The CARES Act: Implications for U.S. Economic Competitveness

Wednesday, March 24, 2021
Mark Makela/Reuters

Professor of Public Policy and Economics, Gerald R. Ford School of Public Policy and Economics, University of Michigan


Vice President for National Program and Outreach, Council on Foreign Relations

FASKIANOS: Thank you. Welcome to the Council on Foreign Relations State and Local Officials webinar. I'm Irina Faskianos vice president for the National Program and Outreach here at CFR. We're delighted to have participants from forty-nine U.S. states and territories with us. Thank you for taking the time from your busy schedules to join this discussion which is on the record.

As you know, CFR is an independent and nonpartisan membership organization, think tank, and publisher focusing on U.S. foreign policy. Through our State and Local Officials Initiative we serve as a resource on international issues affecting the priorities and agendas of state and local governments by providing analysis on a wide range of policy topics. And CFR is also the publisher of Foreign Affairs magazine.

We're delighted to have with us today Dr. Betsey Stevenson. We previously shared her bio with you so I will just give you a few highlights. Dr. Stevenson is a professor of public policy and economics at the University of Michigan. She is a faculty research associate at the National Bureau of Economic Research and serves on the executive committee of the American Economic Association. From 2013 to 2015, she served on the Council of Economic Advisers and advised President Obama on social policy, the labor market, and trade issues. From 2010 to 2011, she was a chief economist at the U.S. Department of Labor. Dr. Stevenson, thanks very much for being with us. I thought we could begin if you could talk about the new stimulus bill, the CARES Act, and what it means for state and local governments and give us your analysis of how you think it will affect U.S. economic recovery and competitiveness.

STEVENSON: Great. Well, thank you so much for having me.

You know just take this step back, you mentioned thinking about U.S. competitiveness and obviously competitiveness is a relative term in terms of how we're faring to the rest of the world and I think the big picture there is just to realize how much COVID has subtracted from the potential of all countries across the world and so we've all sort of taken a step back. So we want to think a little bit both about where we are in absolute terms, as well as relative to other countries.

I think that I want to give a little bit, I think there's so much confusion about how COVID impacted the economy. You know, was it state and local government shutdowns that caused GDP to decline? Research has actually been pretty clear on that it wasn't actually state policy. It was actually the actions individuals were going to be taking on their own anyhow to avoid getting the virus and then the impact of the virus itself or when people are sick at your workplace, when they're distracted by the illnesses of their families', when your customers don't want to come in because they think they're going to get sick. All of these things really reduces our ability to produce and that is something that's happening around the world. But there how you manage the virus actually had an impact on how much you actually got hurt by that.

If we also think about our potential GDP. Let me say, what do we mean by "potential" because you hear policymakers talk about that a lot and I think sometimes it gets lost in the weeds in terms of what it actually is. And what we're thinking about is if we were all able to produce at our best, using all of our resources, how much could we be producing in total as a nation. And there's obviously a limit to how much we can work, and there's a limit to the resources we have, and so there's some limit to what we can do until we have actual technological change and other progress that generates economic growth. And the reason I'm giving you this very basic set of comments is just in order to understand the stimulus bill and the potential "is the stimulus bill too big or not big enough?" You have to sort of start to be able to think of what are we trying to get to? We're trying to get to our potential GDP. And in some ways, potential has been permanently harmed because we're seeing companies having to dedicate resources to combating COVID and to protecting their employees from COVID. And then research is starting to show that companies did less in R&D because they were busy thinking instead how do we reconfigure our workplace to keep our workers safe? What kind of PPE do we need? Do we need to change our air circulation? If you think about all sorts of businesses that have taken time and energy that they would have spent thinking about how to do what they do better and instead they've spent that time and those managers' time, resources on trying to protect employees themselves, their customers from COVID. Even something where we think might shows up in GDP so it doesn't show up as a hit to GDP.

Think about developing the vaccine. The vaccine is what's gonna get us out of here but those resources that we're spending on developing a vaccine and fighting COVID are actually resources that we're not spending on something else. So we can think about things in terms of the short run the medium run in the long run.

