The CARES Act that President Trump signed into law last Friday marks the fourth big effort to support the U.S. economy as it continues to reel from the impact of the coronavirus pandemic. It includes some $2.2 trillion in cash, loans, tax breaks and other incentives for individuals and families, small and big businesses, state and local governments, and health and education services, among others. It builds on a series of actions by the Federal Reserve, and two other relief bills Trump signed in March – one for $8.3 billion in emergency funding for mostly health and human services, and another for paid sick and family leave for affected employees or those caring for a sick child.
The relief measures in the Coronavirus Aid, Relief, and Economic Security Act break down roughly as follows: About $560 billion for individuals; $500 billion for big corporations; $377 billion for small businesses; $339.8 billion for state and local governments; $153.5 billion for public health; $43.7 billion for education and other services; and $26 billion for safety nets.
Wharton finance professor Jeremy Siegel described the CARES legislation as “a broad-based, strong and effective relief bill,” adding that “it is remarkable that it could be cobbled together in such a short time.”
“This will dramatically cushion the economic blow from the shutdowns,” Siegel continued. “Combined with the Federal Reserve’s program, the U.S. government has come out with all guns blasting to blunt the economic impact. We now need to speed medical relief and develop effective therapeutics.”
Wharton finance professor Richard Marston also commended the relief efforts: “I have to applaud Congress and the administration for the bipartisan support of this package. A unanimous vote in the Senate! But that just shows how scared everyone is.”
Cash in Hand
“Channeling liquidity to the most illiquid people leads to the most spending stimulus,” said Wharton finance professor Nicholas S. Souleles, drawing upon his research on stimulus rebates sent to households in prior recessions. Those beneficiaries are typically “unemployed, people with low income and cash on hand or [those] who have maxed out their credit cards, including people with good jobs who are temporarily illiquid,” he added.
The act provides for about $300 billion in rebate checks for all U.S. residents, including those who have no income or earn income from non-taxable benefit programs. Individuals with an adjusted gross income of up to $75,000 would receive $1,200 ($2,400 for married couples), with an extra $500 for each child below the age of 17. The incentive will reduce by 5% for every $100 above those income thresholds. It will phase out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Those benefits will range between $1,385 and $1,990 across four main income groups of taxpayers, according to an analysis by the Penn Wharton Budget Model. An NPR report puts the $1,200 rebate check in perspective: It is a little more than the $936 weekly pay for the median full-time U.S. worker as of the end of 2019.
“The important thing is that people who need checks are going to get them,” Richard Prisinzano, director of policy analysis at the Penn Wharton Budget Model told the Wharton Business Daily radio show on SiriusXM. (Listen to the complete podcast above.) He was previously with the U.S. department of treasury, where among other roles, he helped develop its methodology for identifying small businesses from tax return data.
According to Prisinzano, implementing the direct cash transfers through tax return data “is the quickest way, because it’s what the Internal Revenue Service (IRS) has on file.” He also commended the act’s provision to delay collecting payroll taxes from employers because it “keeps some cash in businesses.” He stressed that helping people and businesses have cash in hand is the need of the hour. “Because as everyone knows, everyone’s being told to stay home. And that has a great effect on workers and businesses throughout the economy.”
“Combined with the Federal Reserve’s program, the U.S. government has come out with all guns blasting to blunt the economic impact.” –Jeremy Siegel
The IRS will use the 2019 or 2018 tax returns of individuals – whichever is the latest filed – as the basis for the rebates, irrespective of the size of income, tax liability or refunds received. If returns were not filed for those years because of insufficient taxable income, the IRS will use the individual’s Form SSA-1099 or Social Security Benefit statement, according to a Forbes report. Those who didn’t file a return in 2018 or 2019 but filed the form in 2020 will receive a credit equivalent to the direct check. The IRS will electronically remit the money to bank accounts if they have the relevant direct deposit information. Payments will be made between now and December 31, 2020.
Those checks will likely begin reaching beneficiaries within three weeks, Treasury secretary Steve Mnuchin told CNBC last Thursday. Prisinzano thought that would be the right time frame, but added that “the safe thing is to say it’s probably a little bit longer than that.” He pointed out that the IRS has its task cut out in that effort. “There are programs that have to be written to read all of the electronic returns people filed, get the addresses [and] the direct deposit [information], and then send them,” he said. “There is just some time [needed] to do that. So, for the next couple of weeks, people should make sure they have those belts tightened. People aren’t getting out and spending, so that probably helps some.” On its part, the IRS is “doing it as quickly as they can,” he added. “I don’t think there’s any way to do it any quicker.”
