Moneybox

Everybody Hates Donald Trump’s Plan to Save the Economy From the Coronavirus

Donald Trump at the Capitol with Vice President Mike Pence and Treasury Secretary Steven Mnuchin.
Please borrow and spend, Mr. President. Brendan Smialowski/AFP via Getty Images

Nobody seems to like President Donald Trump’s plan to save the economy from the novel coronavirus. Not Democrats in Congress. Not Republicans. Not even advisers in his own administration.

And, as has often been the case during this crisis, the president’s doubters and haters have a point.

With COVID-19 threatening to slow economic growth to a halt, Trump has argued that Congress should try to stimulate the economy with a large payroll tax cut, in order to boost consumer spending. At a meeting Tuesday with Senate Republicans, Trump reportedly suggested a cut worth $40 billion per month that would last all the way past the November elections. But GOP lawmakers have been “cool on the idea,” according to the Washington Post, which reports that Senate Majority Leader Mitch McConnell “has privately told several allies in recent days he personally opposes” the plan. Ohio Sen. Rob Portman told reporters that he thought “a more targeted approach would be more effective,” while House Minority Leader Kevin McCarthy said he wanted to find a “surgical way“ to help hourly workers.

Democrats, who have been putting together their own rescue package, have been more bluntly dismissive. “The administration seems to believe that the answer to any problem is another tax cut,” Senate Minority Leader Chuck Schumer said on Tuesday. House Majority Leader Steny* Hoyer didn’t mince words either: “I don’t think we think that the payroll tax cut is what we need right now,” he said Monday. “What the economy needs right now is some stability and confidence that we are addressing the issue that is undermining the economy.”

Trump’s own economic team is equally down on his idea, according to Politico:

At a meeting of top economic officials on Monday night, the president and aides like Treasury Secretary Steven Mnuchin, National Economic Council Director Larry Kudlow and Acting Director of the Office of Management and Budget Russ Vought all broadly agreed on ideas such as paid sick leave for hourly workers and loans for small businesses affected by the coronavirus, according to two administration officials briefed on the meeting.

But Mnuchin, Kudlow and Vought were far less enthusiastic about the temporary payroll tax cut idea, arguing it is too early to take that kind of measure. “The president seems to like the idea, but there are a number of people around him who were not as enamored of it,” said one administration official.

While Trump’s critics might not all share the same reasons for opposing his idea—some don’t like stimulus spending in general, some think a tax cut is a bad way to go about it—in the end, they are right that a payroll tax cut is probably a bad way to try and help the economy in the face of a pandemic.

There are some who’ve suggested that any kind of large-scale stimulus would be useless because it wouldn’t directly address the core problems created by the coronavirus. That’s a bit misguided. Dumping money into the economy won’t get more people to fly if they’re afraid of getting sick, or reopen theme parks that have to close. But putting money in people’s pockets would help keep consumer demand from completely cratering.

The problem with Trump’s plan? If you want to boost the economy right now, a payroll tax cut is simply a suboptimal way to do it.

The most obvious problem is that it simply helps the wrong workers. Some Americans are going to be kept away from their jobs when they get sick or their employer closes down for business. Others are going to earn less as business slows (with fewer people traveling and going out, hotel staffers and bartenders are going to earn less in tips). A well-designed stimulus would put money in those people’s pockets, because they need it and are more likely to spend. But a payroll tax cut does the opposite: It lets people who are still working take home a bit more of their paychecks, which they might just save.

Instead of making sure the least affected families have extra income to spend, the government would be better off making sure people had access to paid sick leave or expanding unemployment benefits (ideas Democrats are pushing). You could even expand unemployment insurance to people who haven’t technically lost their jobs but are only furloughed. Economists Jared Bernstein and Jesse Rothstein have suggested an especially interesting plan where the government would pay businesses to keep employing their workers even when they’ve shut down. If the president wants to give every family some spending money, then he could just cut each of them a check for a flat amount, which would channel proportionately more help to low-income households who’ll spend, rather than the upper-middle class that would benefit most from the payroll cut.

In any event, everyone is once again right that Trump is wrong.

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Correction, March 10, 2020: This piece originally misspelled Steny Hoyer’s first name.