So now let's put the stimulus bill in this. i think the big idea in the United States, like why is the U.S.—we can take a glass half empty perspective our glass half full perspective. The glass half empty perspective is that the U.S. has had if we think about per million people, so let's put every country on the same basis, one of the worst in terms of COVID cases. So the worst in terms of big countries in terms of the number of cases and pretty much near the top in terms of deaths. Although countries like the UK and Italy were worse on deaths even though the U.S. was worse on the number of cases. So in that sense that's the glass half empty, we didn't do a great job in protecting our citizens from getting COVID.

The glass half full was we did a great job of getting money into the economy very early on. I’ve never seen policymakers move quite as quickly as they did getting money out there in March. We've also seen the Fed more aggressive than I've ever seen the Fed in terms of trying to protect the economy. So what that meant was we had this huge decline in Q2, followed by an increase in Q3, and an increase in Q4. I'm sure a lot of you on this call know that if we went back to Q3, I would have been telling you how terrified I was for state and local government budgets. Some of you are still suffering with budget shortfalls but nowhere near what we thought might happen when we were looking at this in Q3 and even early Q4, in fact some states even found that they didn't suffer much revenue loss at all. So the states that suffered the most are ones that really depended a lot on taxes from tourism, from conferences but you know household incomes didn't actually decline very much because of that enormous help from the stimulus.

What we've done is we've now layered a new stimulus bill, $1.9 trillion stimulus bill, on top of all of this so let's think about what that does in terms of plugging the hole. A $1.9 trillion stimulus is roughly 8.5 percent of GDP so if we spend these dollars immediately, we would have a GDP that well exceeded what we would have otherwise had in 2024. So that's the sense in which you may have heard some academic economists and policy economists wondering whether the bills are too large. If we went out and spent it all today, we would be trying to produce an economy that is much larger than I think where potential is.

Again, a stimulus bill around 8.5 percent of GDP, to think about that you need to understand the size of our whole today. Right now, U.S. GDP is about 2.5 percent smaller than it was pre-pandemic so that means U.S. GDP needs to grow roughly 2.5 percent in inflation adjusted terms in 2021 to put us back to where we were at the end of 2019. But of course we would have had growth in 2020 and growth in 2021 if we hadn't had the pandemic so we don't want to just go back to 2019, we want to go back to where we would have been without the pandemic. So that means thinking about needing another roughly 2-3 percent annual growth to make up for the growth in 2020 that didn't happen, another 2-ish percent annual growth to make up for the growth that didn't happen in 2021. And so that's a lot of growth that's still needed but perhaps not fully the 8.9 percent.

Now let me put that in the state perspective for you. I think the state and local component also illustrates this point. Estimates suggest that the total cash shortfall facing states for budget years 2020 to 2022 is roughly $150 billion but the stimulus allocated $350 billion for states, territories, tribal governments, cities, and counties. So if states go out and spend all $350 billion at once, some states will be spending more than they had before the pandemic. The concern is, is there enough resources, if we all go out there and spend all that money at once, to actually allow that big surge in demand? I think though, it's not really likely that all these dollars are going to get spent right away.

So the point of such a big stimulus bill, that $1.9 trillion, is acknowledging the fact that Americans have been saving more than ever because of the fact that they're cautious right now, they don't know what's going to happen. So it's quite likely that people are going to save a lot of the money they get by actually either saving it or paying off debt, realize paying off debt as a form of savings. Projects are going to take a while to get going. That's going to be true at the state and local level so some of that money that is headed your way, it's going to take you a little bit of time to get it out of the door. And what that means is that even though a lot of this spending is really designed in the short run, I think it's actually going to provide us a spending path for the next several years, that's going to eventually get us back to where we need to be in 2023 in order to sort of reach full recovery, full employment. And so just to put this in perspective, the consensus forecast is that we get 5.6 percent growth in 2021, then we get close to 3.9 percent growth in 2022, slowing to 2.4 percent in 2023. So that we sort of reach full employment sometime in 2023.