The act allocates $260 billion to provide more unemployment insurance benefits and for longer periods than usual. It also expands those benefits to gig economy and freelance workers like Uber or Lyft drivers who would normally not qualify but are unemployed, partially unemployed or unable to work because of COVID-19. The federal government will give $600 weekly for four months to those who qualify for unemployment insurance from their state; they would also get an extra 13 weeks of unemployment insurance. The provision was controversial – four Republican senators said the extra $600 payment could encourage companies to lay off workers and Americans to stay unemployed.
Those benefits are timely: A record 3.3 million people filed claims for unemployment insurance for the week ended March 21, as captured in a Business Insider chart. The act also waives the existing 10% penalty on early withdrawals from retirement accounts of up to $100,000 if they are related to the pandemic.
Limited Gains
The CARES relief package “is very different from a fiscal stimulus,” said Wharton finance professor Nikolai Roussanov. “The standard, [new] Keynesian logic is that when there is a temporary shortfall in aggregate demand, it can be shored up by providing cash to households who are most likely to spend it.” That was the chief logic behind the tax rebate checks sent to people in 2009 in the wake of the Great Recession, he noted.
There are two problems in applying that logic to the current situation, Roussanov said. “First, the oncoming recession is in large part due to ‘supply side’ factors. Those are disruptions in the supply chain from people not showing up to work – first in China, now in the U.S., and elsewhere in the world. Giving consumers money to spend does nothing to address this.”
Secondly, Roussanov noted that for many consumers, the lack of spending is not because they have a financial constraint or because they are unwilling to spend it, but simply from their inability to do so. “If we cannot go out to restaurants because of quarantine, giving us more money to spend does nothing to solve the problem,” he explained. “Yes, there are people whose incomes have been reduced, sometimes drastically, and their ability to spend can be improved through cash transfers. But that is not something that a blunt instrument like the $1,200 transfer based on a single income cut-off is best suited for. In sum, [in terms of] stimulating aggregate demand, the impact will be positive, but small.”
Helping Small Businesses
Nearly $350 billion has been allocated for loans to small businesses, or firms with fewer than 500 employees, including sole proprietors and nonprofits. They will be eligible for “paycheck protection loans” of up to $10 million each from the Small Business Administration (SBA), with provisions for loan forgiveness if they were used to maintain payroll, pay rent or for select pandemic related expenses. The size of the loan will be determined by the payroll costs incurred by the employer in the preceding year, and will include tips, leave or vacation payments, severance payments and retirement benefits. The loan criteria exclude payroll taxes and payments to employees who earned more than $100,000 in the preceding year or whose primary residence was outside the U.S.
“Channeling liquidity to the most illiquid people leads to the most spending stimulus.” –Nicholas S. Souleles
Small business owners could also avail themselves of the SBA’s “Economic Injury Disaster Loan Advance” of up to $10,000, which will be available within three days of applying and doesn’t have to be repaid. That is in addition to the SBA’s “Economic Injury Disaster Loan” program, which provides small businesses with working capital loans of up to $2 million. Also included in the CARES package is $17 billion to cover six months of payments for small businesses already using SBA loans.
Unlike in the previous recession of 2008-2009 when businesses closed and people lost jobs, the economic impact of the coronavirus pandemic is “self-induced” because people are being asked to stay at home, Prisinzano noted. “Encouraging people to stay home for the health of the nation causes all these ripple effects of businesses closing because they rely on people showing up every Tuesday night for their burger and beer, and those kinds of things.”
The government is supporting those businesses to tide over the crisis with loans, tax deferrals and other incentives, Prisinzano continued. “The government is stepping in and saying, ‘We’re going to support you through this, because everyone needs you to stay home. And then we’re going to try the best we can to keep those businesses aloft so that when the economy opens back up, when it’s healthy to go back out, these businesses are still there.’”
Big Breaks for Big Businesses — with Scrutiny
About $500 billion is allocated for loans and other monies for big corporations, which will have to make public disclosures. Included in this package are $58 billion for airlines to stay open and pay employee wages and benefits, and allocations for passenger air carriers, ($25 billion), air cargo carriers ($4 billion) and airline contractors ($3 billion). Much of the $500 billion will go toward backstopping Federal Reserve loans, a Wall Street Journal report noted.
