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AEIdeas

The CARES Act offers immediate massive cash payments to businesses small and not so small in order to keep them and their employees intact and out of bankruptcy. These well-intentioned policies are designed to facilitate a V-shaped recovery once the danger of COVID-19 subsides. But what if these hopes are dashed and COVID-19 triggers fundamental changes in the economy? What if thousands of businesses are no longer viable in a COVID-19 world? Under this scenario, the CARES Act will prolong the inevitable demise of many businesses, delay recovery, and add to the cost of the crisis instead of reducing it.

$350 billion is a lot of money for the government to give away. $350 billion is the amount Congress allocated to small business in the CARES Act in the form of forgivable loans guaranteed by the small business administration. Firms that receive these loans can turn them into federal grants — free cash courtesy of US taxpayers — provided the businesses use these loans for specific expenses including employee payroll and benefits, rent, insurance, and other approved overhead expenses. Even more shocking, $350 billion may only be a start, as some are predicting that more small business relief money may be necessary.

U.S. President Donald Trump signs the $2.2 trillion H.R. 748 CARES Act coronavirus aid package bill in the Oval Office of the White House in Washington, U.S., March 27, 2020. REUTERS/Jonathan Ernst

In addition to the relief for small business, the act includes $454 billion to support Federal Reserve special lending facilities that will make loans to eligible businesses, states, and municipalities. The Treasury will use the appropriated funds to cover any losses the Federal Reserve incurs on special lending facility loans. The Fed can leverage the Treasury’s $454 billion in credit loss protection to provide up to $4 trillion or more in loans to eligible businesses. The CARES Act also includes a grant program of $25 billion to passenger airlines and $4 billion for air cargo carriers to cover salary payments to employees.

To put the magnitude of this program into perspective, consider that, for the past decade or more, it has been fashionable to disparage banks for the government bailouts they received during the financial crisis. Between 2008 and 2010, the Troubled Asset Relief Program (TARP) injected $426.4 billion into specific financial businesses, the auto industry, and household mortgage assistance to forestall a meltdown of the financial sector and aid the recovery. By the time the program ended, the government recouped $441.7 billion in repayments. Notwithstanding the popular narrative, TARP actually made Uncle Sam (aka the American taxpayer) a profit.

The thinking behind CARES Act support relies on a short-lived economic disruption from the COVID-19 pandemic. If businesses remain intact, once the COVID 19 danger fades, they will immediately spring back to operating at January’s pace. There are two risks attached to this strategy. The first is that the immediate danger from COVID 19 takes a long time to pass. The second is that, when it passes, consumers will no longer want the same mix of goods and services they demanded before the crisis.

Will restaurants, airlines, cruise lines, mass sporting events, and other social and service businesses bounce right back like nothing happened? No one really knows. How long before people want to fly in crowded airplanes, eat next to strangers in a crowded restaurant, or set sail on a floating city with 5,000 other customers in close quarters?

If the public’s demand for goods and services is dramatically altered by the COVID-19 crisis, the American taxpayer will have spent an extravagant sum to keep intact thousands of businesses that may no longer have a profitable customer base. That the pandemic will cause long-lived changes in consumers’ spending patterns seems just as likely as not. Congress should carefully consider this possibility before doubling down and increasing the magnitude of the CARES Act business support programs.

Programs designed to keep businesses intact and idling are counting on a short decline followed by a return to robust growth. If consumers significantly change their spending patterns, these programs will have spent a lot of taxpayer money and only succeeded in prolonging the time it takes the economy to reach its new normal.

The optimal policy response to the crisis hinges on which forecast of the post-COVID-19 economy is more prescient — a short V-shaped recession as forecast by the administration, or a deep recession with unemployment rates rivaling those of the Great Depression. At this point, the shape and timing of the economic recovery is anyone’s guess. At least some in Congress are aware of the policy quandary they face. When asked about the need for additional federal government stimulus given the economic uncertainties, Senator John Kennedy of Louisiana responded, “What I have learned is that for every economist, there is an equal and opposite economist — and often times they are both wrong.”