By Lorenzo L. Perez
The new U.S. presidential administration which took over on January 20 must address serious health and economic challenges. This article recommends economic policy initiatives to address the health and economic crises based on the principles of the Social Doctrine of the Church. The dignity of the human person and the defense of life calls for giving priority to spending programs to control the spread of the virus. The principles of solidarity and the common good call for economic initiatives that favor the majority. The principle of subsidiarity calls for allowing lower levels of government to play a key role in implementing some of the health and economic programs. The preferential option for the poor calls for new benefit programs to be targeted to the most needed. Actions are needed to protect the Earth (our Common Home) following Pope Francis’s teachings.
Congress approved a $2 billion relief package in March 2020 that proved to be effective in offsetting the effects of economic contraction including the federal government topping up unemployment benefits, a one-time cash transfer to low -and middle-income households, and loans to small businesses that could be converted into grants if employees were not dismissed. After much delay, Congress finally agreed to a second stimulus bill (about $900 billion) right before Christmas, extending aid to millions of struggling households through stimulus checks and enhancing federal unemployment benefits and money for small business, schools, and childcare, as well as vaccine distributions. It also repurposed $429 billion in unused funding of emergency lending programs run by the Federal Reserve Board.
As projected, COVID-19 cases exploded as the weather grew colder in 2020 when effective public health directives failed to be followed effectively. Hope is growing, however, because a number of vaccines against the COVID-19 virus are being rolled out (albeit less rapidly than expected). Economic output declined by 3.5 percent in real terms in 2020 (the largest decline since 1946 when WWII spending came to an end) and the unemployment rate declined to 6.3 percent in December but mostly as a result of people leaving the work force. The demand for food aid from poorer segments of the population has increased sharply and the possibility exists that bankruptcies will continue to rise.
This article discusses first actions during the first six months of 2021 to stop the spreading of the virus and continue to offset the effects of the economic shock related to the pandemic; secondly, it proposes structural policies that addresses long standing problems of the American economy and that would take more time to implement. Structural policy initiatives are discussed in the areas of fiscal policy, monetary policy, environmental regulations/actions to address climate change, and international economic policies (trade policy, relations with developing countries and policies for international financial institutions, and immigration).
The first item of business for the new administration should be to assess the current health, economic and social issues requiring immediate attention and then to take targeted actions to launch an effective and coordinated anti-COVID-19 campaign and programs to address unemployment, hunger, and other social needs. The implementation of the two stimulus packages passed in 2020 have had beneficial effects, but the level of unemployment, the pressures on many businesses, an increase in hunger in the country, and the difficult financial situation of many school districts clearly indicate that more stimulus efforts are needed.
In the health sector, there is a need to have a national policy to ensure that the necessary resources are made available to state and local governments. Any lasting economic recovery will not be ensured until the pandemic comes under control. Efforts should be made to speed up the inoculation of the available vaccines. The lack of sufficient protective equipment for health workers remains, and testing and tracking protocols for the virus must be improved.
On the economic front, the additional federal jobless benefits were extended only through March 2021 by the second stimulus package, and some additional resources were made available to help small businesses as long as they kept their employees. These actions need to be strengthened, and the Biden administration should also seek congressional authorization to start raising the minimum wage nationally early in the year. Food insecurity is evidently growing in the U.S. and needs to be addressed at the federal level through the expansion of nutrition programs such as SNAP, formerly known as the food stamps program. State and local governments remain in dire need of federal help to offset their declines in revenue, avoid staff dismissals, and meet demands for increased expenditures associated with the pandemic, particularly in schools. All of this will cost billions of dollars in additional resources, and they should be committed as soon as possible.
Finally, in the short run, the United States should join other countries in the ongoing international efforts to help the poorest countries secure vaccines for their populations. Under the leadership of the World Health Organization (WHO) and other organizations, an international effort has been launched (the Covax facility). Countries including the United Kingdom, Canada, Germany and Saudi Arabia have committed funds to this project, and the United States should not be absent from this endeavor. Solidarity and the common good demand it. If nothing else, self- preservation calls for helping other countries vaccinate their people; it would be foolhardy to believe this country could contain the virus without ensuring that it is controlled in other countries too.