Some benefits cover businesses of all sizes. Those whose operations are fully or partially suspended because of the pandemic will get refundable tax credits aimed at helping them keep their employees on their payrolls, so as to ensure that they can return to work later. Businesses with fewer than 100 employees could use the deduction even if they aren’t closed, an NPR summary noted. Businesses could also defer paying payroll taxes, or the 6.2% of employee wages towards Social Security taxes, in equal measure over the next two years. Non-corporate taxpayers such as individuals, trusts and estates are allowed to deduct in the 2020 tax year all excess business losses (where deductions exceed income), replacing existing caps.
The act allows businesses to apply net operating losses incurred in tax years 2018, 2019 and 2020 to their tax liabilities in the previous five years. It also removed a provision in the 2017 Tax Cuts and Jobs Act that capped the carryforward of net operating losses at 80%. Further, it allows businesses a higher deduction for business interest expenses for tax years 2019 and 2020 – from 30% to 50% of adjusted taxable income. They could also choose to use their 2019 taxable income as the basis in their 2020 tax filings for business interest deduction.
All that expanded wiggle room for businesses that incurred losses is “one of the compromises” where both Democrats and Republicans agreed that “there are trade-offs to get this thing through,” said Prisinzano. “The two big pieces [relating to] the net operating loss and the interest deductions are rewarding businesses that did very well in 2019,” he said. “You’re basically going to let them go back to 2019 and reduce what they’ve already paid in tax. That’s a strange one to me.”
Some features of the act have been criticized for the special deals they may offer vested interests. The Trump family, which owns hotels, could benefit from two provisions aimed at helping hotels and restaurants, according to a New York Times report. The act also specifically sets aside $17 billion for “businesses critical to maintaining national security” – a category seen as intended at least partly for Boeing, the report added. Trump did allude to that when he told reporters that his administration would help Boeing, airlines and cruise lines.
“For Boeing getting a lot of money, you could make a reasonable argument [since] they do a lot of defense contracting,” said Prisinzano. But he wasn’t entirely comfortable with the CARES Act extending small business loans to enterprises with 500 employees or less. “Is that really small?” he wondered.
“This is a disaster situation so we do need relief, but it will certainly not stimulate the economy back to life.” –Richard Marston
Significantly, the act incorporates checks and balances to prevent abuse of its provisions. A special inspector general will oversee pandemic recovery with oversight of all loans and other uses of taxpayer dollars. Businesses cannot use the relief money for stock buybacks or executive bonuses. “The idea is, if you need it we [the government] should give it to you,” Prisinzano said. “If you don’t need it, or you’re going to use it for something else, that’s inappropriate.”
The Democrats also succeeded in incorporating a provision that prevents President Trump and his family members from receiving any assistance from the $500 billion allocation for businesses. The also act explicitly debars the vice president, members of the cabinet and of Congress – and their families – from availing themselves of those allocations. The definition of family includes “spouse, child, son-in-law or daughter-in-law.”
Will the Relief Measures Work?
“This is a disaster situation so we do need relief, but it will certainly not stimulate the economy back to life,” said Marston. “About half of the package is in the form of loans. There are extended unemployment benefits, surely needed but again for temporary relief. There are small cash checks for individuals. Surely they are also needed, but small compared with the cash needed by many households. There is money for hospitals, but that is a stopgap. Businesses and the people they employ will suffer lasting effects from the shutdown of the economy. To jump-start the economy back to life, Congress will have to pass additional spending bills. The recession is going to be that deep.”
Marston drew a parallel with the assistance the government provided to the Virgin Islands and Puerto Rico after Hurricanes Irma and Maria in September 2017. “The disaster relief provided by FEMA (the Federal Emergency Management Agency) and other government agencies was enormously important in helping the islands restore some semblance of life,” he said. For example, FEMA paid for electricity restoration and helped to collect and cart away the hurricane debris, he noted. “But after these storms, many businesses never opened again in both places. The lasting damage to Puerto Rico was particularly severe. This will be the case after COVID-19 is conquered. There will be wreckage all around the U.S. economy.”
Marston predicted a slow economic recovery, and one that will need further relief measures. “Once the virus curve turns down, I expect restrictions on economic activity to be slowly lifted,” he said. “Companies that survive will reopen for business. But many firms will need financing before they open up again. And there will have to be additional massive aid to particular sectors including state and local governments. So expect this bill to be a down payment only.”
If the economic downturn persists, the relief measures could be extended, according to Prisinzano. “My expectation is that there [might] be another set of checks,” he said. “The Fed is not done with the tools that they can use,” he continued, pointing to a CNBC interview where Fed chairman Jerome Powell said as much.