Now, I've been talking a lot about GDP growth, one of the things you might have noticed is that there's been a real emphasis not just on how do we get economic growth back to where it was before, but how do we get back to full employment. And these two things normally go hand in hand, but they're not the same thing. And so this shift in emphasis on full employment is going to mean—that I think is one explanation for why we have such a large stimulus bill trying to push as many people back to work as possible and why you also have really accommodative monetary policy, I think for state and local governments—the idea that the Federal Reserve is going to have very accommodative monetary policy for the next several years is really important, because that means that you can expect interest rates are going to stay low. That affects your businesses that are trying to borrow and affects states that are trying to borrow. And we expect interest rates to stay low because the latest reading from the FOMC said that the Fed doesn't plan any rate rises over the next three years. But one of the things we saw between 2015 and the beginning of the pandemic was that running the economy what they call "very hot", trying to see just how many more people we can pull into the labor force is sort of what helps us understand what is our full potential and we found we could bring a lot more workers into the labor force.

So I think what you have seen is a federal government policy with a lot of money coming to help state and local governments. Make sure that you're not part of the problem because you were part of the problem in the 2008 recession, as many of you know. One of the reasons why we saw such a slow recovery was because state and local government employment didn't recover to the peaks from the last boom. So didn't recover to what happened before the 2008 recession started to decimate state and local government employment until 2019. We don't want to see that happen, we want to see you get back to full state and local government employment by hopefully even earlier than 2023. With the money coming your way, the fact that I think a lot of state and local governments proactively did some early furloughs that this should completely stem the bleeding of state and local government jobs. And that's really important, because when you lay off workers, it's important you do that for your budget but you actually make your state and local economy worse because those workers spend less in your local stores. They are less likely to spend money with their—look get you to pay their rent, they're spending less money in your economy. That sort of snowball effect started. You have to do it, you don't have money so you lay people off but what happens? You end up with less money because you've made your economy worse. And so all that money coming from the stimulus package is designed to make sure that there is no snowball effect coming out of state and local government employment. So that's sort of the big picture takeaway on it.

Just sort of end by saying, I think there are three questions that I think are worth thinking about and then I'm happy to talk more about this. Number one, is that what happened to potential GDP in the short run and in the long run? And what are we trying to get back to? I sort of tried to touch on a lot of that. Who wins and who loses as we recover? And there I think we all know that the people who got hit hardest in this pandemic were people at the bottom of the income distribution. So even though what a lot of what's in that stimulus is going straight to households in your communities, I think it's really going to shape and reshape communities. And a lot of state and local areas where you see a lot of money flowing towards people at the bottom of the income distribution, which will change their spending habits quite dramatically and one hopes catapult them back into much more stable living and spending and working. But the big thing to realize is that we still see 700,000 people a week losing their jobs. There's a lot of destruction still going on, and yet, we're starting to build back, so we're gonna have this simultaneously building back while seeing your businesses on Main Streets continue to shut down. You're going to be dealing with these green shoots of growth while you're still seeing businesses announce that they just didn't make it.

And so then my third question is, we should be thinking about how does our global position change? And that will change depending on how we react. What we bring back to U.S. shores to do, sort of reshoring which I think we're seeing a bunch of businesses doing. As well as how we change our import behavior and what happens to supply chains that have been very, very clogged throughout the pandemic and are starting to unclog right now. In a really big picture way, we've seen just enormous movement in adoption of technology and that is going to affect how our economy plays out over the next five years. And that very likely does shift us to hopefully a more dominant global position but realize that the big learning we had from technology has happened in a lot of other countries, although not equally across. I think the US has been particularly good at getting people to be very productive at home, to learn and use new technology. It changed where we are on the adoption path of a lot of new technologies, whether it's shopping online, whether it's working and having meetings online, whether it's using cloud-based software. We've just had this very big surge in forcing us all to adopt much faster than human nature usually lets us adopt. So I brought a lot of issues to the table. Why don't I stop there so we can turn to questions.

FASKIANOS: Betsey, thank you very much. That was terrific. Let's go to all of you now. 

(Gives queuing instructions.)

I see we already have a few questions coming there but I'm going to first go to the raised hand, Patsy Sullivan. And if you can unmute yourself. There we go.

