As Congress continues to debate a new economic stimulus package, two new studies have shown that the vast amount of federal aid that has been doled out already has capped an anticipated rise in poverty.
The findings, reported on by the New York Times Sunday, show that federal aid has prevented the rise in poverty that experts predicted after unemployment was sent to the “highest level since the Great Depression.”
But researchers cautioned that when aid, such as increased unemployment payments, expires next month, low-income families could again be vulnerable.
The report aligns with a conversation I had recently with Leila E. Davis, an economist at the University of Massachusetts Boston, who spoke about how economic recovery hinged on additional government aid and private spending.
The two are somewhat intertwined as an additional fiscal policy response would be aimed at offsetting the reduced spending that’s been seen in past months because of factors such as job security and health risks, she said.
“One of the big things that’s been happening here is an enormous contraction in demand and spending,” said Davis. “As households stay home and stop spending and lose their jobs, it creates a chain reaction elsewhere. It leads to businesses facing problems as well.
“This contraction and demand puts us in this scenario where it’s going to make it difficult to turn things around. There’s some need for policy response and private spending to offset the contraction of household spending in the economy,” she said.
For example, proponents say that additional stimulus checks, which are under discussion by Congress, would help bolster the economy as they could lead to increased spending.
However, opponents say that the cost of providing additional checks is too great — the initial round of direct payments cost approximately $300 billion, according to the Washington Post.
Even with a relatively good policy response, Davis believes the country is facing a long and deep downturn. The hopes that have been flying around for a “V-shaped recovery,” or a sharp fall in economic activity followed by a dramatic rise, are unlikely to happen, she said.
Although the unemployment rate fell slightly in May, to 13.3 percent, the rate in April (14.7 percent) is the highest the country has seen since the Great Depression, when it was about 25 percent.
That vast amount of unemployment has been a “big economic shock,” Davis said, who expects the rate could become even worse in the near term.
A lot of the unemployment that’s been seen is people who have been temporarily furloughed, but if businesses are unable to bring people back to work, Davis said much of that unemployment could become permanent.
Government spending is needed to plug that gap, Davis said, in terms of providing relief for businesses and individuals.
Although Davis said she thinks it’s going to be hard for some time, she noted that it is not possible to know how long it will take the economy to recover because so much of that recovery hinges on the country’s ability to treat the virus and its policy responses.
“It’s impossible to know but it’s not looking like a couple of months blip,” she said. “It’s looking like a long and hard road. If we think about the magnitude of the shock of the Great Recession, this is shaping up to be an even greater shock and it took us a long time to grow out of that.
“That’s looking like, unfortunately, to be a much smaller shock than what we’re experiencing now.”
