On March 27, 2020, the President approved the CARES (Coronavirus Aid, Relief, and Economic Security) Act, a $2.2 trillion package of economic interventions to support individuals, small businesses, hospitals, and state, local, and tribal governments.1 The goal was to provide a shot of economic adrenaline to sustain society through what was expected by many to be two to three months of economic crisis.
Now, four months later, it has become clear that the quick shot administered in March is not sufficient for the task. The number of new weekly COVID cases in the US has climbed from 82,000 during the week of March 27 to 464,000 during the week of July 24.2 While the number of people filing new unemployment claims has dropped from 6.8 million during the week of March 27 to 1.4 million this past week, over 17 million Americans are filing for ongoing unemployment benefits.3These unemployment figures are significantly worse than America experienced during the Great Financial Crisis of 2007-2009.
Now, having reached July 31 without an extension of the CARES Act or an alternative plan, the additional $600 per week ($15/hour for a 40-hour workweek) unemployment benefits go away.4 For companies that received Payroll Protection Program loans in the spring to cover eight weeks of payroll, that eight weeks is long past. While PPP has been extended to cover payroll costs over a longer period, it does not allow companies to re-apply for additional funding.5 In short, the duration of some of the most important Federal interventions has not kept pace with a crisis of much longer duration than many had planned for.
So, here we are in an intense election year with a pandemic and a pandemic-induced economic crisis. In 2Q 2020, economic growth declined by 32.9% annualized, following an already horrible -5.0% annualized in 1Q.6 In addition to the $2.2 trillion CARES Act spend, the economic contraction of 2Q represented a decrease in current Gross Domestic Product of another $2.15 trillion, making the 1Q decrease in GDP of $186 billion seem a trifle.7
While it would seem obvious that additional economic intervention is required, there are legitimate and important arguments about the size and nature of that intervention. While Syntrinsic is not in the position to recommend specific policies, we are in the business of understanding the variables and their potential costs and benefits.
Relief and Stimulus
Economic intervention designed to provide economic relief (e.g., increased unemployment benefits) can stabilize an individual financially and thus support that individual’s sphere of influence. Such efforts do not resuscitate an economy in crisis but can make the crisis more bearable.
Stimulus, on the other hand, is designed to reactivate the economy. Infrastructure projects, funds for research and development, and other incentives to grow businesses and workforces can have a multiplier effect that grows economic activity.8
While the CARES Act was focused on “Relief” and “Economic Security,” the next intervention needs to include a component to catalyze economic growth. Without economic growth, our socio-economic model becomes unsustainable.
Employers and Workers
The CARES ACT focused on supporting workers by providing financing to their employers. Similarly, the US Federal Reserve has offered loans these past few months to small and medium-sized businesses through their Main Street Lending Program. Both efforts reflect a recognition that without a healthy businesses sector, current and future employees will not have places to work, thus making them dependent on long-term government assistance.
Some are concerned that supporting the private sector through loans or grants to businesses may benefit owners without ensuring that capital flows through to their employees. This valid concern should inform the structure and implementation of additional support to small and mid-sized businesses.
Interestingly, skeptics of government support for small and mid-sized business have not focused their ire on large public companies that continue to issue debt at almost no cost because US Federal Reserve policies have driven down interest rates and created a sense that the Fed will backstop any corporate debt that goes bad. With Fed policies explicitly supporting the largest companies regardless of quality, it would be difficult for Congress or the White House to argue against continued funding for small and mid-sized companies.
Role of Local Government
One of the most significant policy differences between Republicans and Democrats throughout this crisis has been the degree to which the Federal government should provide capital to state and local governments. In initial proposals for the next round of Federal intervention, Democrats propose another $1 trillion for states and cities above the $150 billion provided in the CARES Act. The Republican plan has no additional money for states and cities.9
Federal intervention in local governments has long been a fraught issue in US politics. Whether seeking Federal funding for agriculture, education, transportation, national parks, or defense spending, local jurisdictions often have wanted as much Federal largess as possible while retaining maximum local control. In our divisive political climate, we expect that support for local government will inspire the most contentious negotiations of any future Federal intervention.
The Long-Term ConsequencesWhile there are few fiscal conservatives in either major party anymore, many recognize that there is a real cost of additional Federal intervention. The US Debt to GDP Ratio10 had hovered between 50-65% from the early 1990s to 2008. It climbed to just over 80% due to the Great Financial Crisis of 2007- 2009, and now is close to 110% (see chart below).11
Over the past several years, we frequently have commented on the risks of growing debt that does not have a stimulative offset. Still, we recognize the unprecedented challenges the pandemic has introduced. Over 150,000 Americans have died of COVID so far, nearly three times the number who died in the Vietnam War and over 1/3 as many who died during World War II. This crisis cannot be ignored or wished away, nor can the economic damage be lightly dismissed.
The next Federal economic intervention
requires the highest quality analysis, deliberation, and negotiation in a
cultural milieu that makes all of that incredibly difficult. Still, our predecessors
worked through much worse situations with far fewer resources: less data, less
technology, less political freedom, and less capital. Looking back many years
from now, History may forget the details of our current schisms, but will be
quick to judge whether we were able to overcome them.
2. Johns Hopkins University
3. US Department of Labor
4. Normally, unemployment benefits vary from state to state, with each state having its own rules for eligibility and providing vastly different amounts. In addition to those normal benefits, the CARES Act has provided $600/week from the Federal government for unemployed people and broadened the definition of eligible workers to include contract workers and self-employed.
5. The Payroll Protection Program loans funds to small businesses (generally under 500 employees) with the idea that at least 75% of the loan would be used to maintain previous levels of personnel over the eight weeks starting with the date of the loan. Generally speaking, companies that were able to maintain personnel would be rewarded by having the loan convert to a grant. While the program’s time horizon was extended and use of funds were modified to give more flexibility, the amount of loans was not increased. Thus, the duration of the PPP program ends up being much shorter than the duration of the crisis many employers (and their employees) face. It also is important to note that there continues to be high uncertainty around the terms of having loans forgiven (i.e., turned into grants). That uncertainty, in turn, has dissuaded many from applying and caused others to give back loans they already received. In addition, because PPP loans were administered through the commercial banking sector, banks had tremendous leeway in determining who should benefit from PPP and to what degree. Unbanked businesses were largely left out of this intervention.
7. US Bureau of Economic Analysis
8. While many people erroneously call any government intervention “Keynesian” in nature, John Maynard Keynes expressly distinguished between government spending that created a multiplier versus such spending that was not additive to the economy. See John Maynard Keynes, “The General Theory of Employment, Interest and Money.” (1936)
10. The ratio of our total Federal debt outstanding (including interdepartmental) to our total Gross Domestic Product, which is an estimated calculation of total economic activity.