Q: Hello, can you hear me? My name is Patsy Sullivan. I'm from Middlesboro, Kentucky, and I'm on City Council. Of course, the pandemic hit hard here, we're in coal country. I was listening to you talk and I was kinda iffy both ways on the CARES Act. You know, anybody appreciates money from the government and helping out. My thing about it is it'll help in the short-term and yeah, either way it'll stimulate the economy but I don't see how the growth will be three or four years from now because we're gonna have to pay that money back somehow, the taxpayers, or whatever. I mean in the short haul, I know people's want to go out and spend money and stimulate things like that, but in the long haul, it's got to come back. I mean, you know, we can't keep printing money. It's going to have to come back. So I mean that's what—when they start talking about this and everything and like how you're talking about resources and building new jobs and things like that. We have resource jobs that went away, that's well paid, that they should have the cap on track, along with this for the GDP growth. See what I'm saying? So if you want to explain. I understand stimulating the economy with the CARES Act and stuff, but it's going to hit a wall somewhere, it can't just keep building cause it's got to come back. If you kind of want to explain that to me.

STEVENSON: Let's get back to the CARES Act because I think that's such a good example of how stimulating the economy actually does generate permanent, lasting benefits. So what we saw in March of 2020 was an enormous decline in consumer spending. People were terrified to go out and buy things because they didn't know what was going to happen to their household income. So this isn't just about me spending the money the government's sends.

To put this in perspective, households today have $2 trillion more in savings than they would have had without the pandemic. So that sounds crazy, right? Like, oh my gosh, we had tough times, how is it that people have more in savings? Well, they're not crazy, it's that people think times are bad but they could get worse so I better put some money aside. Well, the problem is (INAUDIBLE.) buying things and this was particularly true for the wealthiest households.

So of that $2 trillion, more than a trillion of it was how the top 10 percent, or even richer households. And so they stopped traveling, that's why there wasn't money going to the airlines, They stopped going out to restaurants because of the pandemic, that's why we saw a lot of restaurants shut. So what the stimulus bill did was, first of all supported industries where there was no way to stimulate demand. So that's why you saw money going to the airlines. The concern was, well, if the airlines go out of business because nobody's flying during the pandemic and they don't have the resources to keep going, then we'll come out of the pandemic and we won't have any airlines. If we don't have any airlines, that potential GDP I was talking about is going to be a lot lower because it's going to be harder for us to get our stuff and our people from place to place. So we want to do things like save that airlines.

It's also the case that as you give people money, well then they became a little bit less nervous and then maybe they didn't go back into restaurants but they ordered more takeout. So we saw consumer spending really rebound in May and that rebound is actually why we had economic growth in the third quarter of 2020 and why we ended 2020 with GDP only being 2.4 percent below where it had been in 2019 even though it had declined by almost 10 percent in the second quarter. That means we made a lot of that back up in the third and fourth quarter and what that did was prevented permanent damage. Permanent damage is what happens when you have a business completely shut. It takes a lot more time to open a brand new business. So if you have permanent damage to the economy that reduces potential GDP, that's also going to reduce tax revenue.

So when you talk about having to pay back things that were like the CARES Act. Well if we've kept those businesses intact then there's more income that's going to be coming in, there's going to be more revenue coming in. Some of it actually pays itself back naturally by having prevented the declines in the economy because people over the next several years pay taxes on income that wouldn't be there. Think about how slowly we're coming out of the 2008 recession and how much more tax revenue we would have raised if we had just been say twice as fast coming out of the recession. So the idea of a stimulus bill is can we speed up the recovery in a way that means that we preserve potential GDP and we have a bigger economy going forward forever. 

Now you sort of asked another really important question which is in all of this though there are permanent changes happening in the economy that are not really about the pandemic but that the pandemic may have pushed us along quite rapidly. So I talked about the—we've had this big infusion of technology adoption. That's fantastic for some people but for others it's terrible. We're never gonna have as many retail sale jobs in the United States, somebody working at a retail counter, as we had in 2019 again. That is my prediction, we will never have as many, we'll never go back. That's because we were already moving to more people online shopping, to less storefront, it being more expensive to get physical people into your store. So if that means that people who relied on working retail sales jobs to make a living have to find something else to do and transitioning them is going to be tough. That's one of the reasons why it's going to be important for workforce development programs to be helping people make these kinds of transitions. You're not just going to see the most vulnerable workers unable to find work but you may see people with more work experience in higher skills that are struggling to find work. So thinking about expanding our workforce development programs in a way that caters to a wider range of people who are dealing with very rapid sectoral change is going to be important and, again, I think this is one reason why it's so useful to have gotten the stimulus funding.