Policy efforts will be needed in the coming years to address the lingering effects of the pandemic as well as to address deep-rooted economic and social challenges faced by the United States. Among the most urgent are the social and economic outcomes related to poverty; inequalities of opportunities and declining socioeconomic mobility; increasingly unequal income distribution; rising barriers to trade and foreign investment; and an unsustainable medium-term path for public debt.
In addition, at the international level, a key priority is the restoration of the shared expectation among the major countries that international economic diplomacy is consequential. A healthy global economy requires both the habit of international cooperation and major mutual commitments at times of crisis. This is in line with the promotion of the common good and the spirit of solidarity. The nature of the current macroeconomic challenges is very different from what it has been historically. Neither excessive inflation nor the crowding out of private investment by budget deficits is a current problem in the industrialized world, and very low interest rates extending out 30 years in all major countries suggest that markets do not expect them to become serious problems.
Following the sharp contraction of 2020, the private economy may not find its way back to full employment, underscoring the importance of public policy initiatives. A global program of fiscal stimulus to strengthen demand and protect households and other priorities could be developed. With interest rates stuck at zero across advanced economies, fiscal stimulus has powerful spillovers effects when done collectively to assist growth in the U.S. and abroad. Going forward, an important part of a fiscal stimulus package for the U.S. would be the spending actions discussed above as short-term measures.
An effective stimulus package also requires infrastructure investment, which in the United States now represents a smaller percentage of GDP than in most years of the past half century. Unsurprisingly then, the quality of U.S. infrastructure is declining relative to that of other countries. With interest rates at historically low levels, the case for a significant increase in infrastructure is compelling. It will be important, however, to focus new spending on projects that yield significant returns and to fund maintenance and repair of existing capital rather than focusing solely on flashy new projects. Investment on jump-start projects related to the repair of highways; freight infrastructure; and on the broader transportation system aimed at reducing carbon footprints should be prioritized.
1 Lawrence Summers: Memo to the Biden Administration on priorities for the U.S. Treasury, part of the PIIE series Rebuilding the Global Economy.
2 Jason Furman: Memo to the Director of the National Economic Council, PIIE series Rebuilding the Global Economy.
3 Karen Dynan: Strengthening the US economy to foster rebuilding and recovery, part of the aforementioned PIIE series
In addition on the spending side, to better address the poverty and inequality problems mentioned above, an effort should be made to: increase and better target personal tax credits like the Earned Income Tax Credit program and the Earned Child Tax Credit for individuals having an income below an established threshold; nutritional programs need to be improved to abolish the specter of hunger; programs that give children in lower-income American families a better chance to succeed economically (e.g., in education); the provision of more comprehensive and portable health insurance and measures to increase the protection of American workers in the workplace.
On the revenue side, there is a need to address (1) the unfairness of the tax burden across income levels and (2) the insufficient level of federal government revenues. The 2017 tax cuts were expensive and strongly biased in favor of high-income earners and corporations, and it will be necessary to reverse some of the actions taken in 2017 for the sake of fairness and solidarity. Raising individual tax rates of high-income households is one part of the agenda. Another should be a critical review of the deductions in the tax code produced by lobbying efforts over the years resulting in many companies and some individuals paying nothing in taxes. The U.S. treatment of business income remains out of line with its treatment in many developed countries and does not collect enough revenue to support needed government spending while failing to foster efficiency and fairness. An increase and reform of corporate taxation will work better with international cooperation, given the mobility of U.S. companies, the tax competition in some jurisdictions, and ad-hoc, digital and other taxes on U.S. companies operating in other jurisdictions. An increase in the Internal Revenue Service (IRS) staff which has been decimated in recent years, would help to ensure the proper enforcement of tax regulations.
