- Dr. John Garen
The CARES Act: Relief, But What About Recovery?
The CARES Act is the dramatic and massive $2.2 trillion response to the coronavirus crisis. It is largely an aid and relief bill and should be thought of mostly in those terms, not as economic stimulus.
Naturally, dire times call for particular attention the most vulnerable. There are a lot of funds for this purpose, but evidently the bill has wider goals. One seems to be enabling people to retain their basic lifestyle until the crisis is over, e.g., paying the mortgage, keeping the lights and heat on, and buying gas and groceries. The direct payments to families and the federal top-off of unemployment insurance are examples and are large parts of the CARES Act.
Forgivable loans to small businesses, so they retain and pay their employees, are in a similar vein. However, the point of channeling money through businesses is so they will remain intact and can restart quickly. If firms go bankrupt, they could restart after the crises, but the processes of bankruptcy and restart are time-consuming and costly, eating up resources and delaying the time to resumption.
A large amount of funds is targeted to bigger firms, but these are loans that must be repaid. The thinking is that large firms need the funds to remain open, but can take on additional debt without fear of immediate bankruptcy. However, the subsequent repayment of this debt comes at the expense of shareholders. If you have a pension plan, this means you.
There are other substantial buckets of aid, including assistance to hospitals and state and local governments.
Unfortunately, there are non-trivial amounts of pork tucked into the bill. A brief review suggests it’s around $100 billion; about 5% of the total. Perhaps we should be relieved that it’s that small. Still, $100 billion is a lot of money and it’s distressing that some politicians used this crises simply to gain political advantage.
As noted, this bill is not an economic stimulus. It puts more money in the hands of numerous people and firms. But it will not “stimulate spending” because there is not as much to buy. With many stores and their suppliers shutdown, less is being produced. More dollars do nothing if there is less to buy. A real recovery comes only when commerce and production resume.
The closures forced by many governors is the cause of the lost output. The intent is to reduce the spread of the virus. However, the cost of forgone production is high; many forecast a 30% reduction in output for the second quarter of 2020. By comparison, the worst quarter of the Great Recession was an 8.4% reduction. People somewhere are bearing this cost. Though some households will get more cash, others forgo it. Those loaning money (the bond buyers) to the government are reducing their consumption, so the burden of the shutdowns is shifted, not eliminated. Bond holders get their money back later, but this simply means more future taxes for everyone.
If the future economy grows faster than the tax bill, higher taxes are less of a problem. However, higher taxes slow economic growth, making this less likely. Moreover, this burden comes on top of an already precarious federal budget, with pre-existing concerns about future taxes and growth. To gain a sense of this, the 2020 federal budget is $4.8 trillion with a $1.1 trillion deficit. The $2.2 trillion CARES Act raises spending by 46%, triples the deficit, and raises the debt. We have not seen deficits and debt like this since the aftermath of World War II, when government spending shrank and the economy began to boom.
This is meant to highlight the high costs incurred from the economic shutdowns. This doesn’t mean nothing should be done about coronavirus that impedes economic activity. It does mean, however, that for a true return to normalcy, there must be a timely reopening. Paying people not to work cannot last. At present, policy makers ought to limit the damage to the economy with a more measured approach regarding which limitations are sensible. People want safety, but not at any cost; otherwise we would never drive our cars and run the risk of an accident. Thus, it’s important to access the additional safety we received from the last round of closures and what the cost was. Are we getting trivial improvement in the former with large increments in the latter? I am concerned that this is the case, especially with the political incentives for policy makers to “do something” as long as it looks good, whether it really makes a difference or not. The costs of under-responding to the crises are high, but so are the costs of over-responding, so it’s critical to get it right.
Dr. John Garen is the BB&T Professor of Economics at the University of Kentucky and a Senior Fellow at Pegasus Institute