On Friday, August 26, Vice President Harris spoke in North Carolina and outlined the bare bones of an economic policy agenda for her Administration. I have to say I am very impressed with it. The best part is restoring and expanding the Child Tax Credit.
[Details here. See also the on line newsletter of Robert Hubbell.]
I wonder how many people really remember what was happening in March of 2020. The Coronavirus had knocked the economy to its knees. Unemployment went from 3.5% in February of 2020 to 14.8 two months later. The economy fell into recession.
[Details here. ]
Congress rushed through laws to shore up the economy and keep up the incomes of those who lost their jobs. There also was direct aid to businesses to keep them afloat. One of the most important elements in those early bills was a big increase in unemployment compensation – a dramatic one -- $600 per week. That added up to an extra $3600 a month. (And this was on top of what the current amount was in each particular state!). That extra $3600 made a big difference. An expanded child tax credit also played a role in propping up family incomes. The result was, despite the fact that the economy fell into recession for the first few months of 2020, real disposable personal income --- the amount of money people had in their pockets to spend after paying their taxes and receiving government payments WENT UP --- in fact it went up dramatically.
[There is an interactive diagram available here. By manipulating the original diagram, one can turn it into a monthly report and reduce the coverage to the past five years. Once you do that, the diagram shows that disposable personal income per person had averaged $48.0 thousand in February 2020 and despite the giant increase in unemployment, the emergency measures caused take home pay to go up to $54.3 thousand two months later. Please note because averages are pulled up by very high-income individuals this number is much higher than what the typical individual would take home – but it still in indicative of the success of these emergency measures in propping up incomes despite the recession and big increase in unemployment.]
The same thing happened, in early 2021 when the American rescue plan raised disposable personal income to an even higher level.
[$61.5 thousand in March. Details of the entire bill, here. ]
Unfortunately, the emergency measures passed in 2020 and 2021 had expiration dates on them and over the course of 2021, despite the efforts of President Biden to persuade so-called “moderate” Democrats that these expenditures were doing yeoman service --- stimulating the economy and dramatically reducing child poverty, --- and therefore should be made permanent, the razor thin majority in the Senate gave Senators Manchin and Sinema veto power over whatever the Democrats wanted to pass.
Interestingly, the original emergency measures garnered unanimous support in Congress where Republicans in the Senate and Democrats in the House made sure that what THEY wanted in the bill would be there. Trump, knowing of course nothing about the substance, signed it because he needed to be seen to be doing SOMETHING even as he failed miserably to protect the public in the run up to the pandemic. Once Biden took office, every effort to help the economy was opposed by almost all Republicans so in the Senate (with a one vote majority) Manchin and Sinema in effect had veto power.
The result was that the expanded unemployment compensation and the larger child tax credit expired. By January of 2022, per capita disposable personal income fell to $48.3 thousand -- a bit higher than it was before the pandemic but well below the heights during 2021. Child poverty which had fallen dramatically went back up.
Here is where Vice President Harris’ economic proposal is most crucial. We know that an expanded and PERMANENT child tax credit will PERMANENTLY reduce child poverty. It already did that temporarily in 2021. And Vice President Harris is very carefully targeting some of the increases to those most in need. So, for example, the $6000 child tax credit that will be available for parents in the first year of a newborn’s life will only last that year. Meanwhile, the increase in the general child tax credit to $3600 will be a welcome increase from the current $2000.
(and I want to remind all readers that all these credits are REFUNDABLE which means if you don’t have enough of a tax burden for the credit to offset, you get a check in the mail)
I cannot stress enough how important these elements of Vice President Harris’ plan are. We proved back in 2020 and 2021 that such policies actually work. Here’s hoping the new Congress will agree with her after January 20.
I know there were arguments that such generosity might significantly reduce the willingness of people to go to work – that in some cases, expanded unemployment insurance plus the child tax credit would give people more take-home pay than if they actually got a job.
So what? If people won’t work for low wages raise the damn wage.
I know this sounds flip but that is the beauty of low levels of unemployment – it puts upward pressure on wages which plays a role in reducing the outrageous income inequality in our country.
Some people respond by insisting that if wages go up, that will create inflation. And yes, there was an inflationary surge after the economy recovered from the pandemic induced recession. Some of that might have been the result of the increased spending by government but note that disposable personal income came down in 2022. The inflation that persisted during that year was mostly caused by supply chain disruptions. (Inflation peaked at 8 percent in 2022 and has been falling ever since).
And --- surprise surprise, --- the Federal Reserve has been able to engineer what most people said could not be done – a SOFT LANDING – where the inflation rate comes down (it’s now below 3 percent) and there is no recession. Meanwhile, since 2022, wage increases have been higher than inflation. [That information, here.]
(It actually gives me great pleasure to report that throughout 2022, virtually the entire economics journalism crew were wringing their hands that the only way to stop the inflation was to engineer a recession. Many prominent economists asserted that as well. They were wrong and the reason is instructive. They ASSUMED that the inflation was the result of the increased government spending and low unemployment instead of what really caused it --- supply chain disruption. The result is that there was no recession as the Federal Reserve raised interest rates and for that we are all grateful! However, if the Federal Reserve does not move to quickly cut interest rates (one half a percent in September) there is a danger that the economy will be pushed into recession.). So, fingers crossed on that one.
Vice President Harris also had some proposals to reduce the cost of living. I will deal with them in future commentaries. For now, we should celebrate her proposals to increase incomes and hope that the new Congress will support them.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
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