The CARES Act worked really well...

Today’s email is co-authored with Sully Meyer, Neal Reddy, and Ryan Vuono. We have previously written emails on where America’s Covid data initially came from and the dangerous narrative collapse during Covid.

Last week, the Biden transition team announced its intention to pass two more multi-trillion-dollar bills in the coming months. With this in mind, it is a good time to revisit the CARES Act and see how wise it is to pass another trillion-dollar package. We now have a pretty good idea of what effect the bill had on the economy, as year-end statistics have been published. Most of those statistics, not to mention all the analysis and punditry that has accompanied it, indicate that this is the right move by Biden.

Biden’s new plan won’t just be a duplicate of the CARES Act

The first piece of legislation would be very similar to the CARES Act in a few respects; most notably, the Biden team wants to distribute another round of $2,000 checks and extend unemployment insurance (UI), which is currently set to expire in March. The administration, which released the plan through incoming director of the National Economic Council Brian Deese, has not specified whether it plans to expand UI back to $600 or keep it at $300.

This bill won’t just be a duplicate of the CARES Act, however: there are also rumors that the bill would distribute more federal aid to state and local governments (to expedite the vaccine distribution process) and, in an effort to reduce poverty, expand child and earned income tax credits. All of that would be part of the first bill, which will likely be deficit-funded.

We are short on details for the second bill, but it is thought to be focused on infrastructure and job-creation and paid for by taxes on wealthy citizens and large corporations.

The CARES Act worked really well

Robinson Meyer, a recent guest of the show and co-founder of the COVID Tracking Project, argues that while the political system is hugely dysfunctional, the CARES Act proved that the federal government can still be effective. The bill, in his mind, was a hugely successful piece of legislation that correctly responded to the imminent housing and economic crisis back in the early spring.

Matt Yglesias expressed a sentiment similar to Rob’s in a recent article of his own, citing the fact that personal income rose and the poverty rate fell during the early months of the pandemic. That wasn’t just the effect of the stimulus checks: the huge $600 boost to unemployment insurance was equivalent to working a $15/hour job on a standard workweek.

The fact that income rose and poverty fell under such a program may indicate some issues of affordability and equity in the American economy, but it also indicates clearly that the tried-and-true American safety net dating back to the New Deal is still as effective as ever. Of course, the watered-down stimulus bill that passed in late December only included $300 UI, so hopefully the Biden administration will reverse that in these upcoming bills.

Meanwhile, Kaplan et al. (2020) from UChicago found that “The CARES Act mitigated economic welfare losses by around 20% on average without increasing fatalities. It redistributed economic gains heavily toward low-income households, while middle-income households gained little from the stimulus package.”

*Kaplan et al. (2020), “The Impact of the CARES Act on Economic Welfare,” Becker Friedman Institute, University of Chicago.*

The CARES Act appears to shift the so-called Pandemic Possibilities Frontier, the theorized tradeoff between economic welfare and public health, inward – which effectively allows for less economic impact than a world without a stimulus, all else unchanged.

Curiously, it looks like the CARES Act may have left some of the middle class households less buoyed by the pandemic. Households dependent on income that has low remote work flexibility saw a steeper fall than even the lower income jobs that are classified as essential work. Consumption rates from essential workers actually recovered relatively quickly because unemployment insurance eclipsed the incomes of the low-income households. Hopefully, the anti-poverty tax policies that the next Biden package is expected to adopt will help middle class families.

Lessons learned about the American welfare state

According to Rob, the CARES Act, in tandem with the remarkable vaccine development process, illustrates something else about America’s crisis-management function: we have a truly incredible capacity for public good. Although it may be spread across the public and private sectors, managed by all manner of entities and bureaucracies, America has the resources to address most problems thrown its way. Sound familiar ?

The brilliance of the CARES Act and, in many cases, the welfare state in general is that when the government applies its capacity for public good generously, benefits quickly pile up downstream of that investment. For instance, thanks to Paycheck Protection Program (PPP) loans, businesses felt freer to reduce capacity, close, or go remote without the threat of permanent lay-offs or closures looming over them. Unemployment insurance enabled the Americans who were laid off to improve themselves and their resumes, so they could become more competitive job applicants. The stimulus checks endowed citizens with the financial freedom to observe social distancing protocols, invest in PPP, and keep money circulating in the economy.

America still experiences many of the same stresses from March

Of course, this all fell apart as the effect of the CARES Act began to wear off. Without federal support, citizens, businesses, and state and local governments are forced to choose between public health and their own future. For instance, New York Governor Andrew Cuomo, once a trusted, even revered, pandemic leader, is now experiencing a dip in approval, as he is faced with the hard choice between screwing local businesses or exacerbating the spread of the virus. He, like many other governors and mayors, could not make that choice, and instead opted for a confused communication strategy that stressed both avoiding indoor spaces and eating at local restaurants.

The Republican Senate’s continued refusal to distribute state and local aid has even muddled America’s undeniable success with the vaccine, as the federal government has largely left the minutiae of vaccine distribution to state governments, while denying the funds required to administer such a process. Here, we can see the interface between the capacity of the federal government for public good and the inability of the national political system to get stuff done. While the government can do a lot of good (and will likely do more under a Biden administration), our polarized political discourse only inhibits that.

It’s pretty easy to see that, despite an anemic stimulus package passing Congress in late December, the post-CARES Act decline hasn’t really stopped. Despite a bull market on Wall Street and a quickly accelerating vaccine roll-out, the current on-the-ground situation is not too different than it was in March. Case counts are on the rise, and the fatality rate is even more dire, with America setting a new record at 4,400 deaths on Jan. 12 last week.

Meanwhile, recent jobs reports have pointed at growing economic pains. Initial claims for state unemployment leaped over one million, and the government announced the economy lost 140,000 jobs in December. (Concerningly, the male workforce gained jobs, meaning women represent all of those losses. This checks out, as most of the job losses occurred in the service sector, where women dominate the restaurant and hospitality industries. This provides a strong mandate for gender equity to be at the center of Biden’s proposals.)

Biden’s plan for the first stimulus bill resembles a hopped-up CARES Act, meaning it is very well-suited for the current situation. An added benefit is that, even while the plan gives Americans the means to subsist (or more) through the next months, it also charts a path out of the pandemic with increased funding for vaccine distribution. I think the idea is that, just as the first bill begins to expire, America will be approaching herd immunity, but in bad need of a kick in its economic ass. This is where the second bill, with its infrastructure and jobs programs, will kick in.

All of this is to say: Biden’s plans seemed to have learned from the CARES Act and are well-suited for the moment. Now it’s just a question of passing them…