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Grading The Covid Stimulus Packages
The good, the ok, and the ugly
During the Covid pandemic, the US Federal Government came together and passed the largest economic stimulus packages in history. Not once, but three times, bills that dwarfed any previous attempt by the US government to shore up the economy became law. These three stimulus packages, the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act, fundamentally changed the state of the American economy during the Covid pandemic. The effects of the three are still being felt and are driving monetary policy to this day.
First, it’s important to get a sense of how innovative the Covid stimulus packages were. Before the 21st century, governments didn’t pass large-scale stimulus packages meant to improve the economy writ large. In fact, during the 1920s, prevailing wisdom said that when the economy is in a recession governments should spend less because of the decrease in tax revenues. This mindset is logically coherent - it makes sense to say the government should spend less when revenues are lower. Unfortunately, it locks the economy into a death spiral where worse economic outcomes are matched by less economic spending. The result of the 1929 stock crash was the Great Depression. Since then, many economists have favored “anti-cyclical spending”, where government spending increases when the economy is doing poorly and government spending decreases when the economy is doing well. This should produce a counterbalancing effect that keeps the economy from entering a severe depression when times are bad or experiencing high inflation when times are good.
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Thus, when the economy began to crash in 2008 and it appeared the entire financial system might collapse, Congress sprung into action, signing the Troubled Asset Relief Program (TARP) and American Recovery and Reinvestment Act (ARRA) into law in 2008 and 2009, respectively. TARP would end up costing the economy around $450 billion, while ARRA would cost around $830 billion. Did they work? Depends on who you ask. There is no unanimous consensus, but the most common thinking by economists is that TARP and ARRA were too small. The American economy did not enter a decade-long depression, but even five years after the end of the recession unemployment was above 6.0 percent the economy was sputtering. Would a $2 trillion stimulus package have made the Great Recession just a garden-variety recession? There’s no way to know, but the slow recovery from 2010-2014 helped plant the seeds for a larger government response when the Covid pandemic hit in 2020. With the benefit of a few years of hindsight, it’s time to grade the three Covid stimulus packages.
Stimulus #1: The Coronavirus Aid, Relief, and Economic Security (CARES) Act. Enacted: March 27, 2020. Size: $2.2 trillion.
The CARES Act has its detractors, but my feeling is that this should be viewed as one of the greatest acts of legislation ever passed. At a time when America had a combative and relatively unpopular Republican president running for re-election and a Democratic-controlled House of Representatives, the government came together to pass a bill of stupefying proportions. Remember, until the CARES Act, the largest government stimulus package was worth about $830 billion. To come together in a matter of weeks and pass a bill worth almost triple that is an impressive achievement.
Is the CARES act perfect? No. The structure of this bill, and the two stimulus packages that followed, made them ripe for fraud. Current estimates put the total amount of fraud at hundreds of billions of dollars. The CARES Act was a blunt instrument that delivered economic relief quickly and without a lot of safeguards. That, however, is a feature, not a bug. In March of 2020 there were a lot of unknowns. How dangerous was Covid? How long would the pandemic last? When could businesses reopen? Nobody knew, so it was crucial to get money into the hands of Americans fast. Could a better-targeted system have reduced unemployment fraud by billions of dollars? Yes, but the additional problems any screening would have incurred would have been tremendous. Would some people take advantage of the extra $600 a week in unemployment benefits and choose not to work? Of course. But the entire economy was shutting down in March 2020. It was crucial to get money to individuals as soon as possible. Once people start falling behind on their mortgages, rent, or car payments, long-term economic damage beyond the pandemic would have occurred. This was one of the few times that the best solution really was to throw money at the problem. So yes, some of the aid would be poorly targeted and go to those who don’t need it. But the economy was kept forcefully afloat on a raft made of dollars.
Stimulus #2: The Consolidated Appropriations Act (CAA). Enacted: December 27, 2020. Size: $900 billion.
