Scoring the $1.9 Trillion Stimulus Plan and Earlier Covid Relief Programs

Yves here. The tone of this piece is understated and it’s written in layperson English as opposed to economese. But don’t be deceived. It take a hard look at the stimulus plan just passed, more formally called the American Rescue Plan, and finds a lot not to like about it and the earlier Covid relief packages. The headline, that they were poorly designed and missed or under-targeted many groups that suffered economically, should come as no surprise. But it does a good job in explaining why.

By Anton Korinek, Associate Professor of Economics, Darden School of Business of the University of Virginia and Gosia Glinska, ​Associate Director of Research Impact, Batten Institute. Originally published at the UVA Darden’s Ideas to Action blog

The $1.9 trillion COVID-19 relief bill offers a powerful reminder of the government’s role in modern economies. Today, millions of Americans are counting on federal aid to help weather the economic shock of the pandemic. And so are businesses struggling to stay afloat, especially those in the hard-hit service sector.

“Whenever we’re faced with a contagious disease like the coronavirus, the government has an important role to play,” says Darden Professor Anton Korinek, whose areas of expertise include macroeconomics, international finance, and inequality. “Big crises are inherently times of enormous redistributions. Some corporations have gotten massively richer, others have gone bust. Some people lost their jobs and careers they may never regain, while others can work from home and save on travel. In some ways, their lives have actually improved.”

So what are the best policy measures in a pandemic-ravaged environment, characterized by unequal impacts?

The Case for Crisis Insurance

If you ask Korinek, this is really Economics 101. “It’s about providing insurance to spread out unequal impact,” he says. “Economists generally think that the government should provide such ‘crisis insurance’ whenever the private market can’t. One example is unemployment insurance.”

When we face risks that are individual-specific, notes Korinek, such as the risk that our house may burn down, it’s relatively easy to buy insurance in the marketplace. However, when we’re confronted with unforeseen, economy-wide risks, like pandemics, it is essentially impossible to be insured. “The way I view the hand of the government during a crisis,” says Korinek, “is not that it distorts markets. Rather, it makes up for missing markets. The market is incomplete, and the government is making it work better.”

Automatic Stabilizers

The first line of defense in a crisis, says Korinek, is the type of insurance economists call “automatic stabilizers.” Built into government budgets, automatic stabilizers are mechanisms designed to increase spending or decrease taxes during economic downturns. Because they don’t require new legislation, automatic stabilizers can help families ease financial difficulties when times are bad without lengthy congressional approvals. For example, when a household’s income declines, the taxes generally decrease. In addition, a household may become eligible for unemployment insurance, food stamps, or Medicaid.1

However, automatic stabilizers provide limited insurance. “The U.S. has the weakest automatic stabilizers among developed economies,” says Korinek. “Unemployment insurance, for example, lasts for a brief period of time and covers only a fraction of lost income.”

Discretionary Ad Hoc Stabilizers

To buffer the effects of the pandemic on the economy, the U.S. Congress has already enacted a number of bipartisan COVID-19 related bills, including the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act — known as the CARES Act — and the $2.3 trillion Consolidated Appropriations Act, which was signed into law last December, after weeks of intense negotiations between Democrats and Republicans.

But how effective were they?

Poor Targeting

“Desirability of insurance,” says Korinek, “is proportional to our ability to target — to get relief where it’s most needed. And those discretionary ad hoc relief measures like the CARES Act had massive targeting problems.”

The CARES Act sent the $1,200 checks to joint tax filers earning up to $150,000 and single filers up to $75,000. While households earning that much received stimulus cash — even if they didn’t suffer any income losses from the pandemic — millions of low-income families got nothing, largely because they weren’t on tax rolls.

Some of the targeting problems were caused by the woefully outdated digital infrastructure. “Individual bailouts,” says Korinek, “were distributed through the unemployment insurance computer systems, which are so antiquated that it was impossible to program anything but a fixed amount — $600. That’s why everybody who was unemployed got an extra $600 supplement, regardless of how much income they lost.”

We could certainly learn from countries like France, which have well-oiled social insurance infrastructures. “When the French government ordered all restaurants closed,” says Korinek, “it could automatically pay all restaurant employees precisely what they lost in wages.”

Another example of poor targeting was the Paycheck Protection Program (also known as PPP), which offered forgivable loans to small businesses that kept their employees on the payroll. Because business bailouts were administered through banks, many of the hardest-hit small businesses that lacked established banking relationships were left out.

In addition, the loans cost too much for each job saved. “Providing business bailouts through banks is certainly not ideal,” says Korinek. “We have, at least in principle, the ability to provide much more targeted relief that involves much lower transaction costs.”

Semi-Automatic Stabilizers

The pandemic is increasingly focusing attention on the need to make economic stabilizers work better. “This isn’t only a question of economic efficiency,” says Korinek. “It’s also a question of national security, because we don’t know what kinds of disasters we’ll have to provide relief for in the future.”

Korinek’s solution?

“We’d want to have those systems I call semi-automatic stabilizers,” says Korinek. “What I have in mind is creating structures that make it easier to provide economic stabilizers such as the CARES Act. We want to have, for example, computer infrastructures in place that allow us to provide better-targeted unemployment insurance.”

Korinek points out that it can take months of planning before projects that receive stimulus funding are ready to be implemented. And since speed is key during a crisis, says Korinek, “We need a semi-automatic plan in place so that, when we need it, we can essentially press a button to get things rolling.”

