MADISON —The federal government over the past year committed nearly $31 billion in relief to Wisconsin, a small part of the $4 trillion in two of the largest federal bailouts in American history.
Some economists say the latest $1.9 trillion stimulus isn’t needed, that the economy is roaring back to life. They argue that the surge in personal income, personal savings and employment indicates that the federal government overreacted to the COVID-19 pandemic with the size of the first stimulus.
These same economists are concerned about the fallout of all of this spending. The U.S. government is now carrying the biggest budget deficits since World War II. The Congressional Budget Office (CBO) estimates a $2.3 trillion deficit for 2021. The national debt now exceeds 100 percent of gross domestic product (GDP), a milestone last reached in 1945.
Added to the trillions being shoveled into the economy is a Hoover Dam of pent-up demand to spend an estimated $1.6 trillion that American families and business owners managed to save while spending federal grants and loans from the first stimulus.
Wisconsin economists are concerned that all of this overreach will unleash an inflation that will tear down the buffer the federal windfall was supposed to have created while war was being waged on the pandemic.
“I am definitely worried about the long-term consequences of the various stimulus bills,” says Dale Knapp, director of Forward Analytics and author of The COVID Economy: The Economic Impacts of COVID-19 in Wisconsin. “Inflation is one of them but also the debt this is passing on to our children. What happens when interest rates rise to even three or four percent? The annual debt service payment by the federal government will explode, leaving fewer dollars for other federal programs.”
Low-wage workers hit hard early
Few questioned the need for the CARES Act in March 2020, with the federal government taking its cues from the Centers for Disease Control and Prevention (CDC) and strongly suggesting that leaders of state and local governments shut down their economies to limit in-person interaction. Better to be safe than sorry with an uncontrolled virus was the rationale.
Unemployment in Wisconsin shot from 3.2 percent in March 2020 to 14.8 percent the next month, hitting the service industry the hardest. However, unemployment dropped to 10.4 percent in May 2020 and dropped in each of the next eight months, according to the U.S. Bureau of Labor Statistics (BLS). At the end of February, Wisconsin had the ninth-lowest unemployment rate in the country at 3.8 percent, according BLS data.
Even as many Wisconsinites were thriving, lower-wage workers and the sectors in which they worked suffered. As of mid-November, the number of low-wage jobs in Wisconsin was down 18.7 percent compared to February 2020; moderate-pay jobs had fallen 2.8 percent.
Nearly one-third of those in lower-wage jobs said their financial situation had worsened since the COVID-19 outbreak began and they were more likely to have taken on debt or delayed paying bills, a Pew Research Center survey released in March found.
As of December, the arts and entertainment industry experienced a 38 percent employment decline, accommodation a 35 percent decrease and food service a 23 percent drop, according to Knapp. Nationwide, the leisure and hospitality industry lost nearly 500,000 jobs, while the rest of the economy added 358,000 jobs.
“These industries employ a lot of low-wage workers. Job losses in these industries were large,” Knapp says. “White-collar workers were able to continue to work largely due to technology, so there was little impact.”
“COVID clearly had a differential impact,” says Mark Schug, professor emeritus at the University of Wisconsin-Milwaukee and a national consultant on economic and financial education policy. “People with good educations could work from home. Some even did better. I call them the pajama people. People with less education were hit very hard. I call them the apron people. You can’t serve coffee to a customer over Zoom.”
Better than expected
Although it took nearly a year for states to fully mobilize their vaccination programs, their economic recoveries had mostly exceeded expectations. Wisconsin had gotten $13.9 billion through the Paycheck Protection Program (PPP), cash payments, additional unemployment benefits and more than 130,000 forgivable loans for small businesses.
Overall, the state’s GDP dropped by 3.1 percent, to $338.7 billion last year from $349.4 billion in 2019, according to data from the U.S. Bureau of Economic Analysis. However, in the last half of 2020, Wisconsin’s GDP recovery was well ahead of the national average, according to Knapp’s study.
“The rise in GDP was due largely to knowing more about the virus and how to deal with it,” says Knapp. “The ability for restaurants to partially open and other businesses finding ways to work using social distancing.”
State tax revenues also exceeded expectations. In its November economic update, the Wisconsin Department of Revenue (DOR) forecast that employment would not return to pre-pandemic levels until early 2023. The agency predicted that employment in the arts and entertainment, accommodation and food service industries would be about 10 percent below pre-pandemic levels in 2023.
However, the Legislative Fiscal Bureau in January reported that by the end of the fiscal year (June 30), the state’s general fund should have nearly $1.8 billion, roughly $630 million more than had been projected in November.
Read more at the Badger Institute.