The Economic Impact of COVID-19
One major concern on everyone’s mind is how the global, or more specifically the US, economy will fare through the current COVID-19 pandemic. The issue is extremely complicated and no economist has any specifically defined resolution to this economic anomaly sorted out. I’m going to be doing a series of articles trying to analyze the possibilities of what could happen, but it is also important that we know all of the outlying things that have occurred that have made the issue so complex. First, I will look at the massive amount of stimulus funds dished out and where they went. Then, I will provide a brief comparison to the stimulus from 2008. Finally, I will provide some information on stimulus packages in general and compare the current unemployment numbers to previous events.
“In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.” - John Maynard Keynes
COVID-19 Stimulus Breakdown
The article “The Anatomy of the $2 Trillion COVID-19 Stimulus Bill” covers the breakdown of the Cares Act quite beautifully by providing a visual breakdown which I am providing below. Essentially, a full stimulus package of $2 trillion was created and a large portion of about 30% went to individuals, 25% went to large corporations, 19% went to small businesses, 17% went to state and local governments, and 9% went to public services. Now, the article by Visual Capitalist adds details to each section, so if you’d like to check it out you can feel free by visiting the article. My focus will be on what this could mean and how it compares to previous “stimulus” efforts we’ve experienced.
First thing to note, is that this stimulus package is currently the first of what could be a series of packages, so the amount could increase from here as we experience more of the impact. Saying that, there are a few things here that may get you thinking. For example, why large corporations are getting so much and why specifically airlines. Naturally, you can assume travel was impacted heavily by the quarantine orders issued nationwide and planes are specifically being avoided because of their reputation for spreading illness. The issue is, as a means of infrastructure and travel, we cannot allow them to go out of business even if they are charging you an absurd amount for that extra pound in your luggage when you fly. When an entire globe stops flying all at once, they’re going to feel it, so naturally they will need some major assistance. Large corporations are also a major player in sustaining the economy and maintaining low prices for products, so no matter how much it may bother us they still need help in times like this. I can try and evaluate big business in a future post, but for this that’s the general reason.
Another thought that comes to mind for me is the massive amount to individuals. Personally, this feels like a step forward in the government putting the people in the direct line of care. There are, however, still some considerations to think about with this. First, is that the individual cash payments, while helping with things like groceries or other necessities, is intended to be spent and help the economy. It’s not really an assistance program for the newly unemployed since we have unemployment and unemployment increases to handle that.
Second, many individuals believe that individuals are more likely to save their money than spend it while corporations constantly spend their money to invest in itself. This, however, is very controversial because of the impact of the lower corporate tax rates of Reaganomics being unclear due to various other changes that occurred together. It’s also apparent in more recent times that companies do have large stockpiles of savings. Some companies even hold up to half their full value in cash. You can find more on that from this article by The Balance and this article by the New York Times.
[Prior to edits: Saying that, individuals are typically less likely to spend their extra money than corporations. Corporations are constantly spending money to invest in new efforts, but people tend to save their money for larger purchases or having an emergency fund.]
Lastly, it gets pretty difficult to spend that stimulus check if everything is closed. Regardless, this effort is a huge step forward in some economic and cultural changes that people have been looking for and it’s great to see us trying something different than previous stimulus efforts.
Brief 2008 Stimulus Package Comparison
The most recognizable stimulus package that we can compare the Cares Act to is the Economic Stimulus Act of 2008 of $120 billion, the Emergency Economic Stabilization Act of 2008 of $475 billion (or $700 billion set aside), and the American Recovery and Reinvestment Act of 2009 of $831 billion for a total stimulus value of about $1.4 trillion ($1.6 trillion 2020 value). These values may be inaccurate because I cannot find a clearly displayed breakdown. I did find another source “Stimulus Price Tag: $2.8 trillion” which states the full value of the stimulus from then at $2.8 trillion. Already, you can see that the initial stimulus for COVID-19 is larger than the sum of the major bills from the Great Recession, or still a larger initial stimulus. Although there were stimulus checks in 2008, they were $600 and they were not a direct payment, but a tax rebate. This was also restricted to specific eligible citizens and a detailed comparison is provided by this article from The Balance. A tax rebate is essentially a retroactive change to your tax payments, so you get the money to spend. According to the Committee for a Responsible Federal Budget article, the difference between the two bills is $1.8 trillion for the Great Recession and $2.3 trillion for COVID-19 relief.
