Jan 28, 2021

In The Bay: Unintended Consequences of the U.S. Stimulus Bills

In The Bay: Unintended Consequences of the U.S. Stimulus Bills

There have been five rounds of stimulus in the United States since the COVID-19 pandemic began (see the Appendix below for the complete list), and the U.S. Congress is working on a sixth.

As proposed, number six is called the American Rescue Plan. It provides $1.9 trillion in stimulus, including $1,400 checks to most Americans, a refundable child tax credit, an increase in “enhanced unemployment benefits” (from $300 to $400 per week), and a $15 federal minimum wage.

The Consequences

While these bills may help keep the economy moving, they are not without negative, unintended consequences. For example, inflation. The sheer size of these stimulus bills – over $5 trillion combined, or around 20% of U.S. GDP –will lead to higher prices and a weaker dollar.

That’s because there simply isn’t enough money coming in to cover the cost of the bills. So the federal government prints more money to cover that cost. The problem is, printing money causes inflation. That’s Economics 101. Cutting a pizza into smaller slices doesn’t get you more pizza.

But inflation isn’t the only problem. Below, I dig into the unintended consequences of two key components of the stimulus:

  • Enhanced unemployment benefits, and
  • Increased minimum wage.

Enhanced Benefits

The “enhanced unemployment benefits” have an unfortunate side effect: they make it difficult to get people off the sidelines. Many people currently make more on unemployment than they made when they were working.

For example, let’s say Jeff makes $18/hour and lives in Colorado, where the standard unemployment benefit is 60% of average weekly earnings. Jeff can lose his job and qualify for $432/week ($18×40 hours x 60%). That’s basically $10.80/hour for not working. The idea is to help tide him over until he can find a new job. At $10.80/hour, Jeff is motivated to find another job so he can cover expenses and get back to his previous lifestyle.

However, the CARES Act introduced enhanced unemployment benefits of $300/week. This is in addition to what Jeff gets under the state plan. When you tack this on, Jeff’s benefit increases to $732/week, or $18.30/hour. He’s now making more on unemployment than he was when he was working.

What’s more, under the proposed American Rescue Plan, the enhanced benefit increases to $400/week. That pushes Jeff’s hourly rate on unemployment to $20.80. This means if Jeff is offered his old job back at $18/hour, he has no economic incentive to accept it. It would take a raise of over $2.30/hour to entice him back.

It gets worse. There’s a common complaint among employers that people will actually quit their jobs purely to get these enhanced benefits. This is happening, although the Department of Labor makes it clear that it’s fraud.

“Individuals who quit their jobs to access higher benefits, and are untruthful in their UI application about their reason for quitting, will be considered to have committed fraud. If desired, employers can contest unemployment insurance claims through their state unemployment insurance agency’s process.”

Even if an employer successfully contests fraud like this, the incentive is there for employees to quit and for prospective employees to stay out of the job market. This makes it incredibly difficult to fill open positions in certain wage ranges.

Clearly, the intent of the enhanced benefit is to tide people over longer than normal while the overall job market recovers. The idea is that in a COVID-induced downturn, it will take people longer than normal, on average, to recover from a job loss.

The unintended consequence is, of course, that there are job openings going unfilled directly because of this enhanced benefit. As long as this benefit is in place, a significant chunk of the labor force is literally incentivized not to work.

$15 Minimum Wage

An increase in the federal minimum wage to $15 will create one of two responses in employers:

  • Automate jobs that currently pay under $15/hour. There is simply a point where it is less expensive to automate a job than pay a human to perform it.
  • Increase prices. For jobs that can’t be automated, employers will find ways to pass the increased cost onto customers. In other words, more inflation.

In general, an increased minimum wage will mean that the jobs many people left when the downturn hit will no longer be there when the downturn is over. It prices many low-skilled workers out of the job market completely. This includes all the teenagers who can no longer find part-time or summer work because hiring them at the wage they are worth will be illegal.

My Recommendations

  1. Keep the employees you have, if at all possible. Use the benefits of the stimulus, such as PPP, to tide you over. This will help prevent you from having to compete with the unemployment rolls for employees.
  2. Move toward automation. For example, you can implement tools like Fullbay that keep things in a shop following the ideal workflow (authorize before doing work; automatically track PMs; comprehensive invoicing; etc.) without the level of human input a manual process requires.
  3. As inflation and a federal minimum wage drive your costs higher, be prepared to increase your labor rates. As a rule of thumb, you should only be spending 20% of your total revenue on direct technician labor. If you’re spending more than that, take a hard look at the rates you charge and seriously consider an increase.

Appendix: The First Five U.S. COVID-19 Stimulus Bills

  1. Coronavirus Preparedness and Response Act
    March 6, 2020:
    Provides emergency supplemental appropriations of $8.3 billion to combat the spread of COVID-19.
  3. Families First Coronavirus Response Act
    March 18, 2020:
    Provides funding for free coronavirus testing, 14-day paid leave for American workers affected by the pandemic, and increased funding for food stamps.
  5. CARES Act
    March 27, 2020:
    The massive $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act includes $300 billion in one-time cash payments to individual Americans (mostly $1,200 checks; families with children received more), $260 billion in increased unemployment benefits, $350 billion in forgivable loans to small businesses (known as the Paycheck Protection Program or PPP), $500 billion in loans for large businesses, and $339.8 billion to state and local governments.
  7. Paycheck Protection Program and Health Care Enhancement Act
    April 24, 2020:
    Provides another $320 billion in funding for the PPP, an additional $100 billion to the Public Health and Social Services Emergency Fund for healthcare providers’ expenses, lost revenues, and expanded COVID testing.
  9. Consolidated Appropriations Act, 2021
    December 27, 2020:
    Provides an additional $900 billion in stimulus, including $284 billion of further PPP expansion, $166 billion in direct stimulus checks ($600 for most Americans), and $120 billion in increased unemployment benefits.
Jacob Findlay