The historic size of the fiscal packages being discussed here will cause a sizable increase in the level of federal debt in relation to GDP with negative implications for future generations. It is not clear how much fiscal space (an increase in the fiscal deficit without overheating the economy) is there in the United States to carry out the spending initiatives discussed here. For this reason, it is important that priority be given to projects with the highest returns and efforts be made to increase revenues. The low level of interest rates provides some breathing room, but eventually the primary balance of the federal government (revenues minus expenditures other than interest payments) will need to turn into surplus in order to stabilize the debt path. To achieve a primary surplus over time, the International Monetary Fund (IMF) staff recommended in the 2020 Article IV consultation report a number of measures, including the adoption of a federal value-added tax (single rate, few exceptions, possible sharing with state and local governments but accompanied with a strong safety net for low-income people); higher fuel taxes for gasoline and diesel; a carbon tax aimed at a broaden environmental externalities of carbon emission; and entitlement reforms (increase of retirement age; progressivity of benefits; modifying the index formula of social security benefits to reduce the rate of increase; and containing health expenditures). All of these proposals have been discussed at different times and will be resisted by vested interests but will need to receive serious consideration if the United States is to avoid a painful day of reckoning on its debt situation.
4 Lawrence Summers and Natasha Sarin in “Many companies pay nothing in taxes. The Public has a right to know how they pull it off” calculated that in 2019, nearly 20 percent of large corporations that reported profits to shareholders of $100 million or more paid zero (or even negative) federal income taxes.
Finally, the new fiscal policy strategy proposed by a former Treasury Secretary, a former head of the Congressional Budget Office and a Nobel laureate economist argues that a different approach in fiscal policy is required because of the deep uncertainty about interest rates and other key parameters determining the country’s fiscal position. Instead of using arbitrary anchors like debt to GDP, they propose that the budget adjust more automatically and rapidly in areas where there is broad consensus. Doing so would be consistent with broader social goals, allowing discretion for policy makers after the automatic adjustments kick in. Their proposal also discusses stronger automatic stabilizers (spending increases or tax cuts that are automatically triggered when the economy weakens without need for government actions); infrastructure investment; extension of debt maturities; indexation of long-term fiscal programs to their underlying causes; and more emphasis on residual fiscal discretion. This approach has obvious merits, and many of the fiscal proposals advocated by the author can easily be integrated into it.
In reacting to the shocks of the pandemic crisis, the Federal Reserve Board (the Fed) appropriately used its operational independence and put in place an impressive array of initiatives. The Fed’s last year actions were well designed, forceful and instrumental in supporting demand and in restoring the normal functioning of financial markets. The 2020 Article IV consultation of the IMF report notes that beginning in March, the Fed deployed large and front-loaded purchases of Treasury and mortgage-backed securities along various credit facilities, which allowed credit conditions to ease and equity markets to rebound. In addition, it expanded swap lines with other central banks and eased the terms to access these resources. These swaps have had very positive effects on foreign countries and facilitated an easiness in global credit markets (lower interest rates and more liquidity). The Fed also put in place the Payroll Protection Program facility and a Main Street Lending program for the U.S. However, the latter was not very successful, and there were few takers as the terms proved to be unattractive.
5 Peter Orszag, Robert Rubin, and Joseph Stiglitz: “ Fiscal Resiliency in a Deeply Uncertain World: The role of Semiautonomous Discretion”, Policy Brief, Peterson Institute for International Economics, January 2021.
6 Under the swap lines the Fed exchanges dollars for other currencies with foreign central banks for a period of time (in effect allowing foreign central banks to borrow dollars from the Fed, something which can be quite useful if their foreign currency positions are under stress).
