The Future Impact of the CARES Act
“I’ve never signed anything with a “T” on it” (“Trump Signs $2 Trillion Coronavirus Stimulus Bill After Swift Passage by House”) claimed President Trump on Friday, March 27. With the recent stimulus bill injecting $2.2 Trillion into the United States economy, a select few have raised a cautious brow of questioning. Many believe that in order to dodge an irrecoverable collapse, the latest economic impacts of COVID 19 can only be resolved by the government. At the astronomical price of $2.2 trillion to the American taxpayer, it begs the questions: how much is too much, where is the money going, can corporations sustain this bill, and where is the money coming from?
First, taxpayers should examine where the funds in the bill are allocated. Just over $600 billion will go to individuals, about half of that in unemployment insurance with the remaining half in direct cash payments. $500 billion are deemed to aid large corporations, with roughly $50 billion going to the airline industry. About $380 billion will go to small businesses, primarily in the form of loans. $340 billion will go to state and local governments, with $275 billion of that aiding “Covid 19 response”. The final portion of the bill includes $180 billion to public services, where $100 billion of that is deemed for hospitals (The Anatomy of the $2Trillion Covid-19 stimulus bill). To further emphasize the expense of this bill, note that if 80% of the loan is used for payroll, the loans become forgiven. Certainly this has the ability to provide immense aid to small businesses, but must come full circle in the sense that taxes must be raised in the future to avoid a weakened currency.
Certain parts of the fund allocation call for a closer look. For example, many critics have questioned why Boeing must receive $17 billion for “national security purposes” outside of the $58 billion already headed to bailout the airline industry (The Anatomy of the $2Trillion Covid-19 stimulus bill). In many cases, the bill clearly outlines how much is set to go to worker’s wages, but some industries include a vague report with tens of billions of funds going towards “other”. In the previous government bailout after the housing market crashed, executives of bulge bracket banks reaped the benefits of unusually large bonuses. The government has, however, prohibited certain artificial stock price increases from happening with share buybacks and dividend payments for 12 months. Though the government has done a better job this time around to prohibit actions like these, it is something to keep an eye on.
Nearly everyone agrees that stimulus induced by the government is necessary, but the size is certainly debatable. The essential component necessary for understanding skepticism of the bill revolves around the understanding that the majority of stimulus is financed by debt. On the surface, this sounds like a worthy idea, however, in the long run this could prove fatal to the United States economy. With about $1 trillion of business investment financed by loans, the likelihood of defaults skyrocket. According to Goldman Sachs and the Fed, the country could face up to 30% unemployment in the near future. With 30% unemployment, Americans will be forced to use their direct cash payments and unemployment insurance on essentials, thus not supporting business investment with adequate aggregate demand. Only certain businesses providing essential goods and services will be supported. The snowball continues from there. With inadequate aggregate demand to account for a surplus of business investment, companies are bound to realize surpluses and take massive revenue hits in the upcoming quarters. Finally, this will make it nearly impossible for many companies to payback the nearly $1 trillion in government sponsored loans and defaults will skyrocket (Janet Yellen Says Too Much Corporate Borrowing Will Hinder Economic Recovery). Though up to 80% of these loans can be forgiven, that segues into our next topic: the federal budget.
How can the United States afford this? This is where the concept of a budget deficit resurfaces. The United States has partaken in enormous budget deficits for two consecutive decades now, with Bill Clinton being the last to balance the budget. Prior to Clinton, budget deficits were also common. The country’s spending has already greatly outpaced the nation’s revenue. Up until 2009, the deficit had largely been kept under $400 billion. The government’s last stimulus package after the Great Recession induced by the 2008-2009 housing bubble cost roughly $800 billion in total, resulting in a yearly deficit of about $1.3 Trillion (US Budget Deficit by year compared to GDP, Debt Increase, and Events). Budget deficits have sharply increased in recent years already, partially due to the inaction of supply side economics in 2017 by President Trump. The goal was to decrease taxes and increase business and consumer spending to boost the economy, albeit at the price of increased borrowing in order to make up for the lost tax revenue. According to thebalance.com, prior to the coronavirus pandemic the country’s deficit was already projected at almost $1.1 trillion. Enormous debt has simply become a means to normal operation by the United States government, which leads many unconcerned. Unbeknown to many Americans, the dangers of this uninterrupted borrowing may possibly lead to a weaker US dollar in the future. That being said, it is possible to offset the problems that massive borrowing yields. In the coming years, the United States would have to drastically increase taxes in order to pay off this debt. This seems relatively unlikely, given the possibilities of a Trump reelection. Though the country certainly needs federal stimulus, looking into the future leaves many Americans wondering just how much is necessary.
Works Cited
Amadeo, Kimberly. “Is the US Budget Deficit Really That Bad?” The Balance, The Balance, 2 Mar. 2020, www.thebalance.com/us-deficit-by-year-3306306.
Derby, Michael S. “Janet Yellen Says Too Much Corporate Borrowing Will Hinder Economic Recovery.” The Wall Street Journal, Dow Jones & Company, 30 Mar. 2020, www.wsj.com/articles/janet-yellen-says-too-much-corporate-borrowing-will-hinder-economic-recovery-11585603500.
Hughes, Siobhan, and Natalie Andrews. “Trump Signs $2 Trillion Coronavirus Stimulus Bill After Swift Passage by House.” The Wall Street Journal, Dow Jones & Company, 28 Mar. 2020, www.wsj.com/articles/house-lawmakers-race-to-washington-to-ensure-coronavirus-stimulus-passes-11585318472.
Routley, Nick. “The Anatomy of the $2 Trillion COVID-19 Stimulus Bill.” Visual Capitalist, 30 Mar. 2020, www.visualcapitalist.com/the-anatomy-of-the-2-trillion-covid-19-stimulus-bill/.
