The CARES Act was Phase III of a fiscal response to the coronavirus. In dollar amount, Phase III dwarfed the previous measures. Previous Phase I legislation included $8.3 billion in aid to help contain and treat the virus, including diagnostic testing and human vaccine clinical trials. Phase II (the Families First Coronavirus Response Act) legislation guaranteed free coronavirus testing, provided paid emergency leave, enhanced unemployment insurance, strengthened food security initiatives, and increased Federal Medicaid funding to states. The bill required governments and private businesses with fewer than 500 employees to provide up to two weeks of paid sick leave for those who miss work due to the coronavirus or for those who have to take care of family members affected by the pandemic. If needed, workers could take another 10 weeks off at two-thirds of their pay. A refundable tax credit is available to businesses and self-employed workers to cover the expense. The U.S. Labor Department could exempt companies with fewer than 50 workers if they risk going out of business. The fiscal policy stimulus reflects the challenges of a service sector economy when consumer spending is declining. According to the U.S. Bureau of Labor Statistics, nonfarm payrolls in the private sector consisted of 128 million jobs as of February 2020. Out of those jobs, approximately 107.2 million (about 83 percent) were in the service sector, approximately 20.8 million (about 17 percent) were in the goods-producing sector. Many service sector jobs are in transportation, retail trade, restaurants, real estate, movie theaters – industries that depend on personal visits and service. Many of those jobs are within small businesses. The Phase III fiscal policy also comes on the heels of the use of monetary policy by the Federal Reserve to bolster the sinking economy. Programs of the Federal Reserve included: • Purchase at least $500 billion of Treasury securities • Purchase at least $200 billion of mortgage-backed securities (including commercial) • Creation of two credit facilities that support large employers through making loans and bond financing more accessible • Additional credit facilities were created to help facilitate the flow of credit to consumers, small business, and municipalities In April, the Federal Reserve announced additional actions to provide up to $2.3 trillion in loans to support the economy. The $2.3 trillion loan program would supply increased liquidity to financial institutions and access to credit for individuals, businesses, and local governments. Working with financial institutions and the U.S. Treasury, the Federal Reserve established specific loan programs targeted at households, employers of all sizes, and state and local governments to help weather the economic storm caused by the coronavirus. Collectively, the programs of the Federal Reserve were meant to increase access to credit and borrowing by consumers, business, and municipalities. The programs were in tandem with the Federal Reserve cutting the fed funds rate to 0.00 – 0.25% in early March. Unfortunately, the fiscal and monetary policy actions were reactionary. Would they be enough to bail-out the economy? Probably not, but no one really knew. The ultimate impact of the coronavirus on the economy and financial markets would be a function of how much it would spread, and how long it would last. With mounting unemployment, it quickly became clear in April that the Phase 3 stimulus was not enough. In late April, another $484 billion (also known as the Phase 3.5 stimulus) was passed by Congress and primarily aimed at small businesses. The legislation includes another $320 billion to help small businesses keep workers on the payroll. The initial program established by the CARES Act, referred to as the Paycheck Protection Program (PPP), ran out of money due to heavy demand. The program provides forgivable loans to small businesses that keep employees on the payroll. The initial program also ran into difficulties because funding was often difficult to obtain by small businesses that did not have established banking relationships. Approximately $60 billion of this additional PPP funding is aimed at businesses that do not have established banking relationships, including rural and minority- owned businesses. An additional $75 billion in funding is provided for hospitals and $25 billion for corid-19 testing. The Small Business Administration’s disaster relief fund is also increased by $60 billion.
Center for Business and Economic Insight - CBEI EXTRA!
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