The Stimulus Bill That Isn’t

The unprecedented COVID-19 pandemic is almost enough to make one sympathize with the politicians in Washington, DC and state capitals. And while everybody on social media may think they’ve become an expert on epidemiology overnight, it’s actually hard to know whether government measures are overreactions, too little too late, or the perfect Goldilocks response to the public health crisis. In some ways, it’s also tempting to sympathize with the federal responses to the economic side of the crisis, since this downturn does not fit within any traditional patterns of a recession.

Unfortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which contains very little economic stimulus, a bit of relief, and a lot of pork, is not likely to provide significant economic relief, and it may even postpone the recovery.

The Economic Problem

The current economic downturn does not fit within traditional economic models. It is not the result of the flagging aggregate demand that Keynesians typically emphasize, nor is it a manifestation of the Austrian business cycle. It is primarily a supply-side crisis, as businesses are forced to shut down.

Unemployment claims at the beginning of April had increased by approximately 10 million. Out of a civilian labor force of approximately 165 million, this represents about six percent. Unemployment will increase dramatically if businesses do not open soon, and the personal hardships will be terrible for those who suddenly find themselves without a paycheck or ready opportunities to switch jobs. But the numbers show a stark dichotomy: the vast majority of American workers are still able to work, and only a minority has suddenly and violently been slammed by unemployment and limited job prospects. This means, in macroeconomic terms, that the vast majority of Americans are suffering not from an unwillingness to spend, but from limited opportunities to do so. It is doubtful that a cash infusion for this majority will lead to more aggregate expenditures. In sum, this is not a crisis of aggregate demand, but a crisis of aggregate supply.

It seems, then, that a federal economic bill in response to the COVID-19 virus would do three things: First, target public health solutions to the crisis, from direct support of hospitals and equipment production, to loosening of regulations that thwart innovation. Second, stimulate aggregate supply by removing barriers to trade and innovation, while urging (or forcing?) the states to do the same. Third, if anything on the welfare front, provide immediate and carefully targeted relief to the small numbers who are suddenly and drastically affected—where the states and civil society need support.

With these criteria in mind, how does the CARES Act address public health, aggregate supply, and welfare?


The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. At $2 trillion, it represents a whopping 50 percent of the 2019 federal budget and about 10 percent of the US GDP. It has been called the largest-ever economic stimulus package—but is it really an economic stimulus package?

The final version is 880 pages long, and different analysts break it down into several different categories. It has proven quite difficult to figure out the details, as it consists of several legislative packages, many categories potentially overlap—and many snouts are in the trough. We can, however, break it down as follows:

Support to Individuals560
Cash to Individuals300
Unemployment for Individuals260
Support to Small Business377
Loans to Small Business350
Grants to Small Business10
Small Business Loan Relief17
Support to Big Business500
Airlines/National Security46
Loans to Business (And State/Local Gov’t)454
Welfare (Mostly Food Security)26
Education (Student Loans)44
State/Local Government Support340
COVID-19 Support275
Community Development5
Education (K-12)13
Education (Higher)14
Misc. State/Local28

Moving from legislative categories to economic classifications, we can break it down differently:

Health/Medical425 (21%)
COVID-19 State/Local275
Welfare635 (32%)
Cash to individuals300
Unemployment to individuals260
Welfare Programs
Food security26
Education (student loans)44
Welfare/Pork/Unclear937 (47%)
Support to Business and Direct Grants
Loans to small business350
Grants to small business10
Small business loan relief17
Airlines/national security46
Community development5
Education (K-12)13
-Education (higher)14
Misc. state/local28
Loans to Business (And State/Local Gov’t)454

Looking at our first criterion, $425 billion, or 21 percent of the total, is targeted at fighting the COVID-19 epidemic. If we ignore the details of disbursement, we can assume this category is indeed dedicated to public health.

We run into issues when looking at the second criterion, addressing aggregate supply. From a macroeconomic point of view, the immediate priority after public health should be reducing social isolation and promoting the ability to work, perhaps in a Korean-style, targeted test-and-quarantine approach, rather than blanket social isolation. Aggregate demand is currently strong—or at least potential aggregate demand—with consumers ready and eager to spend as soon as they are able to leave home, and as soon as firms start producing again. So putting money in consumers’ hands will not cause fiscal stimulus. While it may make an immense and immediate difference for a small percentage of recipients, it is unlikely to have any overall fiscal impact, as business closings and social isolation impede spending. What is more, about half of the relief ($300 billion) involves blanket grants to individuals, some of whom are in desperate need, but most of whom are still drawing wages. To be fair, CARES contains some small measures, like a deferral of payroll taxes and other minor but helpful, structural benefits that promote aggregate supply; but these are mostly afterthoughts. In sum, about a third of the CARES Act goes to welfare, but without any appreciable macroeconomic impact.

