As the COVID-19 crisis rages on, not only have the health impacts been devastating, but the United States is facing a financial and economic crisis that has already surpassed the intensity and scope of the Great Recession of 2008-2009. More than 17 million people have filed for unemployment claims, an unseen precedent. Major market indexes, such as the S&P 500 and Dow Jones, have fallen by 20%-30%, showing investors’ fears over companies being able to remain solvent and pay their debts.
In response, Congress has passed a more than $2 trillion spending bill, the CARES Act, and the Federal Reserve Bank recently announced another $2.3 trillion in programs to support the economy. However, even with these measures, the coronavirus continues to devastate the economy. The Congressional Budget Office predicts that U.S. production will suffer an annualized decline of 28 percent. Despite concerns over massive increases in government spending and additions to the federal debt, right now the economic consequences of not injecting money into the economy far outweigh the consequences of rises in federal debt and spending.
A substantial portion of the relief measures passed through the CARES Act has been directed toward small and struggling businesses and is intended to help them pay their debts, workers’ salaries, leases, and anything else essential to staying in business. Specifically, Congress appropriated $350 billion to the Paycheck Protection Program, which will provide loans to small businesses equal to 2.5 times a company’s average payroll for 2019. An additional $500 billion was appropriated for other struggling businesses. In this current economic downturn, supporting struggling businesses is one of the best ways to mitigate economic loss in the future. The alternative is for failing businesses to fire workers to save money, which is already happening — Retailers Macy’s and Gap are laying off tens of thousands of employees.
High unemployment rates have high social costs, as people are faced with job and income insecurity, but also important macroeconomic costs. A one percent rise in unemployment is typically associated with a 2% decline in economic output, and the Congressional Budget Office has forecasted a rise in unemployment levels to 10%, levels not seen since the great recession. The spending packages passed are designed to lower unemployment rates and prevent further economic loss in the future. Keeping people employed now will ensure that once demand for goods and services starts to pick up again, the economy will be sufficiently employed and can resume production as quickly and seamlessly as possible.
Another portion of the relief measures will come through the direct payments to individuals, as eligible Americans are entitled up to a tax rebate of up to $1,200 as a direct payment. The direct payments to individuals are extremely important as millions of Americans are and continue to be laid off. These payments are what will allow Americans to pay for their essential needs and obligations. Though many people are skeptical of the government handing out “free money” to individuals, if the government cannot support individuals right now, those individuals will suffer losses of income, moving them into income brackets that will automatically trigger government spending in federal safety net programs such as Unemployment Insurance and the Supplemental Nutrition Assistance Program. Given that the government will ultimately spend money to support these individuals, it is much better spent right now due to the social and economic costs of unemployment.
Critics of the CARES act and its injections of government money into the economy fear massive increases to the federal debt. Analysts at Goldman Sachs expect the deficit to increase by $500 billion to a total of $3.6 trillion for this fiscal year. These numbers can be frighteningly large, but right now, federal debt should not be of concern. Much of the “spending” that Congress has written into the CARES act takes the form of loans that will eventually be repaid by private companies. This is backed up by history: After the 2008 financial crisis, Congress passed the Troubled Asset Relief Program, which called for government expenditures of $700 billion. In actuality, TARP only cost the federal government $31 billion because most of the loans were repaid.
Furthermore, interest rates for the past 10 years have been historically low, hovering around 1%. The debt that the United States has to take out to finance its government spending will eventually need to be repaid with interest. If interest rates remain low, which they most likely will, the interest payments will be low and end up not costing the government much. If the government can spend right now to help stimulate the economy, a stronger performing future economy can pay for the debt without requiring higher taxes or budget cuts, which many people fear.
No one knows how long the present moment will last, meaning that no one knows how long businesses will have to sustain losses and employees will have to remain unemployed. If the coronavirus crisis continues for multiple months, there is no way the United States will not face a crisis of liquidity, where businesses and people cannot meet their bills, unless the federal government steps in. Even if coronavirus ends up being relatively short-lived and the government has spent almost $5 trillion, the negative consequences of government spending are likely to be small, and certainly smaller than the disaster that would come if the coronavirus lasts for months and the government does nothing.
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