Moderate July Employment Gains May Prompt Trump Executive Order Amid Congressional Confusion

Some have criticized President Trump for the current economic malaise. But, even his greatest critics have to cut some slack on the economy when we’re in the middle of a world-wide pandemic.

The Bureau of Labor Statistics (BLS) just announced that nonfarm payroll increased by 1.8 million for July, lowering the unemployment rate from 11.1% to 10.2%. These employment gains were concentrated in leisure and hospitality, government, retail trade, professional and business services, other services, and health care.

Although the increase is less than the 4.8 million increase in June and the 2.7 million increase in May, this is not a shocker: many states have re-enacted their restrictions on mobility and businesses.

What many of these state and local officials are overlooking is that a lock down might reduce the transmission of the virus temporarily, but it is not a long-term, or even a medium-term, solution. Plus, it comes with grave unintended consequences.

Understanding The Economic Recovery

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The good news is that the recovery continues. The troubling news is that some states have enacted troubling policies.

Although the primary driver behind the decline in employment and surge in layoffs was the virus, state policies have undoubtedly played a role in mediating the effects of the pandemic. My research has shown that stay-at-home orders have depressed the U.S. market for child care, adversely affected employment in retail and hospitality sectors, and reduced small business revenue growth and consumption spending. Many of the “studies” claiming otherwise use aggregated data and fail to control for obvious confounds.

Not that we’d expect state policy not to matter—otherwise, why would we even try?—another way to gauge its importance is to examine how much of the decline in state employment is explained by the growth in COVID-19 infections. The figure below shows that the correlation between state employment and infection growth between May and June is only -0.17. In this sense, states that were more heavily affected experienced greater employment declines, but not systematically so compared to others. That should come as good news: good state-level policy can help accelerate the recovery.

The road forward is admittedly bumpy, but the economic recovery has been a lot stronger than many critics had predicted. And, this month was still a step forward. That’s part of the reason the stock market has continued increasing—employment numbers have consistently beat expectations, raising investor confidence.

Congress Flounders—New Executive Action On the Horizon

Uncertainty continues to shock the economy. For example, much of July’s gain in employment was concentrated in temporary help jobs. Put differently, much of the increase was also driven by people who usually work part-time, relative to those who usually work full-time.

Expectations have been high for a second round of the stimulus, but last week proved disappointing when talks stalled. Moreover, talks were also slow this week as many GOP lawmakers voice disagreement and Democrat lawmakers refuse to compromise.

But, if there’s no agreement by the end of the day, will it happen at all?

Probably, but not through Congress.

President Trump has remarked that he’s willing to undertake unilateral executive action, drawing possibly upon money that has not yet been spent through the CARES Act that was passed in April.

That would be a welcome allocation of funds given that the CARES Act allocated $150 billion to state and local governments, but my research suggests that the pandemic will only adversely affect state revenues by $79.9-125.2 billion, leaving money on the table for further allocation.

What should we expect?

Putting a hold on evictions is almost entirely bipartisan, so that’s likely. But, the unemployment insurance benefits are still up for grabs.

Since there is now growing evidence that overly generous unemployment benefits will slow the recovery by discouraging people from returning to work, Trump is considering payroll tax cuts through an alternative vehicle that does not depend on Congressional approval: simply require Treasury refrain from withholding payroll taxes. Some critics fairly argue that these will not benefit employees, but empirical research has generally shown (e.g., in the context of corporate tax cuts) that employees benefit: firms receive only 40% of the benefits. There is also new research pointing out that payroll tax cuts can make firms more resilient during recessions.

The recent employment numbers are an important step in the right direction, but more work remains to be done. If Congress cannot strike a deal, then President Trump will likely use the tools he has on the table to deliver relief to the American people.

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