Prisinzano expected the Fed to unveil a package similar to the Troubled Asset Relief Program, or TARP, that it had operated in the 2008 financial crisis, where it essentially invested in the equity of troubled banks and companies. “Obviously there’s nowhere to go with interest rates right now,” following the Fed’s March 15 action where it brought interest rates to a range of zero to 0.25%, he said. “So maybe it’s opening those lending windows to different places, and making rates available to a wider set of folks … [that] we should expect to see in the coming weeks.”
“For the next couple weeks, people should make sure they have those belts tightened.” –Richard Prisinzano
Macroeconomic Casualties
The Penn Wharton Budget Model has estimated “the lasting macroeconomic effects of the anticipated recession due to coronavirus, as the initial shock leads to lower federal revenue and higher debt.” It laid out two scenarios: If the economy recovers the year after a deep recession (a V-shaped recovery), it projected the federal debt at 3.2% higher and GDP 0.3% lower by 2030. If the recovery occurs over two additional years (a U-shaped recovery), it estimated a 5.9% increase in federal debt and a 0.6% drop in GDP by 2030. “Barring future fiscal policy to reduce debt, the so-called ‘potential GDP’ will, therefore, be permanently lower due to the coronavirus,” it cautioned.
The PWBM analysis noted that “regardless of how deep the coronavirus-induced recession turns out to be, there will be lingering adverse impacts on the longer-term economy even without new fiscal policy measures.” However, the actual impact will depend on how fast the recovery takes hold, it stated. Both the federal stimulus spending and the recession would create additional debt, it pointed out. Federal revenues will shrink as economic activity slows during a recession, and without changes in federal spending, the deficits and debt will increase, it warned. “This increased debt crowds out private investment and leads to lower future output and income.”
Roussanov, too, believes that the $2-trillion relief package will aggravate the fiscal deficit. “The big unknown is whether the resulting deficit will unleash a bout of inflation,” he said. “Such worries did not materialize the last time around, and they very well might not this time, either. But, given how little-understood inflation remains, we cannot rule it out.”
Roussanov said the medium- to long-run impact on the economy depends on the ability of businesses of all sizes to weather the crisis without going under. Much depends on whether the “supply shocks” are transitory or long-lasting, he added. “For businesses that can weather the pandemic, it will be but a blip in their long-run profitability. But for many of them operating on slim margins, it is life-or-death.”
While the $500 billion corporate relief program aims to help the businesses impacted by the coronavirus crisis, “the question is whether this will be well-spent,” said Roussanov. “The concern is that this fund will mostly go to the most politically powerful large public companies, which are the ones who need it the least.” He pointed to a letter to Congress from a group of economists at universities, where they have criticized the “bailouts” in the CARES Act for large corporations.
Roussanov said “moral hazard” is another concern. “Systemically important firms and industries such as banks, car makers, and, now, airlines have an incentive to minimize their equity cushion in good times, since they know that when the economy suffers a large shock the government will bail them out in order to protect against large job losses and massive disruptions in the system,” he said. “Mom-and-pop businesses that are also affected [by the pandemic] are much less able to draw on public investors and not nearly as well-versed at negotiating the channels of government-provided aid.” It is unclear how effective the programs in the CARES Act for small businesses will turn out to be, he added.
“[In terms of] stimulating aggregate demand, the impact will be positive, but small.” –Nikolai Roussanov
Roussanov was also worried about “the distributional aspects” of the crisis, where “the burden is shared unequally across the population.” Here, he said highly skilled, primarily college-educated workers “have a very different experience in this environment” from that of unskilled, primarily non-college-educated workers. Skilled workers are able to carry on with their lives in “financially rewarding ways” where most still have their jobs and keep getting paid, but “many lower-skilled workers find themselves without pay and having to take care of their children who are now out of school,” he explained.
To be sure, the increased unemployment insurance benefits as well as the $1,200 rebate checks should help, but these are unevenly distributed among those who continue to work and get paid, and others who do not, Roussanov said. He also doubted if the unemployment benefits will be sufficient, especially since many workers who might be affected are part-time with reduced hours or self-employed.
Roussanov also feared that the coming recession could leave behind “long-lasting adverse effects.” He said that in the three previous recessions, there was “permanent shedding” of routine jobs or those most vulnerable to automation. He explained why some jobs disappear forever after recessions in a Knowledge at Wharton interview in August 2018. “This time around there might be an added force: We will learn to make do with fewer human interactions, potentially making many previously ‘non-routine’ jobs that rely on such interaction obsolete. That means many of the low-skill jobs that absorbed the bulk of non-college educated labor force will disappear forever.”
