WASHINGTON—A substantial increase in personal savings and better-than-expected tax revenues in many states have weakened the case for President Joe Biden’s sweeping $1.9 trillion economic relief bill, which is now before the Senate.
While Biden continues to defend his “American Rescue Plan” to fight the pandemic, a growing number of critics question the size of the proposed spending.
During lockdowns last year, many Americans saved more money than usual since most stores and restaurants were closed. According to a new report by the U.S. Bureau of Economic Analysis, personal income soared by 10 percent in January, thanks mainly to government stimulus benefits.
The personal saving rate surged to 20.5 percent of disposable personal income in January, up from 13.4 percent in December. Americans now have more than $3.9 trillion in savings compared to $1.4 trillion in February last year before the start of the pandemic restrictions.
“If the next round of $1,400 checks goes out in April, it will undoubtedly boost personal income by a new record amount to another record high,” Ed Yardeni, a veteran Wall Street strategist and president of Yardeni Research, wrote in a note to clients.
The surge in savings suggests that “much of the month’s stimulus hasn’t been spent yet,” he said.
State and local revenues, which are normally vulnerable to economic downturns, have also been resilient despite the pandemic, studies showed.
A JPMorgan survey found that states collected nearly as much revenue in 2020 as they did in 2019, based on tax receipts data from 47 states. Some states even saw unexpected budget surpluses due to federal aid and a rise in tax revenues.
“As currently drafted, the American Rescue Plan fails the test,” the U.S. Chamber of Commerce said in a statement on March 2, pushing for a smaller, more targeted rescue plan.
“Since the introduction of the American Rescue Plan, we have learned that personal savings have grown substantially with Americans saving almost $3 trillion since the pandemic began, and the majority of states have not suffered a significant loss in tax revenue, and some have more revenue than pre-pandemic,” the statement read.
“These facts are not a reason for inaction, but they are a reason to target aid where it is needed.”
The U.S. House of Representatives approved Biden’s $1.9 trillion stimulus bill this past weekend, with no Republican support and two Democrats voting against it.
The Senate Majority Leader Chuck Schumer (D-N.Y.) has promised to move the bill as quickly as possible through the Senate. Moderate Democrats have pushed for more targeted stimulus payments, prompting some changes to the House version of the bill.
Senate Democrats, for example, consider giving $1,400 checks to fewer Americans by lowering the income cap. They also plan to remove the language to raise the federal minimum wage to $15 an hour after the Senate parliamentarian ruled last week that the provision couldn’t be part of a budget reconciliation bill.
To pass the bill, Vice President Kamala Harris may have to cast a tie-breaking vote in the Senate, which is split 50–50 between the two parties. Democrats must remain united if Biden’s rescue plan is to get across the finish line.
‘Partisan Spending Bill’
Critics argue that a large stimulus plan is likely to cause a boom that overheats the economy, which might result in higher inflation.
Democratic economist Larry Summers in a recent op-ed criticized Biden’s “very large” relief plan, saying that it might threaten future inflation and financial stability.
The Democrats’ plan also includes the $400-per-week enhanced unemployment insurance benefit, which is generous enough to discourage people from going back to work, according to Summers.
The White House and Democratic leaders aim to pass the relief package before current unemployment benefits expire on March 14.
“For almost a full year now, new unemployment claims have exceeded the pre-pandemic all-time high,” White House press secretary Jen Psaki said at a March 1 press briefing, defending the president’s plan.
“And the economic data shows a K-shaped recovery with millions of workers at risk of being left behind. That’s why it’s absolutely critical Congress act, and we certainly hope they do that as quickly as possible.”
Republicans have opposed the plan, calling it a “partisan spending bill” filled with progressive agenda items. They argue that less than 9 percent of the spending bill actually goes toward fighting the pandemic, and with less than 1 percent being dedicated to vaccinations.
“You see, they had to leave room for all the completely unrelated left-wing pet priorities, like sending $350 billion to bail out long mismanaged state and local governments,” Senate Minority Leader Mitch McConnell (R-Ky.) said on March 2 on the Senate floor.
He also criticized, among other things, the expansion of Obamacare insurance subsidies that would “disproportionately benefit wealthier people.”
The relief bill makes Affordable Care Act subsidies available to the affluent by removing the income cap, which is four times the federal poverty line ($51,520 for an individual and $106,000 for a family of four).
“House Democrats’ COVID legislation would, for this year and next, eliminate the cap on subsidy eligibility, and lower the specified premium percentages, such that households qualifying for exchange subsidies would spend no more than 8.5 percent of income on premiums for benchmark coverage,” Chris Jacobs, a health policy expert and CEO of Juniper Research Group, said in a recent op-ed.
This change “would come at a major cost to taxpayers, subsidizing coverage for households earning hundreds of thousands of dollars,” Jacobs said.
According to estimates, the provision could provide a $3,000 subsidy to a couple earning $200,000 this year.