As an economist I'll just point out, not all budgets are fungible but getting this kind of relief from the federal government does give you a little bit more breathing space in programs that you might fund and therefore you can think about it as covering all sorts of things. Helping to facilitate all sorts of spending even though the bill was very specific in terms of funding for things like K through 12 education, for small businesses, for restaurants, for making up for actual state local employment. The bill was sort of more narrow, though, than the overall impact on your budget should be because hopefully there's some fungibility although as I said I realized not complete.

FASKIANOS: Betsey, just to follow up, are you as an economist concerned there's been a lot of debate about how big our deficit, how big can or should we go? So is our deficit ballooning out of control or...

STEVENSON: Right now, the answer to that is no. And I understand particularly a lot of older folks who, and I might even put myself in that category so not to insult anybody, who remember concerns about the deficit, even in the 90 and the efforts we made to try to bring the deficit down. The thing is if you go back then to the 90s, interest rates were higher and that meant that we could see real—it was really difficult for businesses to borrow. Businesses facing 7, 8 percent interest rates, and part of that was due to the fact that there just wasn't as much savings out there for businesses to borrow at and businesses were trying to do a lot of borrowing and so government deficits was crowding out the ability for the private sector to borrow. We do not see that today. Interest rates are basically at zero, right? The Federal Reserve has pinned interest rates at zero because they can't go any lower. And interest rates prior to coming into this, were already really low, near zero. So we've had these very, very low interest rates, which some economists have pointed to a secular stagnation. Businesses are not being held back from investing based on high interest rates. So as long as the government can borrow at those low rates, they're not crowding out private investors. That government borrowing isn't causing problems in the economy. A lot of people said, "Well, maybe, you're not thinking about the kids who are going to have to pay that back. I've got young kids, they're going to be—what's going to happen with this debt?" Again, if you go back to World War II, when we racked up tons of debt to deal with the war— how did we get out of it? We got out of it by having massive economic growth. So you can't ignore the impact on economic growth. Economic growth is what helps us evaluate the debt.

FASKIANOS: Thank you. There's a written question from Alexander Smith, the city commissioner for the city of Apopka, Florida. And it may be too soon since this bill just passed. "Are there any guidelines as to how or what projects the funds the cities received can be used for?" And John Tornga, also in Florida, commissioner in Florida, says, "How does the full $1.9 T affect us directly? If some is sent other places?" I'm not quite sure I understand that second part of that, but...

STEVENSON: Getting into the weeds. I can't answer that partially because nobody knows the answer yet. You might have seen that the Biden administration has appointed Gene Sperling to oversee the distribution. It's a lot of money. We want to make sure it gets out there in the right ways. So you're gonna see guidelines coming now. Things are moving very quickly with this.

One thing I will say as kind of a public service announcement to you guys, I found just talking to friends, or posting myself to my community groups on Facebook, a lot of people don't realize that the bill made up to $10,200 of unemployment insurance tax free. And the rest of your unemployment insurance, of course, is taxable. Unemployment insurance is usually taxable. The IRS hasn't even put out the guidelines for what that means. They basically told people just don't file yet and that's one of the reasons why the filing date was moved to May 17 from April 15 because it's going to take them a few days to start telling people what exactly is this going to mean and how do you fill out your form now that you get to exclude $10,200 of unemployment insurance. My public service announcement is make sure your citizens know this. That residents know this because I think a lot of people are unaware.

FASKIANOS: Great, thank you. I'm going to go next to Sean Doherty, who has his hand raised.

Q: Hi. I'm Sean Doherty, a trustee for the town of Firestone in northern Colorado. Just kind of in the same line as the last two questions, you know, we talk about spending and eventually paying the piper in deficits and those types of things. Just along the same line, and it's more, I mean I totally get the math equation that by forcing money into the economy you're gonna stimulate growth, there'll be more income taxes to pay back, if you want to look at that as debt, you took out an IOU. But just kind of philosophically then why wouldn't the case be made that's the way the economy runs? The government just cuts checks and gives out free money and eventually the economy gets ramped up, and we're paying more income taxes like why couldn't that be a holistic solution? And then obviously, it's a rhetorical question because at some point, at some balancing point, the equation doesn't quite work, right? And so if you could just speak to that, that would be great.