A case could be made to a need to maintain the monetary support in the short run to bring the economy back to maximum employment and 2 percent inflation, given that the Fed’s forecasts anticipate that both inflation and employment will remain below its medium-term goals. Such continued support would complement the fiscal measures discussed earlier. The Article IV of the IMF report warns against providing additional incentives for excessive financial risk taking and a shift of resources toward more risky activities. These activities require cautious surveillance to ensure that excesses that could result in damaging effects on the economy (and on the common good) do not occur. In this context, the regulatory framework for the financial system and the supervisory practices of the financial system needs to be judiciously enforced and kept under close review to ensure that the financial system stays resilient and flexible. The possible rise of borrowers’ insolvency presents a challenge. Carmen Reinhart, the Chief Economist of the World Bank, has warned that a financial balance-sheet crisis is gathering momentum across a broad swathe of countries. A balancing act has to be achieved by supervisors between promoting continued bank lending while avoiding a banking crisis.
Environmental regulations and Climate Change
Environmental regulations should be considered under the umbrella of economic policy because they can aim at maintaining and using natural resources in a way that induces sustainable development in line with the good steward role of nature that humanity is called to be. They can also be an unnecessary hindrance to economic activities that lower output. In developing environmental policies, there is always a tension between protecting the environment (slowing down temperature rises, cleaning air and water, protecting endangered species, etc.) and promoting the exploitation of natural resources. The Trump administration will pass down in history as imposing the most anti-environmental regulations policy of any administration after having eliminated tens of existing regulations that had been introduced by Republican and Democratic administrations to protect the environment. It also tried to open for commercial exploitation previously protected federal lands and withdrew from the Paris Climate Agreement. These actions amounted to a total disregard of the common good.
It is clear that the Biden administration will need to do a quick assessment of the executive actions taken by the Trump administration and most likely reverse them to protect the common good. As promised, one of the first actions of President Biden administration took was to have the U.S. rejoin the Paris Climate Agreement. Rejoining that Agreement will help reestablish U.S. leadership in multilateral efforts to combat and adapt to climate change. There are numerous specific policies that could be adopted. Examples are pressing to consider decarbonization targets in future trade negotiations; the adoption of a carbon tax adjustment on energy’s consumption contribution to imported goods and services; and initiatives in maritime and fishing issues.
7 Carmen Reinhart: “The coming covid-19 credit crunch” , The Economist—The World in 2021, December 2020.
8 The growth of nonbank credit markets complicates the supervisoryfunctions.
9 For a detailed discussion of these objectives, see Cullen Hendrix’s memo to the Bureau of Energy Resources and Oceans and International Environment and Scientific Affairs in the PIIE series
The Trump administration’s trade policy of promoting “fair and equal trade” was not successful in negotiating many trade agreements beneficial to the United States and reduced the trust of allies and export opportunities for American producers. The Biden administration needs to reintroduce a narrative promoting the advantages of openly participating in the global economy, emphasizing that such a participation is not charity for other countries and that the United States receives concrete benefits from such collaborative efforts.
At the same time, it should recognize that adjustment costs to trade can be quite strong in certain geographical areas and put together effective programs to ameliorate the impacts of these costs. Rebuilding trust with allies is a necessary first step to defining common interests and an action plan ensuring long-term cooperation in areas of joint concern involving the World Trade Organization (WTO) and policies toward China.
A good start for the incoming administration would be to remove bilateral tariff actions with economic allies. Bown notes that the elimination of costly retaliation facing American exporters will require removing the U.S. tariffs on steel and aluminum, which impose needless costs on American metal-using industries and do little to protect America’s national security.
The Trump administration’s arbitrary imposition of tariffs creates a lot of uncertainty which hampers domestic investment and disrupts supply chains for American companies that export part of their production. These tariff actions damaged the common good and the spirit of solidarity in relations with allies, While negotiating new trade agreements (preferably with a distinct set of countries at a time) might not be a top priority because of the political capital that would need to be spent domestically, revisiting the possibility of joining the Trans-Pacific Partnership (finally named the Comprehensive and Progressive Trans-Pacific Partnership) which covers a large share of the world economy, should be on the radar of the new authorities. Large trade opportunities and opportunities to influencing the template for new rules in the trading system were lost by Trump’s decision of not joining this agreement.
