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Outside the Box: Fix these 3 things so federal and state governments can offer more targeted help during the next recession

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The COVID-19 pandemic took a devastating human toll. It also posed an extraordinary threat to the U.S. economy – one met by a swift, forceful, creative and largely successful response from fiscal and monetary policy.

While the lessons from this recession continue to unfold, the next recession may arrive sooner than we hope. Now is the time to identify lessons from the economic policy response to COVID-19, to build on what worked and to prepare for the next recession.

The U.S. economic recovery from the sharp 2020 downturn was stronger than initially forecast and stronger than recoveries in other advanced economies. Remarkably few businesses failed. Remarkably few people lost their homes or were evicted. State and local government budgets are in good shape. And despite the enormous increase in federal borrowing, long-term interest rates remain low, in part because of the Federal Reserve’s actions.

The sizable fiscal and monetary response – $5 trillion in federal spending plus the Fed’s zero interest rates and $5 trillion in quantitative easing – demonstrate that fiscal and monetary policy can stabilize an economy in crisis.

Of course, all that fiscal and monetary stimulus contributed to an unwelcome surge in inflation. It’s too soon to know if history will judge that the response was too big; if inflation is brought down over the next couple of years without too much pain, then the response to the pandemic will likely be seen as an historic success.  

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Plus: Rising wages and labor shortage threaten U.S. effort to tame inflation quickly

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A strong, broad, and inclusive social insurance system provides effective relief to distressed households as well as providing necessary macroeconomic stimulus. For example, people who lose their jobs and receive unemployment benefits promptly spend much of the money they receive, boosting demand. Sufficiently generous social insurance benefits – like unemployment insurance, nutrition programs, and Medicaid – can reduce the need for aid to businesses, homeowners, renters, and even state and local governments.

Generous unemployment benefits seem to discourage work less than previously thought. The federal government supplemented regular unemployment benefits by $600 – and later – $300 a week and made benefits available to gig workers and others not previously eligible. It has been argued that these benefits dissuaded people from taking jobs when employers were eager to hire them. At least during the pandemic, the evidence suggests these effects were quite small.

Making permanent some COVID-era benefits (such as broadening eligibility for unemployment benefits) is the kind of policy we could enact now to ensure a strong enough safety net and avoid the need for emergency legislation in the next crisis.

In the future, support for households should better reflect the state of the economy and the needs of households. Congress allowed programs to lapse prematurely in the summer and fall of 2020 and probably provided too much stimulus in the winter and spring of 2021. The federal supplement to unemployment benefits swung up and down with little connection to the state of the labor market. Most households received a sizable one-time stimulus payment in the spring of 2021 when better targeted and persistent support would have been better.

Congress, therefore, should craft policies that respond automatically as economic conditions warrant – more money when the economy does worse, less when it does better.

Increasing administrative capacity now, before the next recession, will allow for a stronger response. We learned that the federal government could deliver stimulus payments electronically to households very quickly, but we also learned that it is hard to quickly launch entirely new programs (such as aid to renters) or modify existing programs (such as unemployment insurance).

Federal and state governments should modernize computer systems, improve communications across agencies and levels of government, and invest in data systems so they can be more agile in the next crisis.

We cannot be certain that Congress will always move as swiftly as it did in the spring of 2020. Recent experience shows that it can, but we can’t leave economic security up to the ever-changing political winds. Before the next crisis arrives, we should do at least three things: improve existing social insurance programs such as unemployment insurance, enlarge automatic stabilizers that respond to economic conditions, and improve the administrative infrastructure so we can stand up effective, temporary and right-sized programs quickly in the next downturn.

Wendy Edelberg is director of the Hamilton Project at the Brookings Institution. David Wessel is director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution, and Louise Sheiner is the center’s policy director.

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