STEVENSON: Yeah, I'm really glad you asked that question. And this really comes to why did I start with this idea of what's potential output? That's because it doesn't work once we're at potential. So if the government keeps trying to spend money and we're already at potential then it's crowding somebody out. At some point growth has to come from real technological developments, right? We have to have innovation, we have to have new ideas so we can do things better, faster. That's where economic growth comes from.

In a developed country, like the United States, I think there's a lot of confusion. People think it comes from investment in capital. We get very little extra growth from that. I mean, sure, we don't want businesses not putting in new factories. But our real growth comes from technological change, right? And we are potentially on the cusp of huge economic growth coming out of artificial intelligence and the things that we can do there. But what has happened is when we're in a period where we've got a bunch of idle resources, so we have workers who are just sitting at home doing nothing, we have machines that aren't being used, we have savings that aren't being used to make investments. If we can take all those idle resources and make them not idle, make them actually do something productive, then we're making things better off and the government can have a role pushing us towards potential output.

When I said there's some debate about whether $1.9 trillion is too big, the debate is that if we all go out and spend all that money today, we get above potential output. We don't get to operate, not for very long, and certainly not for very far, above potential output. So what that means is it starts crowding out other stuff and it pushes prices up, and we get higher inflation. So if you want to think about the debate about what's the limits to government spending, at some point, you have to worry about inflationary pressure. At some point, if we get inflationary pressure, the Fed will have to counteract that fiscal policy and they'll start to raise interest rates. As they raise interest rates that crowds out private investment spending. That's exactly what I was talking about earlier, that right now, there's no crowding out of private investment spending. I'm not worried about it.

If the government decides that they're going to—if we start pushing out money on, you know, as you said, what's the point where we end? Well the point where we end, is when we have recovered the economy to that point of potential output. And let me put a very important point on it, particularly for you guys who do a lot of projects. At a time like this where there's idle resources, it is the best time for the economy, for the people in your community, and for you to be out there doing projects like fixing roads, building new schools. Whatever kind of infrastructure projects that you have on your agenda, do them now! It's the cheapest time for our economy because you're not competing with the private sector who wants to use those resources. Those resources are sitting there idle, that's why interest rates are so low, that's why unemployment is so high. So if you can get out there and use those resources now, you're going to do a lot to get us back to where we should be. And then what I want you to do is when the economy is thriving pull back. You don't need to be doing your investment projects anymore. That's a good time to stop and get out of the way of the private sector.

FASKIANOS: So Betsey, just to go to the human piece of this—Mayor Nicole LaChapelle, who's the mayor of Easthampton, a town in Massachusetts. "She's hopeful to see stimulus money coming to the cities but what will be the rebound of those most affected? Will the rebound of those most affected by the pandemic be sustainable? How do you best invest in those communities to empower them to pursue their best potential? I think you talk about the projects but if you can address those at the lower end of the income."

STEVENSON: Yeah I think the question is really got to be about—sort of is this about pandemic related? A sort of pain and suffering that people at the bottom of the income distribution have suffered? Some of those folks are going to be able to go back to work once the service sector starts to rebound, which it will. And it will be rebound very sharply, very quickly. I'm less of an optimist that everything's great this summer but again I think as we end 2021 we're going to see real demand for services coming back. But I do think that there are some people who will find that their employers are gone, that their jobs are gone. I think we're going to need to help people develop new skills, find new employers. Actually just matching—this isn't that. Some people want like why is it so bad when people lose their job? Well finding a job does not happen instantaneously, right? It takes some work and it's slow. It can be slow particularly if you need to change industries. So if you have worked in the mall in a clothing store for most of your life and there are just fewer of those jobs around, you need to start thinking what should I do instead? Is home healthcare worker in my future? What kinds of things can I do and what kind of training do I need?

