Understanding the stimulus bill

The U.S. Senate and the Trump administration have spent the better part of a week now moving the country toward a $2 trillion fiscal stimulus package designed to address the explosive economic costs of the coronavirus threat. The American economy has come to a virtual halt for the past week or so, and it’s likely to be in such a state for another couple of weeks, maybe longer. Lawmakers are under pressure to somehow prop up the economy through various mechanisms available to the legislative branch. The basic formation of the stimulus bill largely came out of the Treasury Department, driven by Secretary Steven Mnuchin. Also leading the charge were Sens. Mitch McConnell (on the Republican side) and Chuck Schumer (on the Democratic side). Early Wednesday morning, McConnell announced the parties had reached enough agreement to pass the bill, and planned to bring it to a Senate vote by the afternoon. President Donald Trump is widely expected to sign whatever Congress puts before him. What does the bill mean to everyday Americans? Will it prove effective in mitigating the economic damage done by the coronavirus and by our societal quasi-shutdown? The bill is largely divided into four categories:

The first category, small business damage mitigation, is perhaps the most important. It addresses the expected spillover effect of the coronavirus crisis on the U.S. economy in the latter half of 2020: Restaurants and shopping malls are hurt immensely by two to four weeks of closure, but their ability to keep employees on their payrolls in the months that follow will be paramount.

This portion of the stimulus will primarily take the form of loan forgiveness, whereby small businesses can borrow money from their banks, while the banks get government guarantees and relief from having these loans count against their regulatory capital. Other measures—such as the deferral of payroll taxes due—will help a great deal as well. The second category strikes me as less efficacious as a stimulus strategy. It consists of direct payments to Americans—reportedly up to $3,200 for a family of four. With payments in the range of $1,000 per adult and $750 per child (proposed amounts have been all over the map), this measure is intended to provide cash support to families who have taken a financial hit this month (and will next month). Other plans for “Main Street”: a temporary suspension of taxes due (until July 15), a temporary suspension of student loan repayments, and various other tax refunds and subsidies. The third category is crucial but more controversial, and involves billions of dollars in financial support for large businesses impacted by the coronavirus crisis through no fault of their own. Think airlines, hotels, cruise lines, and so on. The idea is to add government resources to a loan program the Federal Reserve has created to support troubled industries. The loans would come with favorable terms for the businesses, but with rules restricting stock buybacks and executive compensation. (Last-minute wrangling over the bill has apparently created a five-person “committee” that will oversee this program.) Finally, the fourth category, healthcare support, is where there is the least pushback from the American people. This involves hospital funding, state and local support, increased supplies, scientific research, etc. The success of this portion of the stimulus plan will depend on its execution—that is, on the reduction of bureaucracy. There is, and ought to be, great questioning about how a nation $23 trillion in debt will pay for all this. But that hasn’t been a primary focus during this crisis. Economists would argue (including yours truly) that the cost of this stimulus now is likely much less than the long-term economic cost (and impact to national debt) that we would incur by allowing the current economic crisis to skyrocket in severity.

That said, the idea of taking emergency measures now, and seeking to reduce their costs later, has little precedence in American government. Furthermore, the role of the nation’s central bank—the Federal Reserve—as a tool for debt monetization is concerning. True, the agency can “create money” to the extent that it legally controls open money market operations, but ultimately, the Fed’s practice of simply monetizing the government’s excessive debt is untenable, ineffective, and a long-term hammer on real growth. The “Japanification” of the American economy is under way, and not attractive. We need more clarity on the specifics of the stimulus plan in the days to come, and we need real competence in its administration in the months to come. But let’s remember: The ability of a government to deal with financial emergencies is greatly enhanced when, before the emergency, its own fiscal house is in order. The same is true of individuals and families, of course. We would be better prepared for this needed stimulus had we not ratcheted up our debt in the good times.

That lesson has few future chances to be really learned.

—This story was updated on March 25