money on rent, food and other necessities. This spring’s $1,200 checks padded Americans’ bank accounts but didn’t stimulate much spending.

Republicans worry that providing too strong a safety net creates a disincentive to work. That’s a reason to phase out the extra benefits as the economy improves, but it’s a weak argument when hotels, restaurants and many other industries are forced to operate at well below their usual level.

Many Republicans also oppose federal aid to state and local governments, saying they don’t want to reward governors and mayors for being spendthrifts. They cite big pension deficits accumulated by states such as Illinois.

The fiscal responsibility lecture, though, isn’t especially relevant to the situation at hand. States and cities have suffered a huge, unanticipated drop in tax revenue that will force them to cut spending and lay off workers.

Leaving local governments to fend for themselves would be a big mistake, Fazzari believes. If public-sector layoffs mount, he said, “You could turn what was an external health crisis into a demand-driven recession, making things worse than they already were.”

Republicans and Democrats proved in March that they could agree on timely, targeted stimulus in the face of an unprecedented economic challenge. As they search for another compromise four months later, they need to focus aid where it will do the most good, not where it will be politically popular.

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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

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