The other important and urgent area in trade policy is to reset the relationship of the U.S. with the WTO. Despite its shortcomings, the WTO continues to provide the essential rulebook for U.S. economic and commercial engagement with much of the rest of the world. The monitoring and enforcement of trade rules has been weakened by the vacancies in its Appellate Body, which occurred in part as a result of the Trump administration taking a position against filling them. A new Director General of the WTO is about to be appointed, and the United States should take the opportunity to vigorously reengage this organization at this time. The U.S. should work actively with others on WTO reform to address important gaps in WTO rules and to establish an effective dispute settlement mechanism. Efforts should be made to address policies that distort trade flows and investment decisions. The U.S. legislation on the Generalized System of Preferences for developing countries expired on December 31 and needs to be renewed. This is no time to increase trade barriers to poor countries on the grounds of solidarity and the preferential option for the poor.
Regarding trade and other aspects of economic relations with China, the new administration should continue to emphasize its opposition to Chinese violations of intellectual property, China’s requirement on the obligatory transferring of technology that it requires from foreign companies that want to operate in China, and the subsidies to state enterprises. More success in having China modify its practices for the benefit of the common good is likely to be achieved if the United States can get the support of allies in its negotiations with China, perhaps within the WTO. The removal of US tariffs on China should be linked to China’s removal of its retaliatory tariffs on the U.S. and specific steps by China to address its distortionary and discriminatory practices.
10 Chad P. Bown: Trade-Related Policy Priorities for the Next Administration in the PIIE series
Developing Countries and the International Finance Institutions
Another important area of international economic policy resides within the areas of U.S. relations with developing countries and international financial institutions such as the International Monetary Fund, the World Bank, and Regional Development Banks. Low-and middle-income countries have been hit badly by the pandemic. The success in reducing poverty in the last couple of decades is likely to be erased in many countries. These countries need assistance in fighting the pandemic by helping them gain access to vaccines. Budgetary support and debt relief are also needed to offset the effects of the economic lock down in certain areas. To make sure that each of them is doing their fair share, most wealthy country governments offer debt relief jointly through the Paris Club — a group of government lenders. This year, the Group of 20 (a group of the largest economies of the world which include the Paris Club members) are working in a Common Framework for Debt Relief. It will be important to ensure that China — which is by itself a larger creditor to developing countries than all the other industrialized countries together — participates in this initiative and that the United States takes an active leadership role. It is not difficult to anticipate that developing countries will increasingly have difficulties in servicing their debts. These initiatives can be defended by the principle of solidarity and the preferential option for the poor.
In these circumstances, the Biden administration should be supportive of efforts to increase the resources available in international finance institutions that help developing countries. The United States should be allowed to lend directly to the IMF as other rich countries have been doing for some time and be supportive of an increase of quotas in the IMF (quotas are increased by member countries depositing convertible and their currencies in the IMF, which increases the IMF lending power). In addition, a new issue of Special Drawing Rights (the IMF currency) should be supported by the U.S. IMF member countries can use SDRs to settle their financial obligations with the IMF. Likewise, the U.S. Treasury should contribute to the resources of the World Bank window (IDA-19) for lending to low-income countries in soft terms. All these actions will support the economies of developing countries and the world economy in general.
Immigration policy has humanitarian and economic aspects. The U.S. historically has opened its doors to people fleeing poverty, political persecution, or violence in their home countries. Immigrants have played a positive role in the economy as hard workers (many times in jobs where is difficult to attract American workers) and bringing special talents and skills to the country. The portion of Americans who favor immigration stands at the highest level since Gallup began asking the question more than a half-century ago. Nearly 80 percent believe immigrants are good for the country. A recent Cato Institute report indicate that that in 80 percent of American counties, the number of prime age workers (25-54) declined between 2007 and 2017. The nation has a declining birthrate and an aging population that is retiring. Economic output potential and Social Security and Medicare can benefit greatly by a replenishment of the work force by immigrants. But the Trump administration dismantled decades of immigration policy and norms and managed to slash legal migration levels by about half compared with 2016. The Trump administration also gutted refugee and asylum admissions, halved the entrance of immediate relatives of current US citizens, and — under cover of the pandemic — completely halted the so-called diversity immigration program which grants green cards to underrepresented migrant populations, many from Africa.
