New GDP Numbers Put Pressure On Congress For $1,200 Stimulus

The Bureau of Economic Analysis (BEA) just released its advance estimate for real gross domestic product (GDP) in the second quarter: a -32.9% decline. That is on top of a 5% decline for the first quarter.

While Mark Meadows remarked yesterday that the White House is “nowhere close to a deal” after a meeting with Democratic leaders, these recent GDP numbers are going to put pressure on lawmakers to nail down an agreement soon because the cost of delay is growing.

Unfortunately, many lawmakers have been unwilling to negotiate on a number of fundamental issues, most notably the provision of liability insurance and a decline in weekly unemployment benefits, despite strong economic evidence that these changes are needed to set the economy back on track. Indeed, the driving explanation for why we have seen the beginning of an employment recovery in May and June stems from the reopening of states, so policies that continue to nurture reopening safely are integral.

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If we are going to get the economy back on track, people need to have confidence that we’re going in the right direction. Uncertainty is one of the biggest factors that depresses the stock market and business investment. In fact, rigorous research has shown that wage subsidies (e.g., unemployment insurance) do little if uncertainty in the system remains. All of this feeds back into economic confidence, which my research shows has a causal effect on individual spending behavior.

So, how are we doing so far? After a week of deliberations in Congress, uncertainty appears to have increased. Consider some time series data up to July 29th from Refinitiv MarketPsych, which uses sophisticated natural language processing algorithms to scan all news and social media text. We can see a surge in uncertainty, as per their measure from social media text, which followed right after an initial decline when it looked like a deal was in sight earlier in the week.

We cannot have a recovery if we do not deal with uncertainty. The recent GDP numbers give a glimpse of what we have to lose: if Congress fails to come to a resolution soon, uncertainty will continue to grow and delay the recovery even further. This turns into a self-reinforcing feedback loop whereby uncertainty generates more caution and debate, which creates more uncertainty since nothing gets done.

While you might be tempted to argue that lawmakers who are holding out should cave to the demands in the House, a $3 trillion stimulus that fails to include liability protection and extends $600/week unemployment insurance may actually be quite damaging to the economy. Our deficit cannot keep increasing indefinitely. Moreover, the absence of liability insurance will make businesses cautious about opening. And, extending overly generous unemployment benefits risks encouraging people to stay at home, rather than returning to work.

At the very least, provisions that make unemployment benefits tax deductible if spent on educational and training initiatives could encourage more people to use the time wisely, investing in skills for the future while they are out of work, but the discussion seems halted.

The recent release of the second quarter GDP estimate of -32.9 shows what’s at stake: the future of the American economy. Given that investment and consumption are so tightly linked to uncertainty, we need an agreement soon to create stability. Lawmakers should avoid kicking the can down the road if they want to get elected—their constituents will hold them accountable for all the bickering.

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