New US fiscal action should avert closures but not a recession

The sweeping $2 trillion package of COVID-19 rescue measures nearing Congressional approval will not prevent a sharp recession in the next few months. But  it will replace a large share of income lost by laid off workers and should enable many businesses to avoid permanent closures. Avoiding bankruptcy and liquidation is critical to enabling a rapid economic recovery as soon as health officials deem it safe to return to work.

The package's grants, loans, and other features represent roughly 10 percent of US GDP in 2019, and this measure comes on top of two earlier bills with a combined value of less than $100 billion. Given the haste with which the bill was written, further steps may need to be taken, especially if the COVID-related business closures last more than about three months. Nevertheless, this package is a very good attempt to address key issues in a manner that is both timely and appropriate in size.

Major elements of the package include the following:

Grants

• An estimated $250 billion to temporarily increase unemployment benefits for most workers who are laid off in 2020.
• $150 billion in grants to states, localities, and tribes.
• $100 billion in grants to hospitals and health care providers.
• $45 billion in disaster relief programs, including some grants to small businesses.
• $31 billion in educational programs.
• $29 billion in wage subsidies for airlines, air cargo operations, and their suppliers.
• $27 billion for medical research and development.
• $25 billion in agricultural programs.
• $25 billion in food stamps and related programs.
• $20 billion for the Department of Veterans Affairs, mainly for health care.
• $10 billion in grants to airports.
• Numerous smaller items.

Tax Reductions

• $270 billion for direct payments to individuals of $1,200 per adult and $500 per child for single taxpayers earning less than $75,000 and couples earning less than $150,000.¹ (This is considered a tax rebate.)
• $210 billion in deferred payroll taxes.
• Numerous other tax reductions and deferrals.

Loans

• $500 billion for loans and loan guarantees to large corporations, of which $46 billion is targeted for airlines, air cargo, and national security–related firms. The rest may be used at the discretion of the secretary of the Treasury, including use as a first-loss tranche to leverage Fed lending programs to corporations. Recipients must maintain employment at 90 percent of previous levels. Other conditions apply.
• $350 billion for small business loans (of which $1 billion is allocated to administer the loans). Portions of these loans may be converted to grants based on revenues and employment at the recipients.
• $10 billion credit line from Treasury to the Postal Service.

Administrative Expenses

• Budgets of most federal agencies are increased to handle the costs of working from home and administering larger programs during the crisis.

An important question that is likely to surface in coming days is whether heavily affected large corporations that are in sectors not targeted for wage subsidies will be willing to take up the emergency loans given the requirement to maintain 90 percent of their employees on payroll. Look for industries such as hotel and restaurant chains to lobby for employment-based grants similar to those offered to the airlines. My colleague David Wilcox recently posted some ideas on how to structure aid to affected industries at lower cost to taxpayers.

Note

1. Donald Hammond and David Wilcox describe the challenges of getting payments out quickly, especially to low-income households, in a recent PIIE blog.