Should the Canada Emergency Response Benefit (CERB) be extended a few more months?

 

That’s a question for the moment for Canada. Headlines like “Extending CERB for months could double $60-billion budget, PBO report suggests” would make deficit hawks scream. In order to start having a meaningful public discourse about this, a minimum set of policy questions is needed to be asked.

What’s the policy purpose of Canada Emergency Response Benefit (CERB)? Many would agree at least a part of it is to stimulate the economy. Let’s use that as a point of departure for the purpose here.

Will the extension of CERB do what the program is supposed to do? Assuming that the stimulus is to stimulate the economy to hit a certain target, one way to think about the extension can be borrowed from Paul Krugman. Canada has an unemployment rate of slightly below 14% now, compared to above 5% at the start of the year. Assuming that two percentage points of GDP are needed to reduce one percentage point of unemployment rate above 5%, 18 points of additional outputs would be needed to get unemployment rate down to 5%. Assuming Canada has a GDP of $2 trillion, 18% of that or $360 billion would be needed to fill the output gap. Canada’s federal fiscal responses without the extension are estimated to total $146 billion. The extension of CERB  from June 2020 through January 2021 is estimated to cost $64 billion so the total with the extension would be $210 billion. Assuming a stimulus multiplier of two, the output boost without the CERB extension would be $292 billion, while that with the extension would be $420 billion. Given that a multiplier of two is very high, without the extension the total federal fiscal responses might not be able to do the job. Of course, other ways to offer a fiscal push are out there. For example, Canada Emergency Wage Subsidy (CEWS) is the biggest ticket item among the fiscal responses, costing over $75 billion compared to CERB’s over $35 billion before any CERB extension. So how about doubling down on CEWS? That is an important yet separate question. Or how about having fundamental changes rather than stopgap measures? That’s another important yet separate question. Solely on the narrow question of whether the extension could get the job done, the above extremely rough guess would suggest there’s a chance that the extension could get it done.

What if the CERB is not extended? Assuming no other program expansion or extension is implemented, life will continue to be miserable for many. In all likelihood additional fiscal responses will likely be needed, despite what some say. Life has enough pains for everyone. I doubt many would want to starve someone by not acting even they could have acted.

What might be the unintended consequences? Some suggest CERB offers easy money, and access to easy money leads to overdose and sadly deaths. Such unintended consequences call for separate policy responses, and they deserve a separate conversation, just like an important one needs to be had for fraud prevention. But the policy choice is not about whether to starve someone or whether to overdose someone.

The point here is not whether, for example, the back-of-the-envelope calculation above is or isn’t even remotely close to the mark. The point is that for Canada to have meaningful public discussions on whether CERB should be extended, some variations of the above minimum set of questions need to be asked.

Many deficit hawks who see the $64-billion extension would automatically scream fiscal irresponsibility. Imagine you want to buy a house, and you need to get a mortgage.  First there needs to be a house for you to live in, and there needs to have you live in the house, right? If there’s no house or even worse there’s no you, any question that has to do with your mortgage will be mute.

- Professor Thaddeus Hwong