Even if we assume the best of intentions on the part of politicians, the CARES Act does not address the economy’s real problems.

The third criterion is more complicated. The $377 billion targeted at small business for the purpose of preserving payroll sure looks like welfare—especially because it will support workers in need—but it does not address the lack of production. Likewise, the airline industry is receiving $46 billion—good for its laid-off employees, but not helpful if passengers aren’t flying. The $454 billion in loans to big business and state/local governments is murky and smacks of cronyism, but that is another topic for another time (for example, we’ll let slide $200 million for the arts as a rounding error). None of these target production. The crisis may become one of aggregate demand if aggregate supply is not restored and unemployment continues to rise; but almost 80 percent of the CARES bill currently targets aggregate demand, which is not flagging, without addressing aggregate supply. Thus, it does not address the underlying problem driving the economic downturn.

The package is bad macroeconomics in other ways, too. CARES provides an additional $600/week of unemployment for four months; that’s an extra $15/hour, which is likely to discourage workers from shifting to industries that need surge capacity. If the federal government is to increase welfare, it should do so in a way that does not discourage a return to work. It is now keeping zombie firms afloat without increasing production. It is blindly dumping public money without means-testing, while adding to an already bloated national debt. And it is likely to contribute to inflation, as that debt is monetized by low interest rates. These aspects of the law may actually hinder economic recovery.

An Alternative: Targeting Aggregate Supply

It is intriguing to see a pandemic bill that dedicates only 20 percent of expenditures to public health. It is similarly puzzling to see a macroeconomic bill that dedicates precious little to the underlying economic problem of aggregate supply.

Two alternative approaches would have been much more helpful. First, the federal government could loosen regulations. The FDA could stop impeding the development of new experimental drugs and medical equipment. The federal government could loosen regulations that hamper business growth, including the estimated $1.9 trillion “hidden tax” of complying with federal regulations. It could remove CDC and FDA regulations that thwart the import of masks. Economist Tyler Cowen suggests a number of measures: relaxing federal regulations on licensing requirements for medical professionals (in addition to state requirements), lifting labor restrictions on overtime and weekend work, and reducing (rather than deferring) payroll taxes.

Second, the federal government could use its powers for good by working to roll back state regulations. An estimated 30 percent of Americans require a license (i.e., permission from the state) to earn a peaceful living. In this time of epidemiological-structural unemployment, waiving such licensing would facilitate the shift of labor from industries where telecommuting is impossible into new entrepreneurial ventures (and the health sector). Fully 34 states and the District of Columbia have “price-gouging” laws that thwart the market process, create shortages, and discourage firms from increasing supply or others from entering the field. Some states have rolled back regulations, but 35 still have Certificate of Need restrictions that make it difficult and costly for hospitals to expand their operations. And all the states have byzantine and arcane laws that impede commercial activity, from prohibitions on transportation of alcohol and food on the same trucks, to laws that prohibit home healthcare businesses, laws that prohibit physicians from dispensing medicine without a pharmacy, and laws that ban the dispensation of online advice or require the permission of competitors to open a business.

Some states have lifted some of the sillier restrictions (like Texas allowing food and alcohol to be transported on the same truck, or Michigan allowing a distillery to produce hand sanitizer). But perhaps it is time for the federal government to encourage the states to protect economic liberty—or perhaps to force them to do so under the 14th amendment; the Institute for Justice has been working on this, if on a case-by-case and state-by-state basis.

The CARES Act might be bringing much-needed relief to the small but growing percentage of Americans who can no longer draw a paycheck. But, even if we assume the best of intentions on the part of politicians, and ignore (for a moment) crony capture of the public purse, the CARES Act does not address the economy’s real problems.

Sadly, the CARES Act isn’t really a stimulus bill. It is, rather, good, old-fashioned election-year welfare spending. A terrifying grab at the commanding heights of the economy, it significantly expands an already bloated federal budget with one stroke of the legislative pen, while failing to address the most pressing economic needs.

Reader Discussion

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on April 16, 2020 at 09:42:54 am

Yeah, maybe!
But maybe not.

Realistically, it's impossible for anyone to know the right course, impossible for our political leaders to avoid great mistakes, impossible for Congress to steer clear of gargantuan waste (what with a Democrat-controlled House and a 60 vote approval rule in the Senate,) and impossible for the nation, henceforth, to avert 50-years of second-guessing by historians, economists and politicians.

