By Jorge Barro, Ph.D.
Fellow in Public Finance
John Diamond, Ph.D.
Edward A. and Hermena Hancock Kelly Fellow in Public Finance
As of the end of March, the U.S. Congress has passed three bills providing funding and aid for the coronavirus pandemic. Against the backdrop of roughly $17 trillion in outstanding U.S. federal debt, the large emergency response to the coronavirus pandemic expands government obligations by an additional $2 trillion. Given the scale of the pandemic and the requisite and widespread mitigation efforts, however, such fiscal interventions are essential to provide important financial relief to households and businesses. The latest unemployment claims report highlights the urgency of a significant fiscal response, as 3.28 million individuals filed first-time unemployment claims during the week ending March 21. Future reports are virtually certain to reflect even larger job losses. Below, we discuss the main provisions in each of these bills and then discuss general rules for evaluating current and future policies designed to mitigate long-term damage to the economy from the coronavirus pandemic.
The first bill authorized $8.3 billion in emergency funding designed primarily to help government agencies fight the pandemic, including $3.1 billion for the Department of Health and Human Services, $950 million for state and local health departments, $300 million for vaccine development and treatments, and $1.25 billion for international aid in low- and middle-income countries.
The second bill, named the Families First Coronavirus Response Act, provides free coronavirus testing to the public, creates a federal emergency paid sick and family leave program, allocates $1 billion in grants to states for expanded unemployment insurance, and dedicates more than $1.5 billion for food assistance programs. The paid leave provisions require certain employers (generally companies with more than 50 but less than 500 employees) to provide paid sick and family leave, which will be reimbursed through refundable payroll tax credits. These tax credits are also available to self-employed workers. The sick leave benefits are limited to $511 per day for two weeks, while the family leave benefits are limited to $200 per day for 12 weeks. The Joint Committee on Taxation (JCT) estimates that the paid sick and family leave provisions will cost $105 billion.
The third bill, named the Coronavirus Aid, Relief, and Economic Security Act (CARES), provides $2 trillion in aid. The business provisions include $500 billion for loans and assistance to larger companies (with $50 billion going to airlines), $350 billion for small business aid, and $150 billion to hospitals and health care providers. Provisions targeted to individuals include direct payments of $1,200 per adult and $500 per child, which phases out at a 5% rate above $75,000 for single taxpayers and $150,00 for married taxpayers. JCT estimates that the total cost of the direct payments is $292 billion. The third bill also includes an expansion and extension of unemployment benefits. The increased payments to eligible individuals include federal funding of the first week of benefits if states waive their one-week waiting period, an additional $600 per week through July 2020, a 13-week extension at $600 beyond the normal 26 weeks of unemployment benefits provided by states, and funding for Short-Time Compensation (STC) programs. Under the STC programs, employers reduce hours instead of laying off workers, and employees receive pro-rated benefits (federal funding of this provision is equal to 100% if the state has an STC program and 50% if it creates a new STC program). The payments are sufficiently generous that in some cases workers may get more in benefits than they would make working.
We agree that many of the emergency actions were necessary and acknowledge that future fiscal measures, depending on the duration of the pandemic, may be required. We also believe that these emergency actions must attempt to minimize long-term harm to the U.S. economy. For example, expanded unemployment insurance provisions in the CARES Act provide households with important financial relief, especially to low-income workers. Maintaining an elevated benefit for an extended duration, however, would extend the lengths of unemployment spells, causing a slower recovery.
For the most part, we do not characterize the policies enacted to this point as “bailouts.” Unlike in 2008, a particular industry or policy action was not responsible for creating the current circumstances or contributing to its magnitude. Nor was the current crisis the result of a typical business cycle fluctuation. Instead, businesses that had been operating in a sound and robust economy have been asked to temporarily suspend non-essential operations or transition to work-at-home environments to prevent the spread of Covid-19. It is also important to examine how existing policies prior to the crisis affect firm (and household) decisions. For example, the U.S. tax code encourages firms to finance new investments with debt relative to equity. This tax incentive increases the debt holdings of firms and may increase the risk of widespread bankruptcy. Such outcomes would increase the risk of deeper and costlier business cycles and larger downturns in times of crisis.
An ideal outcome would involve the rapid resumption of normal business activities after the pandemic mitigation efforts have eased. A less than ideal outcome would involve widespread closures or bankruptcies of firms that were solvent and functioning properly before the pandemic. Note that in a competitive economy, it is impossible for most firms to plan and prepare for such a large scale disruption. The widespread social distancing measures elicits a government response that ensures business viability through this crisis. Similarly, the strict physical distancing and work-at-home measures that drastically reduce employment opportunities for many individuals warrant a centralized and aggressive policy response. Finally, efforts to maintain existing jobs as well as business employment networks and supply chains will hasten a robust recovery once the health crisis subsides.
So how should public policy responses be structured to deal with the effects of the crisis, while minimizing its potential long-term negative effects? Most importantly, all emergency actions should be temporary and targeted. Temporary policies reduce the incentive for politicians to try to implement policies unrelated to the battle against the pandemic. This is not the time to move the country’s fiscal policy in a partisan direction or alter the long-run size or scope of government. If policy changes are necessary and desired by a majority, they can be adopted after the crisis. Otherwise, enacting the needed policy responses will be more difficult and will be delayed. Policies should also be well targeted to reduce their long-term cost to the extent possible. The CARES Act designed by the Senate and passed by the House mostly aligned with these criteria. By comparison, proposals to institute a $15 minimum wage, enact environmental policy changes, diversity reporting, same-day voter registration, and others that were not enacted were neither temporary or targeted, and generally not relevant as a pandemic response. A more recent proposal to retroactively repeal the state and local tax deduction exemplifies a poorly targeted policy, as the main benefits accrue to high income households.
While the measures passed to date were not perfect, they were mostly temporary and targeted. In fact, many elements did serve to dampen the collateral economic damage of the pandemic spread-mitigation efforts. Ongoing economic policy should remain narrow in focus and correspond directly to the limited duration of the disruption. Such an approach provides an atmosphere conducive to a rapid expansion of economic activity and minimizes near-term moral hazards. Finally, the current crisis exposed existing economic issues, such as low household savings, high corporate debt, and excessive government debt, that will frame the economic policy debates in the aftermath of this pandemic.