The most effective stimulus bill will boost unemployment benefits and PPP in order to drive economic growth, JPMorgan says
- New stimulus would best benefit the economy by focusing on unemployment insurance and the Paycheck Protection Program, Michael Feroli, chief US economist at JPMorgan, said in a note.
- The bank's research suggests that bolstered unemployment benefits would do more to boost economic growth than another round of direct payments.
- While past analysis of PPP shows it was inefficient in saving small businesses, upcoming vaccine distribution strengthens the case for the program as a short-term bridge, Feroli said.
- Aid for state and local governments is likely warranted, but with tax revenues quickly bouncing back, stimulus funds would likely be better used elsewhere, he added.
New stimulus should focus more on aid for small businesses and unemployed Americans than direct payments and municipal governments, Michael Feroli, chief US economist at JPMorgan, said in a note.
Lawmakers are expected to publish language for a $908 billion relief package on Monday, revealing new details on the most promising stimulus proposal in months. Republicans and Democrats in Congress threw their support behind the measure throughout last week, teeing it up for passage before the end of the year. The bill's framework includes funds for expanded federal unemployment benefits, the Paycheck Protection Program, and state and local government aid.
Since deficit concerns constrained the package's size, proper allocation of its $908 billion sum is all the more important, Feroli said. Bolstering unemployment insurance is among the most effective ways to drive economic growth, according to the bank.
JPMorgan's research found that unemployment benefits boasted a spending multiplier of 0.7, meaning roughly 70% of every dollar spent on the program boosted gross domestic product. By comparison, stimulus checks included the CARES Act held a multiplier of 0.6, according to the Congressional Budget Office.
"While the evidence isn't overwhelming, it does suggest that supporting the unemployment insurance system may provide better economic payoff than another round of stimulus checks," Feroli said.
State- and local-government support holds the highest multiplier of the pandemic relief programs, but JPMorgan noted that such aid isn't as necessary as some might think. A lack of such funding dragged on economic growth in the wake of the financial crisis as shrinking government revenues forced municipalities to lay off public workers and slow spending.
Economists fear a similar trend could worsen the current downturn, but tax income is holding up remarkably well, Feroli said. Revenues are less than 0.5% from their pre-pandemic peak, and spending growth has expanded at only a 0.5% annual rate since the first quarter.
While Congress shouldn't abandon state- and local-government aid entirely, data suggests the current downturn damaged government finances much less than the financial crisis did, Feroli said.
On the other side of the spending-multiple spectrum, PPP ranks as the least efficient aid program, according to the CBO. Yet the program's ineffectiveness changes with the advent of a coronavirus vaccine, JPMorgan said.
Before November's positive vaccine development, the program would be "temporarily propping up firms whose business models are no longer viable," Feroli said. With vaccinations expected to start in January, the absence of new PPP aid could doom small businesses that were set to return to profitability, he added.