Based on every measure of unity, the nation was badly divided before Red China attacked us with the Wuhan Virus. Indeed, the nation was more divided and in greater cultural and political crisis before Red China's attack than at any time in our history since 1860. Thus, striking America when it did and in the way it did, Red China has caused a calamity in America not seen since the Great Depression and WWII, yet a plight that is wholly unlike either and morally more ambiguous of solution.

We are without historical or political or economic precedent to serve as guideposts. Our stabilizing traditions are atrophied; our founding institutions of law, governance, education, community, faith and virtue are withered or dead. There is little social cohesion, great moral confusion and no political consensus. And all the while a psychotic media fans the flames of insanity.

Yet, a plan for defense of the public's health and welfare must be found, a strategy for economic reconstruction must be deployed and a counter-attack must be launched in (what surely we all must now call) the "Red China War on World Health and Stability."
On the matter of bold strategies for safety, reconstruction and counter-attack, I, for one, am prepared to cut some slack, provide some praise, offer some prayer and thank God for President Trump.

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on April 16, 2020 at 12:43:22 pm

Very good comment.
Ever since the Wealth of Nations in 1776, political and economic thinkers have been trying to explain the nature and complexity of “political economics”. But over the years the economic thinking became a specialty in its own right, and came to ignore and neglect the political elements in our economic life.
I have come to consider the economy as a network of nodes interconnected by a complex web of buy-sell transactions. Think of it as an economic “brain”, similar to those graphics showing a multitude of neurons “firing” across synapses. Each node (neuron) has a size (or height) based on the relative wealth available to the person or business represented by that node, and the thickness of the interconnections reflects the magnitude (or money velocity) of the money flows between them. With over 300 million people (with parents acting as agents for their young children), and approximately 25 million businesses (with one or more employees making economic decisions on their behalf) there are a very large number of actors (nodes). I can easily estimate that each node makes anywhere between three to thirty (or more) economic decisions per day, or 1 to 10 billion decisions (transactions) per day. Whether you have decided to open a new product line in your business, buy a new car, or once again buy the same brand of corn flakes that you always buy, each is a unique (if often repeated) event or transaction. Depending on the number and kind of participants, the number of inter-connections (links) between them varies over time, from a few dozen per day to thousands.
Trying to explain and understand this complex of interactions, motives, incentives, moods, and so on is not something that anyone should claim to have mastered without ambiguity.
Dr. Wenzel has provided one or two ways to examine this legislation and its projected impact. But he seems to have forgotten the political elements in what we are now facing. There is no mention of the concept that the government owes people compensation for the constitutional “taking” represented by the decisions and commands to close businesses, lay off workers, or try to enforce new social practices, such as wearing masks or maintaining specified distances between people while buy, selling, or recreating. I would welcome further comment on this aspect from the legally trained experts who comment here.
But the core decision to close down our economic activity was really a political one, rather than an economic one, so perhaps political remedies are also required as a complement to the economic ones. Given our current level of political partisanship and division, it is not clear that even a crisis as serious as this one will grant us the ability to bridge our differences in the political arena.

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on April 16, 2020 at 15:02:40 pm

On the matter you raise of constitutional considerations affecting governments' domestic responses to the Wuhan Virus you may appreciate hearing a very recent Federalist Society podcast featuring noted NYU Law Prof Richard Epstein:

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on April 18, 2020 at 01:26:41 am

This is a very thoughtful piece, and correct. I only differ on one thing - criterion 3, “bailout relief” for those injured in govt mandated shutdowns, is essential and will have to (i) large, (ii) short term. The unemployment rate simply from shutdown is likely to go to 20% or higher, and if prolonged more than a month will lead to missed rent, mortgage, and loan payments, which in turn will trigger upstream financial failures. And surveys from NBER, NABE, JD Power, and the U.S.Chamber of Commerce suggest that permanent failures of a quarter of small businesses will be seen after a little over a month and the rate of failure accelerates after that. A substantial part of the economy has been turned off, and after a couple of months won’t be there to turn back on. “Bailouts” simply keep individuals and firms from financial ruin during the period they are forbidden to work or their supply chain is shut down.

This can only be a very short term “solution,” though, because all it does is spread the losses over everyone; it’s destructive but less destructive than facing a year or more of 30% unemployment.

The human damage from an extended shutdown would be worse than from coronavirus, so the real solution is Dr. Wenzel’s “criterion 2,” stat.

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Charles N.Steele

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