El-Erian on stimulus talks: The delay in Congress 'will create a lot of damage'
With congressional stimulus negotiations stalled and more relief provisions expiring, economist Mohamed El-Erian warned that delayed stimulus will damage American households and the broader economy.
“The U.S. is a good example because we have ability but what we've lost is willingness,” he told Yahoo Finance Live (video above). “After January 20, we will find our will again. The problem is that will create a lot of damage in the interim.”
Congressional leaders and the White House failed to reach a deal before the election, and negotiators have not returned to brokering legislation that would help American families, business, and local governments amid the coronavirus pandemic.
For the U.S. economy, that is a recipe for pain.
“There’s already an indication that the labor market may be going into reverse, which is problematic,” said El-Erian, president of Queens' College in Cambridge and the chief economic adviser at Allianz. “We are slowing, and we will slow more, to the extent that household economic insecurity goes up.”
Initial unemployment claims are climbing again, reaching 778,000 for the week ending Nov. 21 after the trend turned upward the week prior. Households are also increasingly struggling: In October, personal income fell and one million Americans entered poverty. As time goes on, more families are experiencing food insecurity as provisions of the CARES Act expire.
Read more: How to file for unemployment insurance
‘Going all-in like a final hand in poker’
The $2.2 trillion CARES Act, which passed Congress in March, was the largest economic stimulus package in history, but many of the provisions that kept households afloat during the pandemic have expired.
Most direct cash payments to Americans were sent out in April, the extra $600 of unemployment benefits expired at the end of July, and the extra $300 under the Lost Wages Assistance (LWA) program expired in September. If a stimulus deal is not reached by the end of the year, more relief provisions will expire, leaving American households with even less support in the winter.
“When we acted thinking it was, in game theory terms, a one-round game, so [...] we’re going all-in like a final hand in poker,” El-Erian said. But “what started out as a one-round policy response has had to evolve into a multi-round policy response. That's where it gets problematic.”
Up to 12 million Americans are expected to lose unemployment benefits coverage when the Pandemic Unemployment Assistance (PUA) and the Pandemic Emergency Unemployment Compensation (PEUC) programs expire on December 26.
‘We may find out that the journey is very painful’
While the White House previously offered $1.9 trillion for a deal, Senate Republicans — who are now likely leading the negotiations — support a much smaller deal. Senate Majority Leader Mitch McConnell’s (R-KY) latest proposal was worth just $500 billion, opening up a huge gap between the two parties on funding.
House Speaker Nancy Pelosi (D-CA) and McConnell haven’t even returned to negotiations, only exchanging statements that urge each other to resume negotiating and compromise.
Americans overwhelmingly support another stimulus package with 80% saying it’s necessary and 68% saying Congress should act immediately on one, a recent survey by Pew Research Center found.
As more time passes, according to El-Erian, any stimulus legislation that emerges will become more important for providing stimulus in addition to addressing the economic damage caused by the delay.
“If we don't get a policy response both on the supply and the demand side that’s forward-looking, we may find out that the journey is very painful for more households and more companies and the destination has more scarring,” he said. “That's why the policy response that comes January, it's going to be so important.”
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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