The U.S. economy is sustaining long-term damage from restrictions on immigration that are deterring talented people from coming to the country and contributing to U.S. economic growth. The number of foreign students applying to study in the United States also has declined. There is a need to restore a sane and compassionate immigration system which could be done in large part through executive orders under existing legislation. The Biden administration can increase refugee admissions relatively quickly (it would require hiring more immigration judges and administrative officers) and halt work on building a wasteful wall along the southern border with Mexico, a project which has been funded by cannibalizing dozens of U.S. military programs.
Work permits can be given, and the threat of deportation for DREAMERS stopped. Reprieves could be given also to hundreds of thousands of migrants whose temporary protective status is being threatened. A pathway to citizenship for more than 10 million unauthorized immigrants will require legislation, something that President Biden has promised to propose.
No one should be under the illusion that the proposals made here will be easy to adopt but they are necessary given the gravity of the situation and well founded on the Social Doctrine of the Church. The economic initiatives recommended by this article to implement in the short run regarding the health sector, jobless benefits, nutrition programs, and the help to state and local governments can be defended by the principles of respect of human dignity, solidarity, and subsidiarity. Fortunately, these initiatives are already being discussed in the public forum. However, this does not mean that anything goes or that the spending should not be targeted to those in need. For example, the proposal to increase cash benefits from $600 to $2,000 for most income levels of the population (proposed by both Trump and Biden) does not stand in strong grounds when many relatively well to do households who have not suffered from unemployment could benefit from it and when these additional resources could be better targeted to the poor and unemployed.
The proposals made on the revenue side can be defended in terms of fairness, solidarity and the common good (it is necessary to avoid the bankruptcy of the government). If implemented over time it will put country’s finances in a sustainable path. The identified environmental actions intend to reverse course of previous misguided policies and adopt policies for the defense of the common good. The proposals made in trade policy and regarding policies for developing countries and international organizations promote solidarity, the common good, and will put the U.S. back in the role of a leader in the international economy to the benefit of all. The proposals on immigration are based on common sense and will benefit the U.S. economy. They are based on the long American tradition of respect of human dignity and solidarity with the poor and the oppressed.
In December 2020, the incoming Biden administration announced its stimulus strategy which can be supported in general terms by the arguments put forward in this article. A first proposed legislative package, named the Rescue package, is large (about $1.9 trillion). It has several components: investment in vaccinations, testing, and increasing public health workers; direct relief: further relief checks for individuals allowing families to qualify with higher incomes (providing additional relief checks of $1,400); raising the federal boost to unemployment; rental assistance; more money for nutrition programs; additional resources to states and localities; aid directly to childcare centers; and increasing tax credits for the cost of childcare. It was announced that the Rescue plan would be followed by a proposed Recovery plan focusing heavily on big investments in infrastructure and green energy of the type envisaged in this article.
11 DREAMERS are undocumented migrants that were brought by their parents to the US when they were children. In 2012 an exercise of prosecutorial discretion was adopted (Deferred Action for Childhood Arrivals-DACA) to provide temporary relief from deportation and work authorization to young immigrants brought as children to the US. Some 800,000 young adults have benefitted from this program.
*Lorenzo Perez, Ph.D.-- Resides in Charlottesville, Virginia. He received a Ph. D. in economics from the University of Pennsylvania in 1972 and worked at the US Treasury, US Agency for International Development and the International Monetary Fund (IMF) in Washington, D.C. He was also an Adjunct Professor at the George Washington University for several years. He retired from the IMF in 2009 after working there for more than 30 years and leading IMF missions to countries in South America, the Caribbean and the Middle East. He is a parishioner of the Church of the Incarnation in Charlottesville and a member of the Agrupacion Catolica Universitaria and the Association for the Study of the Cuban Economy.