The U.S. Capitol Rotunda The U.S. Capitol Rotunda (Credit: Diego M. Radzinschi)

The latest Republican economic aid plan is expected to be too small to prevent a double-dip recession, according to economist Mark Zandi, chief economist at Moody’s Analytics.

The next fiscal rescue package needs to approximate $1.4 trillion, with “at least a third” used to support state and local governments, another third allocated for household income supports and the rest applied to defraying rising health care and other costs, writes Zandi in Moody’s Analytics July macro economic report.

(Related: New GOP Stimulus Package Set for Monday Release)

The Republican proposal reportedly totals about $1 trillion in aid to households, schools and small businesses and for coronavirus testing but excludes any additional aid to state and local governments. Instead it reportedly relaxes some rules for how those governments can use the $150 billion already allocated for their use under the earlier Coronavirus Aid, Relief and Economic Security (CARES) Act.

The proposal is expected to cut extended federal unemployment payments to $200 a week, from $600 currently, until individual states can develop software to provide unemployed workers with 70% of their pre-pandemic income. It also reportedly includes another round of $1,200 stimulus checks for individuals with incomes up to $75,000 a year or couples with incomes up to $150,000 a year.

More fiscal support is needed because of the “re-intensifying virus” and the continued suffering of American workers who remain jobless or are enduring cuts to pay and/or hours, according to Zandi. “Without additional help they will have no choice but to stop paying their bills and pull way back on their spending,” he writes.

That aid, along with more more funds for state and local governments, would provide the biggest multiplier effect for the broader economy, essentially providing more bang for the buck, according to Zandi. Stimulus checks have a smaller impact because higher income households tend to save their checks instead of spending.

State and local governments need more federal aid to avoid potentially millions of layoffs on top of the 1.5 million workers they have already been laid off during the pandemic, which would slow the  national economy even further, writes Dan White, director of government consulting and fiscal policy research at Moody’s Analytics, in the firm’s macro outlook. 

State and local government budgets are strapped due to reduced revenues and increased spending on services and states’ inability to use deficit spending. Unlike the federal government, states must balance their budgets annually, which, in turn, means less funding for towns and cities at times like these.

“If lawmakers fail to come through, the economy is likely to suffer a double-dip recession, with real GDP resuming its decline in their year’s fourth quarter and the first quarter of next year,” writes Zandi, noting that his outlook assumes no “serious second wave this fall” or an effective vaccine in the interim.

— Check out New GOP Stimulus Package Set for Monday Release on ThinkAdvisor.