Congress has a bill worth roughly $2 trillion dollars or 9% of GDP in “Phase 3” aid to deal with the disruptions to economic activity triggered by the COVID-19 crisis. The bill is designed to temporarily help individuals, firms (of all sizes), hospitals and states traverse COVID-tainted waters. The size is smaller as a share of GDP than the backstops provided by other developed economies, despite the glaring gaps in our own safety nets. More will be needed.
Congress must find a way to vote remotely on legislation given a three-week scheduled break and spread of the virus throughout their ranks. The Senate has more latitude to do this than the House of Representatives, whose rules require them to vote in person unless the vote is unanimous. The House needs to find a workaround to constitutional constraints, which were not designed to deal with the social distancing required in a pandemic.
The information to date suggests that the bill includes:
- Four months’ expanded unemployment insurance at 100% of pay, not clear on thresholds. The federal government will provide an additional $600 per week on top of what states pay. Benefits are included for the first time for gig, furloughed workers and freelance workers; again, unclear where caps may be implemented. This provides cash-strapped households with higher unemployment benefits although checks could be delayed by the sheer volume of what is hitting the system. That is why the two paid-leave measures for firms with 50-500 workers were critical late last week; they provide a temporary bridge for some workers. Note: Domestic help appears to be included in the paid-leave provisions; employers will get a tax rebate on taxes paid for their workers in their 2020 tax filings.
- Somewhere between $100 and $150 billion for hospitals, including veterans. There are very few details available. We are assuming that the funding will go toward a broad spectrum of costs, from additional beds, equipment, training, personnel, quarantine facilities for the ill, living quarters for hospital workers and separate sites for non-COVID treatment and emergencies.
- $150 billion for state & local governments. This is one of the most glaring shortfalls in the bill, which will need to be augmented soon. States are at the front line of the battle against COVID-19, are burning through their cash to fight, while revenues disappear. This will force draconian cuts in essential services from education to garbage collection. It could even undermine first responders, which would exacerbate upfront losses and delay the rebound.
At least $350 billion for small business loans that will be forgiven if workers are hired back and/or kept on payrolls through the crisis. This is one of the least clear of the programs. Most small business owners I have spoken with are reluctant to bring workers back without knowing when customers will feel comfortable coming back. Everything from salons to restaurants and factories will need to be cleaned with new protocols to keep workers and customers safe as we slowly ramp up.
- One-time checks of $1200 for people earning less than $75,000, smaller checks phased out up to $99,000 earnings. Couples up to $150,000 and head of household up to $112,500. There are also $500 checks per child under the age of 18. The hurdle here is that the government doesn’t have valid addresses on all of those who are eligible. There are also paper checks for low earners with no tax liabilities. The surge in ranks of working homeless comes to mind. These may be the hardest to locate and help; they are also workers who are unlikely to have direct deposit, which is how the IRS wants to accelerate the distribution of checks. The only people who are precluded beyond income limits are nonresident aliens, estates or trusts and adult dependents.
$500 billion in aid to companies: $75 billion for specific industries (airlines, support industries and defense-critical companies (e.g., Boeing); $425 billion for investment-grade corporate bonds, commercial paper and money market functions. This will be administered by the Treasury, an independent inspector and Congressional oversight panel and the Federal Reserve, which can lend roughly $4 trillion on those assets. The Fed will not lend to companies that receive other forms of government aid (bailouts) and is restricting anyone using their facilities from issuing stock buybacks and dividends. Administration and Congressional officials are barred from participating. An employee retention tax credit also appears to be a part of this but it is unclear how it would be implemented; details are still scarce on this massive bill.
- $20 billion in additional subsidies for farms and increased funding for Supplemental Nutrition Assistance Program (SNAP), or what was called “food stamps.”
That is all in addition to Phases 1 & 2 and the national emergency declaration. Phase 1 included $8.3 billion for research and medical needs. Phase 2 provided $100 billion to subsidize paid sick leave for workers and free testing, once tests become available. The national emergency declaration freed up $50 billion in funds to buy protective medical gear, tests and support for the states from the Federal Emergency Management Administration (FEMA).
These measures will not stop a recession from occurring, but will deploy the lifeboats we need to traverse COVID-tainted waters. The goal is to blunt the blow to the economy so that we have a foundation from which to recover. The cost-benefit is unambiguous: Upfront losses to stem the virus, with lifeboats in the water to keep us afloat, are much better than risking waves of infection, panic and what could easily morph into a depression.
The vote needs to be taken. This is only a start in a long process of stopgap measures. It will take time to ramp up, given the need to reassure workers and consumers that congregating in any way is safe. Much more aggressive and easy testing, e.g. drive-through, for both the virus and the antibodies could play a key role in ramping up. We also may need protocols and funding to sterilize premises and contain infections for months to come. The world on the other side of this will be similar, but not the same as the one we knew. Pandemics are now a reality, not just a plot in a horror movie.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.