So I do think there's going to be some of that reallocation. But I also think this is a really good time for a lot of these communities who've had people who've been hard to employ before the pandemic. How can we think about developing programs to help transition people into more stable work. A lot of the growth, I mentioned this in the beginning of my talk, our growth over the last two decades has really been in the service sector but realize that services are not just about serving coffee or at the bottom end of the income distribution. Our service sector runs the gamut of the income distribution and actually a third of our exports are services. So expect the fact that most of the jobs are going to be in services and then try to figure out what are the skills people need to thrive in a twenty-first-century service sector based economy. A lot of job growth in the twenty-first century has been in education and health services. That got really hit by the pandemic but I expect to see wide growth there again as we come out of the pandemic. And so thinking about how to make those jobs better jobs, but also how to train people to take the jobs that are there is going to be important

FASKIANOS: Thank you going next to Harold Young who has raised his hand. Please unmute yourself.

Q: Okay, I'm Harold Young with Orangeburg County, a county administrator. First of all I'd just like to thank the administration for getting this pushed through because we definitely need this money at this time. The quick question that I have, is there an expectation of us as communities to give, as county government, to give some of that money to the nonprofits because they were listed in that part of the bill?

STEVENSON: Harold, I appreciate your question. I'm not going to be able to answer details on that, as I said earlier. Partially I think it's because they (INAUDIBLE.) Remember exactly what the rules are and how they're going to implement. So that guidance is not out yet, that I'm aware of, and so I don't want to comment on what rules you'll have to face

FASKIANOS: We are going to put together another webinar when there's more clarity on the specifics for the bill so keep a lookout for that. I know that there's analysis going on in how it's going to be deployed so we'll keep watching that. Going to a written question from Derrick Backer who's city administrator for the city of Sunbury in Pennsylvania. "Do you know, Betsey, what was the formula that was used to decide the funding allocation from the stimulus package to local municipalities?"

STEVENSON: So what I can say is that there was money set aside specifically for counties which were deemed to be extremely hard hit by the pandemic. So there's a formula there that provides an extra $65 billion that will go based on how much damage you faced. A lot of the bill—so you've got $350 billion in state and local assistance and then you've got $130 billion for K-12 education, $40 billion for higher education, $7 billion for restaurants, $7 billion for broadband. So there's a lot of money in this bill, some of which is very specific in terms of where it needs to go and some of which is less specific. But again, I can't comment on exactly how things are going to be allocated.

FASKIANOS: Great. Let's go next to Cathy Thompson, who has raised her hand and if you can unmute yourself, Cathy.

Q: I really appreciate the discussion so far, Betsey. I am a county board supervisor in Outagamie County, Wisconsin, and we have a number of projects that we're looking at doing. But I've also been very active in the League of Women Voters. Whoops am I muted? Can you hear me now?

STEVENSON: We can. We heard you.

Q: Okay, oh okay, because it still said to unmute. I've been very active in a climate change study and I would really like to see a lot of the money that counties are getting, in particular, go towards infrastructure, to build for higher winds, worse storms that we are going to have. And it just even in a state like Wisconsin, I imagine they'll come a time within the next decade or so we may have to grow something besides corn because the climate is changing so much. So we need to have people preparing for that kind of thing and even just the weatherization of homes, in terms of solar and wind, going green. I know a lot of the power companies around here are really looking at investing into that and I think if they can partner with homeowners that will save homeowners a lot of money in the not too distant future in Wisconsin, in terms of saving money on energy. But it will also provide jobs, a lot of jobs. So I'm excited about the potential. I'm just hoping that people's imagination will go in that direction.

STEVENSON: Yeah, thank you. I think that you point to the fact that something that is important to realize, which is that right now, our problem is that we have all these unused resources. We have people who don't have work, we have commercial real estate that's sitting vacant, we have equipment that's not being used. But what we do with it is really up to our own decision about what's going to produce the longest run gains. The better you are at coming up with projects that are going to produce long run gains, the better you're going to be at leveraging this current situation to put your city, your town, your community in a better position in the future.

FASKIANOS: I'm going to take a written question from Sharon Lai, who is San Francisco municipal agency board director. "Some of the economic weaknesses that have been sped up and highlighted during the pandemic relate to structural underfunding of social needs, housing affordability, schools, and transportation. Economic GDP growth does not necessarily alleviate these challenges, if you could comment on that."

STEVENSON: So I think one of the obvious aspects of this particular bill was a desire to think about reversing some of the inequality that occurred not just during the pandemic but that has been occurring over time. I think the thing that was really shocking and unexpected, honestly truly unexpected, was that the pandemic worsened inequality, just in a way that nobody fully anticipated.