Insurance Is a Two-Way Street

The pandemic has increased existing economic inequalities. While millions of people are being forced into poverty, the world’s top 10 billionaires, including Jeff Bezos, Elon Musk, and Bill Gates, have seen their combined fortunes increase by half-a-trillion dollars since March 2020.2The pandemic has also led to soaring public spending, with bailouts often going to those who didn’t need them.

“Another lesson from Economics 101,” says Korinek, “is that insurance is a two-way street. Insurance implies that it is optimal to take from the winners in order to provide relief to the losers.”

There are legitimate questions to be asked about whether one of the policy measures should involve increasing taxes on the winners. “We’ll have to take a serious look at that,” says Korinek. “And it’s important to frame it in the public debate as the necessary second part of what an optimal response to a big crisis with unequal impacts really entails.”

One of the critical lessons from the pandemic is that we urgently need systems in place that allow us to better target relief in the future. It would be really desirable, notes Korinek, to add provisions to do so in the American Rescue Plan that is currently under discussion. We either implement those systems or further undermine our ability to deal with the next large-scale adverse event, be it the next lethal pandemic, a global financial crisis, or worse.

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  1. MDA

    I can’t help wondering if a system of universal basic income whereby everyone received regular money from the federal government, without regard to means testing of any type, would obviate the need for extra stimulus when the economy experiences massive disruption. Basic income and universal, government supported healthcare seem like obvious systemic fundamentals. The government would already know how to put money in the hands of every American, and every American would have a place to go for free, not for profit healthcare. When delivery of basic essentials depends on individual employment, we can be sure the delivery will be inconsistent and undependable. Not only that, and at least until our economy is subject to stringent environmental regulation and less oriented to development and consumption, universal employment is fundamentally at odds with what we need to do to save the planet.

    1. tegnost

      “Basic income and universal, government supported healthcare seem like obvious systemic fundamentals.”

      Dream on. These policies are antithetical to the lived polity. And that’s even including the fact that a ubi would be siphoned up by the bezos of the world through control fraud. The socialists at the top of the heap in the us don’t share. If you find bezos as distasteful as I do, you want a job guarantee so that he has pay more for his slaves.

      1. Anonapet

        … you want a job guarantee so that he has pay more for his slaves. tegnost

        Minimum wage laws would guarantee that.

        So actually, the purpose of MMT’s Job Guarantee wrt wages (besides a one-time wage increase) is to provide a buffer stock of pre-disciplined wage-slaves to the private sector in order to put a CEILING (as well as a floor) on wages – that’s the MMT solution to a potential wage-price inflation spiral.

        So if you want to end large scale wage-slavery, the solution isn’t wage-slavery to government to supplement wage-slavery to the private sector.

        1. tegnost

          There’s plenty of work to do that the private sector has no interest in doing whose completion would benefit the public sector

    2. Luke

      To answer part of your question it is in my opionion that universal employment would do little to minimize economic disruption. It is human nature for one to live as well as possible, so if I have a guaranteed income and then have a well paying job, I will finance the house and cars I want. When bad times hit I may possibly loose my house, my cars etc and therefore the domino effect ripples through thte economy. I don’t trust government to do anything right, other than those individuals running the government to take care of themselves. There is an old saying that you get what you pay for and with free healthcare you won’t be happy, and you may not get well.

  2. PlutoniumKun

    I wonder if this is a major driver behind all the major Central Banks looking into digital currency as a means of direct monetary stimulus. Its becoming clear that the inability to get money directly to consumers in one form or another is the greatest threat in the event of major downturns, especially if they are some form of black swan event. The entire financial system has become too good at intercepting fiscal or monetary stimulus for their own ends.

  3. The Rev Kev

    I think that a lot of the proposals here are possibly questionable but first – yes, the relief bill offered a powerful reminder of the government’s role in modern economies but not in the way that you think. It successfully fought down a medicare for all option in the middle of the worse pandemic in a century and which would have saved the US untold billions each and every year. It also fought down a universal basic income but threw a few crumbs in the form of three one-time cheques. It even organized itself to kill off raising the minimum wage to $15 an hour which was an accomplishment in itself. And on top of this it has pushed trillion of dollars to the wealthiest individuals and corporations in the country as well as a lot of their enablers.

    This is not a matter of the measures taken being poorly targeted. They were targeted precisely. The money went right to those who demanded it and it went into their accounts overnight. The concept of thinking in terms of insurance is interesting but I do not think that it is valid here. What has been exposed during the pandemic is systematic problems in the US, not one-offs that need an insurance policy. These are structural problems in how the country is organized and what its priorities are. To be dramatic about it, America has a sucking chest wound right now and the only sort of insurance available is a piece of plastic, some duct tape, and instructions to walk it off and get back to work.

  4. Chris Herbert

    A universal job guarantee (JG) program creates full employment, boom or recession. Plus it pays a socially responsible wage with medical and pension benefits. In addition, this stable employment buffer fights inflation as well as raising the ‘lower bound’ floor in income distribution–which lowers private debt. There’s more! It also creates an employed workforce, which avoids the disasters embedded in the unemployment welfare system. In a recession the number of people in JG goes up. As the economy recovers, the JG numbers go down. It is an almost perfect automatic stabilizer. The opposition is the One Percent. They have this fantasy that if they can only reduce wages, profits can go up automatically. In perpetuity, no less. Sorry. I’d call this the paradox of wages. If they decline demand for products and services also decline. Suppressing wages is bad policy.

    1. Anonapet

      Suppressing wages is bad policy. Chris Herbert

      More accurately, suppressing the income of consumers is bad policy for producers.

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