It’s important to note the CAA had two different components. The first was a stimulus package, the second a spending bill for the government's 2021 fiscal year. The total size of the bill was $2.3 trillion, but of that, only $900 billion was devoted to Covid stimulus. This was also a relatively good bill. By December 2020 Covid was still a major problem, but there were a lot fewer unknowns. It was clear that Covid was not an existential threat to human existence: the fatality rate was less than one percent, and far lower than that for the young. Multiple vaccines had shown near-miraculous results in phase III trials. Still, it was going to take time to vaccinate the country and people were still dying of Covid by the thousands.
The CAA recognized those tradeoffs. People would still get checks in the mail, but they would be smaller. An unemployment top-off was included, but now it would be $300 a week instead of $600 a week. My one gripe with the CAA is that at this point the aid could have been more targeted. It was clear by September of 2020 that Covid was not going to go away on its own. The government had time to create a screening process that would get money to individuals and businesses that needed it because a month-long delay in payouts was not going to have ripple effects that would have occurred in the Spring of 2020. Instead, the government chose to replicate the bluntness of the CARES Act but do so on a smaller scale.
Stimulus #3: American Rescue Plan Act (ARPA). Enacted March 11, 2021. Size: $1.9 trillion.
This is where things began to turn. By March of 2021, hundreds of thousands of Americans were being vaccinated every day. Many schools were still at least partially remote, but restaurants and other businesses had been open for some time. Covid was far from over, but the economy was recovering and the path forward was clear. Instead of passing a third stimulus package similar to the CAA, the government elected to enact a package that was almost as big as the CARES Act. The danger here was that too much stimulus could unleash rampant inflation on the US economy. Some economists, most notably Larry Summers, who served in both the Clinton and Obama administrations, sounded the alarm. At this point, a stimulus this big was reckless. It makes sense for a stimulus package to make up the “gap” between what the economy would be expected to produce and what it was actually producing. So if the economy was expected to produce $2 trillion worth of goods and services every month but was only producing $1.7 trillion, a stimulus of $300 billion would make up the gap. The problem with the ARPA is that it wouldn’t just make up the gap, it would exceed it by 200 percent! Hundreds of billions of extra money were going to be poured into an economy. Additionally, at this time spending on services like hotels and concert tickets was still down. What will happen if people have extra money and a reduced list of places to spend it? Inflation. And that’s what happened.
In fairness, hindsight is 20/20. There were also economists, notably Paul Krugman, who insisted any inflation would be transitory. The US economy was completely off the map at this time. There were no hypothetical models, let alone tested models, of the economy to conclude whether ARPA would cause large sustained inflation. However, two facts made ARPA risky. First, ARPA vastly exceeded the hole caused by Covid in the economy. Two, if inflation occurred the Fed would have to raise interest rates at a time of large deficit spending, which would likely cause major problems for the economy down the line. Combined, my feeling at the time was the risks of ARPA clearly exceeded the benefits. That isn’t to say inflation would have stayed under two percent if ARPA would not have passed. There probably would have been some inflation in 2021 given global supply chain issues and pent-up demand after a year of pandemic restrictions. That inflation, however, would have been much less severe and possibly transitory. In sum, many economists warned that if ARPA passed there would be significant and sustained inflation, and that’s exactly what happened.
The CARES Act was a home run. A great example of the US government coming together and passing a bill that enabled the US economy to bounce back from an unprecedented downturn. The CAA was a smaller version of the CARES Act that could have kept some of the best parts while eliminating the bad, but overall helped the economy along. The ARPA was far too large and seemingly ignored everything we had learned in the past year. Today, the legacy of the stimulus packages is still being written. The economy had a great 2022, albeit with high inflation. The deficit has exploded, and this is going to need to be addressed at some point. The Covid Recession is nothing more than a three-month blip that interrupted a uniquely prosperous time in the US economy. Most importantly, the stimulus packages showed that the economy can be kept afloat, even during a worldwide pandemic, if the government steps in.