The breakdown for the Great Recession stimuli is difficult to narrow down because there were packages by different presidential administrations. If we take a look at the larger American Recovery and Reinvestment Act by using The Balance’s article “Obama's Stimulus Package and How Well It Worked”, we can see it was largely broken into three sections over the course of approximately 3 years with the following values:
Planned Tax Cuts and Credits - $288 billion (~$603.7 billion for CARES Act)
Estimated Value in 2014 - $303 billion
Planned Extended Unemployment Benefits, Education & Healthcare - $224 billion (~$519.3 billion for CARES Act)
Estimated Health Services - $141 billion (~$161.3 billion for CARES Act)
Estimated Education - $97 billion (~$27 billion for CARES Act)
Estimated Unemployment Assistance in 2014 - $64 billion (~$260 billion for CARES Act)
Estimated Supplemental Nutrition Assistance Program - $48 billion (~$15.5 billion for CARES Act)
Planned Federal Contracts, Grants, and Loans - $275 billion (~$877 billion for CARES Act)
I was also able to identify a bailout tracker for the Troubled Asset Relief Program (TARP) bailout funds offered through the Emergency Economic Stabilization Act of 2008. The Bailout List: Banks, Auto Companies, and More outlines what company got what amount and how they’ve worked on making payments back. Overall, it seems that although the company stimulus is comparable, the stimulus for the individuals is significantly increased. Currently, the stimulus is $1200 for every eligible American and a sizable increase to securities such as unemployment, but in 2008 the value was only focused on that $600 tax rebate and some adjustments to taxes and securities.
Stimulus and Unemployment
Stimulus packages largely originated in the 1930s during the Great Depression. At the time, the events of the Great Depression were unprecedented and many economists were essentially saying “Capitalism will allow the system to adjust and it’ll eventually flatten out and we prosper again.” Then, an economist named John Maynard Keynes entered with the famous quote “In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.” Keynes is saying that the standard belief of economists might be true that the economy will recover eventually, but it fails to address the current state. He is saying that we need to take strong action now because people are suffering. If the economy will eventually prosper, we can use that money we will be generating in advance and everything will even out in the long-run.
At this time, Franklin D. Roosevelt was the president of the United states and he had already witnessed Herbert Hoover fail to help the American people while following those old economic beliefs. Then, he decided to try listening to Keynes and the New Deal was established. The New Deal was essentially a major stimulus package that encompassed a large list of projects meant to create jobs for the American people, create basic assistance programs such as social security, and generally stimulate or control the economy. The major difference of this new endeavor is that it utilized money that we didn’t necessarily have. The whole deal was honestly a desperate shot in the dark and it’s debatable if a lot of it worked, but some features definitely worked and were continued. If you’re interested in reading more about the New Deal, you can find information here or from the National Archives. Regardless, the economy did recover as World War II ramped up. This led to a huge expansion of Keynesian Economics which focuses on increased government expenditures and lower taxes to stimulate demand and pull the economy out of recessions. These are the methods we use now to get ourselves out of heavy recessions and economic dips and that is what we refer to as a stimulus package.
One of the largest concerns for Americans is unemployment. Understandably, a poor economy leads to unemployment because companies cannot profit enough to continue to pay employees or they don’t need the extra labor due to lower demand. In recent times, the pandemic essentially forced companies to close and have no need for labor which is pretty crazy to think about. As a result, the unemployment rate has suddenly spiked from the fairly standard 3.5% to a staggering 15% according to this article by CNBC. Comparatively, this is 5% higher than the Great Recession unemployment rate of 10% and still far behind he unprecedented 25% during the Great Depression. It’s also a very sudden occurrence and it is also potentially misleading because many individuals may be on a forced furlough or temporarily laid off. This doesn’t mean it is always the case though because many companies are still failing, so it’s very difficult to tell how bad these numbers will impact the economy moving forward.
That’s my take with some supporting information, but I’d love to hear more regarding this topic. If you studied economics, if you have your own theory, or if you simply have information you’d like to share I want to hear from you. The more information that different people can share the better we can all make decisions. Therefore, if you agree, disagree, or want to add more do so in the comments below.
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