How the CARES Act Will Delay Economic Recovery

by | Apr 8, 2020

How the CARES Act Will Delay Economic Recovery

by | Apr 8, 2020

Screen Shot 2020 04 07 At 5.54.38 Pm

The economic fallout of the government’s shutdown in response to the coronavirus pandemic has been unprecedented.

Nearly ten million people have filed for unemployment benefits in just two weeks. The 6.6 million claims from the last week of March doubled the previous week, and both weeks smashed the previous one-week record of 700,000 claims in 1982.

To mitigate the damage of this mass level of unemployment, the federal “stimulus” bill, called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), includes two key provisions that will serve to prolong the negative economic impact of the shutdown: bailouts to big businesses and the $600 a week in unemployment benefits in addition to state level benefits for eligible recipients.

The bailout payments to big businesses, like the airlines, not only rewards risky behavior but will just delay the inevitable restructuring that will need to take place.

For instance, American Airlines and Boeing, rather than building up cash reserves during the past ten years of flush economic times, instead leveraged low-interest rates (courtesy of mad Fed money printing) to engage in billions of dollars worth of stock buybacks to benefit from the stock market bubble. Now, rather than selling their stocks to raise liquidity as the prices tumble, they will rely again on a taxpayer-funded bailout.  

Furthermore, the bailouts will largely just enable big businesses to stay afloat during the remainder of the shutdown, delaying layoffs that will likely be necessary as the travel industry will be slow to recover due to a public remaining uncertain about the health risks of travel. 

So at a time when the economy is attempting to “re-open,” the businesses that had been propped up during the shutdown will need to engage in another round of layoffs, prolonging any recovery efforts. 

Also damaging to the labor market as the economy attempts to re-start will be the enhanced unemployment benefits. 

 “The $600 weekly unemployment compensation boost included in the CARES Act will provide valuable support to American workers and their families during this challenging time,” said Secretary of Labor Eugene Scalia.

Indeed, the financial support will be critical for those laid off through no fault of their own.

Such benefits, however, will significantly hamper any effort to “re-open” the economy once the pandemic fears erode, and may prove to be very difficult to eliminate.

A cursory look at the data shows that many of those out of work will be getting paid more not to work than they did to work.

Examining Bureau of Labor Statistics data, this article in The Street found “the median income for a full-time wage or salary worker on a weekly basis was $936. For a 40-hour work week, this translates to a yearly income of approximately $48,672.”

Comparatively, a 2019 USA Today article evaluating 2018 state unemployment benefits data reported the average national weekly unemployment payout of $347 a week. Add to this the $600 a week from the CARES act, and that comes to $947 per week, or $49,244 on an annualized basis.

In other words, the average unemployed person receiving benefits due to the coronavirus shutdown would be receiving more income than the national median income from working. Granted, these figures are broad aggregates, but still illustrate the point that many will be receiving more income being unemployed than they would if they chose to return to work.

The federal supplements are currently scheduled to last four months – roughly to the end of July.

Now imagine, using an optimistic scenario, most of the nation begins to wind down their economic shutdowns by mid-May or early June, meaning many workers would still have four to six weeks of eligibility to receive the generous unemployment benefits.

Of those businesses seeking to re-hire workers to help ramp up production and services to customers, many will find it difficult to do so. Unemployed workers who can receive more income staying at home instead of returning to work will choose to stay at home as long as the unemployment checks continue to roll in. Most states have waived the requirement to be seeking work to receive unemployment benefits, so there would be no pressure to do so. 

Returning to work for many would make them financially worse off. Some employers would also offer benefits like health insurance, but many jobs in the hospitality industry – where the majority of jobs have been lost – do not. While many would be eager to return to work to regain a sense of purpose, many others would make the economically-rational choice to continue receiving the higher level of income while avoiding the disutility of work. 

And this effect would reach beyond more than just those that could receive more income staying at home. For some, even the opportunity to earn more money working rather than remaining unemployed would not be deemed to be worth it, once we take the marginal benefits and costs into consideration.

Say someone receiving $947 per week in unemployment benefits has an opportunity to return to a job paying $1,000 a week. Obvious choice, right?

Maybe not.

The choice isn’t simply between receiving $947 a week versus $1,000 a week, but also working 40 hours a week versus zero hours. On the margin, this person would be receiving $53 more a week, but having to work 40 hours to earn that marginal benefit. On the margin, returning to work would yield this person about $1.33 per hour. Many would find this unappealing.

The federal government’s paying out of these additional benefits will surely provide a much-needed financial lifeline to millions forced out of work. But it’s also important to acknowledge how they will make it far more difficult to get the economy going again. Many businesses will find it difficult to once again staff their operations while the benefits continue. 

The notion of generous unemployment benefits discouraging work is not some right-wing, or free market ideological talking point. Even the New York Times resident left-wing economist Paul Krugman acknowledges that extended unemployment benefits will likewise extend higher levels of unemployment. In his 2010 economics textbook, Krugman stated “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect.” He explains that granting more generous benefits “reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.”

Moreover, these benefits will likely prove to be very politically difficult to end. Indeed, before the first checks have even been cut, Nancy Pelosi has been promoting the idea of extending the benefits through September. 

Imagine if unemployment remains high, perhaps in or near double digits, and Congress finds itself debating whether or not to cut millions of out of work American off from these federal benefits just two months before a national election.

Any guesses how that turns out?

The government has shut down the economy, forcing millions out of work. It’s understandable for them to also take measures to cushion the financial blow dealt to those made unemployed because of their decision.

What’s also important is to understand that these actions will most likely prolong any desired “re-start” of the economy, and these supposedly temporary unemployment benefits will prove to be very difficult to eliminate in an election year. 

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