For a couple of reasons. One is that we already knew in the literature that one of the reasons why we're seeing widening inequality is because businesses, what we call, can scale without mass. In other words, businesses that don't need very many workers are actually becoming more dominant in our economy and that is shifting the return to be more towards capital and away from labor. So it's companies like Amazon, fewer of their revenue goes to paying workers than in sort of old-school retail businesses. And what happened was those businesses that have scale without mass, also tended to be the ones that were more pandemic-proof. So that's why we saw the billionaires become even richer during this.

But it wasn't just about the billionaires, we also found that your more pedestrian office worker but in the top 10 percent of the income distribution, was better able to thrive and be more productive at home than people expected. In fact, one of the reasons why employers are thinking about keeping people at home, at least part of the time, was because we saw what office workers were doing at home was they were more productive, which actually somewhat offset the fact that a lot of management time was going to dealing with the pandemic which, of course, is making people less productive. So you see this widening inequality as you saw people at the top end of the income distribution, many of whom feared income losses because they saw their peers have income losses or they themselves had income losses in the 2008 recession, didn't actually end up having them. And that's why I told you that we have $2 trillion in excess savings and most of that came out of the top. Well, that was because people at the top end of the income distribution were fearful of losing their income, and they didn't, but they saved to prepare for it.

So this widening inequality that we saw over the last year is actually coming after decades of widening inequality. And so expanding the child tax credit so that it is more fully refundable, so that it goes to 92 percent of kids, expanding the Earned Income Tax Credit. A lot of that is about seeing well what happens if we make sure that people at the bottom have more resources? How does that end up shaping our overall economy? And that's not a permanent change and I think the big debate we're going to have to have is whether or not that's a permanent change that we want to make going forward. Whether we redirect more money from the government towards the households at the bottom in a way that supports them, or whether we want to do this through things like requiring businesses to pay workers at the bottom more? Or whether we want to do this by providing access to free college, more education. Or whether we want to do this by providing access to training programs? But there are real structural problems that mean that real wages have been declining at the bottom, even while they're rising at very rapid rates at the top.

FASKIANOS: Thank you. I'm going to go next to John Gissler, who has his hand raised.

Q: I first want to comment, I really appreciate CFR providing this webinar, it was most enjoyable and most informative. I have a question concerning the concept of reshoring. You anticipate that reshoring is now taking place and will continue to take place; however, when the administration talks about raising the corporate tax rate from 21 to 28 percent, isn't that going to have a negative impact on the concept of reshoring?

STEVENSON: I don't know what the administration's going to end up or what Congress is going to decide to do with the corporate income tax. I think the debate over the corporate income tax often gets confused by the fact that people think corporations aren't people. So of course corporations, we can't tax non-people, we only tax people and so then the question is who within the corporation is getting taxed and how can those people better avoid taxes? So your concern is that if we do not have a competitive corporate tax rate a lot of companies will leave. So we obviously can't just raise our corporate tax rate without thinking about what's happening globally to corporate tax rates and where our position will be. I think a lot of the desire to raise the corporate tax rate comes from the fact that—this point I was alluding to about companies sort of scale without mass. What we're seeing is a lot more money is going to returns on capital. That means a lot more money is going to investors and less money is going to workers, but we still do a lot more to tax workers than to tax those returns on capital. We have to think about how we're going to reshuffle our tax base in order to make sure that people whose income comes from returns on capital are also paying their fair share. Whether that comes from raising the corporate tax rate, or raising taxes on the individuals who get the benefits from corporate profits. I think is really something that we need to be debating

FASKIANOS: Thank you and with that we're at the end of our time. I really apologize for not being able to get to all of your questions. There were several in there about the specifics of the stimulus package, again it's early days and so there's work being done on that and we will be standing up a call to delve into how it's being allocated to the states and how you can use it in the coming weeks. I don't know what the timeframe is for that but we will keep an eye on that. So Dr. Stevenson thank you very, very much for being with us we really appreciate it. You can follow her on Twitter @BetseyStevenson. So thank you very much

STEVENSON: Thank you. It was nice talking to everyone today.


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