The CARES Act Helped, But The New Temporary Plan Leaves Many Worried
March 2020 saw the standstill of businesses and normalcy in the United States as the novel coronavirus (COVID-19) struck. In response, the federal government introduced the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which enabled adults whose livelihoods or cash flows were impacted by the crisis to receive an additional $600 per week in addition to state unemployment benefits.
However, the temporary relief the CARES Act provided has ended. While $600 won out in March, support and opposition for a new round of weekly payments fell along party lines, with many Senate Republicans arguing in favor of a $200 per week payment. Lawmakers reached a compromise, and President Donald Trump signed an executive order this summer requiring the federal government to pay recipients $300 per week and state governments to pay $100. This faced opposition from states that claimed financial shortages would inhibit their contributions, so the government made the $100 payment optional.
Now, evidence of the original act’s economic boosts has come to light. Three analysts and economists at the Wharton School of the University of Pennsylvania found that the short-run economic impacts of the CARES Act, which cost $2 trillion to implement, outweighed these initial high costs. However, President Trump’s executive order has not only lowered the payment for recipients but has not yet reached most Americans.
The original $600 payment may have mitigated the impacts of impending recessions. In the absence of the CARES Act, the Wharton study predicted an 11 percent annualized drop (referring to an annual rate) in this year’s first-quarter gross domestic product (GDP). GDP measures the total value of goods and services produced in the USA annually. The study also predicted a 37 percent annualized drop in the second quarter of 2020 with an unemployment rate of 12 percent in the third quarter. However, the CARES Act could lower the annualized drop to 30 percent and unemployment to 11 percent. With the labor force comprising 60 percent of the US population, a one-percent difference is promising.
Long-run impacts were also devastating, but more so without the CARES Act. The authors of the study found that a V-shaped recession would consist of a steady decrease in percent deviation from potential output — which is defined as “maximum sustainable output of the economy” — in 2020, and then a steady increase until 2021. After 2021, little change would occur, and the numbers would remain at just below zero past 2030. While a U-shaped recession would begin similarly, the improvement would be slower and delayed. The resulting path would fall slightly below the estimate for the V-shaped recession. The study indicates that the CARES Act would mitigate the respective magnitudes of the recessions. In effect, eliminating the $600 payment too soon could prevent this outcome and further the catastrophe that is sure to ensue in the coming years.
Still, it’s worth mentioning that these recession models are not concrete. They are based on the Great Recession of 2007–2009 since “the main underlying factors driving a broad array of macroeconomic relationships remain the same.” While the simulator takes in data regarding labor market conditions, economic confidence, and business input costs to generate a reliable forecast, every economic crisis is unique. The current pandemic has no modern US precedent.
But even disregarding the effects on possible recessions, the CARES Act has kept an estimated 12 million people out of poverty. Despite Trump’s concerns that the high payments discouraged Americans from seeking employment, research indicates that increasing finances for low-income individuals led to higher spending for things like groceries and rent, effectively boosting the economy.
The plan only struggled in terms of efficiency. A national survey found that this harmed low-income families despite the plan’s benefits. As Stephen Roll and Michal Grinstein-Weiss put it, households trying to access their benefits this spring were met with “long delays, confusion, and frustration.” By requiring direct deposit information, the IRS lengthened the benefit acquisition process for people who had not filed taxes in 2018 or 2019. This disproportionately targeted low-income Americans. Moreover, around half of people seeking unemployment in April and May had not received benefits or were facing obstacles in the application.
However, the government has yet to prioritize a more efficient plan for the remainder of the year. A few states started giving out the new $300 federal benefits this August, but the majority of states that have applied do not expect benefits to come to residents until September or October, and the $44 billion investment will likely not cover more than 6 weeks of benefits.
The economic decisions made in early 2020 may have saved workers then and softened future economic blows, but the current plan lacks the sturdiness to help people whose lives have not returned to normal. In a capitalist country reeling from business devastations, an inefficient plan puts the food, home, and job security of Americans on a tightrope.
