Two Cents
Will Economic Stimulus Save the Economy? (COVID-19)
4/29/2020 | 8m 41sVideo has Audio Description, Closed Captions
What do past examples tell us about its effectiveness?
The U.S. just passed the biggest economic stimulus package in history in response to COVID-19... what do past examples tell us about its effectiveness?
See all videos with Audio DescriptionADProblems playing video? | Closed Captioning Feedback
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Two Cents
Will Economic Stimulus Save the Economy? (COVID-19)
4/29/2020 | 8m 41sVideo has Audio Description, Closed Captions
The U.S. just passed the biggest economic stimulus package in history in response to COVID-19... what do past examples tell us about its effectiveness?
See all videos with Audio DescriptionADProblems playing video? | Closed Captioning Feedback
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You've been hiding in your nuclear bunker for the last month and haven't heard about the CARES Act?
We'll bring you up to speed.
It's an economic relief bill of historic proportions to help soften the financial shockwave of COVID-19.
(host 2) Many of us are starting to feel the effects of the CARES Act on a personal level.
You might have gotten a stimulus check or have filed for unemployment for the first time.
But lots of us are trying to get a sense of how it's affecting the country at large.
Do huge government stimulus programs actually work?
And who is ultimately going to foot this bill?
There's no sugarcoating it-- we're in a grim economic period in history.
During times like these, governments have two major tools at their disposal to keep things from spiraling out of control-- monetary policy and fiscal policy.
(host 2) Monetary policy can be used by a government's central bank to create more money and make borrowing easier.
For example, back in March, the U.S. Federal Reserve began buying back hundreds of billions in bonds, which essentially injected more cash into the economy.
It also slashed interest rates to nearly zero, which lowered the price of loans for people and businesses.
But in a crisis, simply flexing the monetary policy isn't enough.
It has to be coupled with fiscal policy.
This is when a government shifts its own spending levels to influence the economy.
This looks like increases in government spending, gifts, or loans authorized by Congress.
The largest American fiscal program in the last century was the New Deal in the 1930s.
The federal government spent money building roads, parks, and libraries to put people back to work.
Another approach is to send cash directly to people or businesses.
This was done in 2008 and now.
If you received a check from the government in the last few weeks, or a grant to your small business, that's fiscal policy in action.
So, to recap, monetary stimulus is designed to create a more hospitable environment for its citizens to spend their money.
Fiscal stimulus means the government steps in and does the spending itself.
While both of these tools are usually used together in the event of a crisis, it's fiscal stimulus that has the most dramatic and immediate effect.
It's impossible to know how effective this version of it will be until more time has passed.
Thankfully, we do have the benefit of some past examples to get a sense of how fiscal stimulus has played out.
(host 1) Following 9/11, Congress passed a $15 billion stimulus package in loans and direct aid to airlines in an effort to save the industry.
The results were mixed.
The program did meet the goal of preventing an industry implosion, and, once all loans were repaid, the Treasury posted a $300 million profit.
However, critics point out that it wasn't an outright success since it basically rewarded reckless companies who got everything they asked for and responded by laying off thousands of employees and reducing service.
We saw stimulus utilized on a grander scale to slow the economic freefall of 2008.
When a housing crisis ballooned into one of the worst recessions in our country's history, two major programs rolled out.
First, the Troubled Asset Relief Program, or TARP, created a $700 billion program to buy troubled assets from failing banks, help the auto industry, and protect homeowners facing foreclosure.
It helped steady a teetering financial system and ended in the black, posting a profit again of $15 billion.
But, like the previous bailout, it was criticized for seeming to reward rather than punish risky and irresponsible behavior by Wall Street.
If TARP was designed to stop the bleeding, the American Recovery & Reinvestment Act, or ARRA, began the healing process.
It provided $831 billion to three main programs: temporary relief for families and businesses, expansion for food assistance and unemployment benefits, and increased spending for infrastructure and educational projects.
Critics at the time called the plan "a big government blank check that didn't do enough to help the working class," though economists today generally agree that things would have been much, much worse without it.
In 2012, the Congressional Budget Office reported the ARRA raised GDP and lowered unemployment by creating as many as 1.7 million jobs.
So here we are in 2020, in the midst of a global crisis, and already dozens of countries have rolled out their own versions of fiscal stimulus.
Italian lawmakers are working out details on a $28 billion plan to support laid-off workers and issue loans to businesses.
India's stimulus is focusing on even-more basic needs by issuing $23 billion to give food to poor families that were locked down.
Germany's numbers to date are one of the highest, at $189 billion, followed by China at $169 billion.
(host 1) But, by an enormous margin, the American CARES Act takes the cake.
In fact, our program is over twice the size of all other countries' combined.
This $2.3 trillion bill would have been inconceivable a few short months ago, yet today, the broad opinion seems to be that it hasn't gone far enough.
Case in point: the $350 billion fund to help businesses maintain payroll was exhausted in a matter of weeks, leaving millions of businesses out in the cold.
Now we all know there's no such thing as a free lunch.
So the big question is: Who's going to be financially responsible for this $2.3 trillion life raft?
Surprise!
It's us.
Taxpayers are ultimately going to be on the hook for this and any future bail-outs.
With the passage of CARES, the total federal debt is now 25 trillion.
Technically, 6 of that is money the government owes itself, so 19 trillion is a more commonly used figure.
For context, our country's entire GDP was 21.7 trillion for 2019.
So what are the possible consequences for a country racking up such an enormous amount of debt?
It's been long-held economic wisdom that a country should avoid exceeding 90% of its GDP in debt so that their growth doesn't get crushed under the weight of debt payments.
Before the stimulus bill, America was clocking around 87%.
But in the last few decades, economists are increasingly questioning this idea.
They look at the fact that last fiscal year, interest payment tracked around 1.7% of GDP, while back in 1999, they were 3% of GDP.
Based off those numbers, we could potentially have $50 trillion in debt and still keep the interest from racking up.
But that's just interest.
How do we pay back the principal?
The hard truth is, just like a family household, we're either going to have to cut spending or raise income.
Yeah, that means taxes.
Realistically, it would have to be a mix of both.
Simply cutting your way out of this would require a 25% decrease in federal spending, which is more than the budget of the entire U.S. military-- a number so extreme it would probably cause another recession, which would require more stimulus, etcetera.
You know where this is going.
And a tax hike in the near future would be very unpopular.
Yikes.
We're doomed.
Surprisingly, probably not.
Experts believe that the U.S. could continue to take on even more debt as long as inflation stays low.
Thankfully, according to William Gale, a fellow at the Brookings Institute, "There are powerful forces keeping inflation low," like technological advances and globalization, things that are unlikely to disappear.
As long as GDP is able to grow faster than interest payments, we should be okay.
So the answer to: Does economic stimulus work?
depends on how you define success.
Recent versions have left large groups out in the cold and have been slow to turn things around.
But in hindsight, the majority of economic experts believe they are necessary and, while imperfect, keep bad situations from getting much worse.
These programs aren't free, and we will end up paying the bill with slower economic growth in the future.
Stimulants, in finance and medicine, have limited benefits that decrease with use.
But just like an emergency stimulant given by a doctor, they can be the difference between life and death.
(both) And that's our Two Cents.
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