In this week’s data commentary we’ll provide our usual review of health statistics, but primarily focus on what is an increasingly perilous juncture for both the U.S. and North Carolina economies. Specifically, the failure of Congress to agree on a new stimulus plan is feeling more and more like a game of chicken, with U.S. households standing between the onrushing vehicles. Hopefully, there is still time to slam the brakes on the rhetoric and approach the problem with solid economic logic.
First, the data. COVID-19 health statistics have improved both nationally and in North Carolina. Nationally, it appears that a peak in new reported cases and hospitalizations was reached in late July. A similar peak occurred in North Carolina. Encouraging trends are starting to show in positive test rates as well. In contrast, the death rate (which lags new reported cases and hospitalizations) has continued to increase both nationally and statewide.
This week, we added to the dashboard estimates of “R- naught,” or the virus reinfection rate, which measures the average number of people a currently infected individual is expected to infect. Values less than 1.0 are consistent with containment of the virus. Estimates provided by Covid Act Nowsuggest that the rate in North Carolina has fallen below 1.0 recently, and the national number is almost there. Overall, good news in the battle against the virus, although a sustained value below 0.9 is needed to reliably reduce cases on an ongoing basis.
In contrast, the economic statistics are not as encouraging. Our measures of consumer spending continue to tread water. Some important sectors, such as transportation and entertainment, appear to be dipping over the last couple of weeks. The unemployment rate remained steady in North Carolina and ticked up nationally. Small business activity also stayed flat. As we discussed in last week’s commentary, both economies appear to be plateauing after a period of rapid rebound. Our measures of socioeconomic adversity continue to trend up at the national level, although trends in North Carolina are harder to discern because the data are noisier.
A key pillar of the CARES Act was the federal unemployment supplement of $600 a week. These payments alone exceeded the weekly unemployment benefits provided by most states, and together, benefits provided income levels of between roughly $21 an hour and $33 an hour (based on a hypothetical 40-hour work week). These payments actually increased incomes for many people who lost their jobs. In fact, the combination of these payments and other stimulus income led to a second-quarter aggregate disposable personal income growth rate of +42.1% (at an annual rate)—the highest on record. The payments, while very generous, were important for sustaining the economy during the near-national shutdown. However, the $600 unemployment supplement officially expired on July 31, and what will replace it remains highly uncertain. In addition, other terms of new stimulus also remain uncertain.
The Republicans make the case that an additional supplement of $600 a week is so generous it will discourage lower-wage workers from seeking work. The Democrats argue that the disastrous state of the economy means that most people seeking work will not find it, so incentives are not a major issue. Adding to the debate is a study released by the Tobin Center for Economic Policy at Yale University. The findings suggest little effect of unemployment insurance on actual employment levels during the onset of the pandemic or in the weeks immediately following the implementation of benefits.
So who’s right? Both the Republicans and the Democrats have valid points. It’s inconceivable that, with a large majority of workers receiving more in unemployment than they would earn if employed, that a large number of lower-wage workers would have much incentive to reenter employment. Regardless of what happened during the height of the shutdown (when many other forces were at play), benefits will need to come back in line with historic wages if the economy is to fully reopen. It’s important to examine the issue from the perspective of potential employers as well. If benefits stay at such high levels, many businesses will not be able to afford wages that are needed to reemploy workers. This is most pronounced in the service and retail industries, where businesses are struggling to survive. On the other hand, the Democrats have a valid point in that the supply of labor is likely to exceed demand (at the previous equilibrium wage) for the foreseeable future. Many individuals and households are currently facing dire circumstances through no fault of their own, and government assistance is needed to prevent another contraction. In addition, there are still very vulnerable segments of the population for whom the health risks of returning to work are substantial.
What, then, is the preferred path forward? Congress should extend supplemental benefits at a more modest level (maybe $300 a week, which is closer to the $200 a week that the Republicans have proposed), but also provide businesses with a grant of roughly $300 a week per new employee to add unemployed workers to their payrolls at a wage of $600 a week or more. Extending these benefits for 12 weeks will effectively push the same level of income to many unemployed individuals, while at the same time reattaching them to the workforce and generating economic output. Such a proposal would be costly for the federal government, but would lead to better outcomes for the broader labor market and economy. This is just one possible mechanism, but support now needs to be directed toward restarting growth and reemploying people, not to extending incentives to remain detached. Other mechanisms have been suggested that would achieve the same goal. That said, not everyone will be reemployed quickly, so any package should contain other safety nets for those currently receiving unemployment benefits—such as additional mortgage, rent and student loan payment forbearance. In addition, consideration should be made for those with high health risks (e.g., workers over 60 years old).
We are expecting an update on North Carolina’s phased opening this week. Although conditions are improving, the changes are off of a much worse base than just a month ago. Consequently, it’s hard to make the case that the state is safer than it was on July 14. That said, North Carolina has managed the recent increase in cases well and demonstrated that there is headroom in the healthcare system for controlled upticks in infections. Is it enough for a move into Phase 3? Not yet, unfortunately. The state can undertake some additional conservative reopening measures, but needs to ensure conditions don’t deteriorate significantly as people steadily increase nonessential activities away from home (including tens of thousands of college students returning to campuses). Let’s hope everyone does their part to contain the virus in the coming weeks, and we’ll revisit the situation at the end of the month.
Economic Danger Zone