What to make of the US’s $2 trillion coronavirus bailout
In spite of the negatives and the risks, the stimulus package represents a real political and philosophical change.
On Wednesday, the United States Senate overwhelmingly approved a $2 trillion rescue bill to address the effects of the coronavirus pandemic on the economy.
Will it make the US and world economies better than otherwise?
Yes. Perhaps, even significantly so.
Will it save the economy of the US from a severe recession?
Will it save the economy of the world from a severe recession?
Is it better than the 2008 bailouts?
Is it better than the original Republican, White House, Treasury proposals?
Far better. More significantly, it marks a huge change in our political-economic world view. That being said, it is, at best, a mix of the old, established evils, and the refreshing new.
It is impossible to estimate the full, actual impact of the coronavirus pandemic and the attempts to control it on the world economy. At this moment, there are 14 countries on full shutdown. China has a group of regional shutdowns, several of them bigger than entire other countries. At least 13 more countries have partial shutdowns. Then there are the countries that have closed their borders and have quarantines for incoming travellers. The EU has banned all non-essential travel.
On Tuesday, March 24, the Guardian estimated around 20 percent of the global population was under a coronavirus lockdown. On Wednesday, March 25, India went into lockdown. India has a population of 1.37 billion. That brought the total to 35 percent of the world’s population.
Think for a moment of yourself losing a mere two weeks of work and of the cuts you would make to your spending. The world population is 7.8 billion people. Imagine that happening to 2,730,000,000 people.
Not all of them are working adults. That number includes children, retirees, the sick and politicians. Putting people to work has a multiplier effect. They spend what they earn. The businesses that get their money spend a significant portion of it on more goods and services. And on employees, who also spend. When the number of people earning decreases, it has a negative multiplier effect. A plant closes. Employees lose their pay. The local grocery, bowling alley, liquor store all suffer. The tax base declines. That affects police, teachers and all public services.
The average net profit margin for US businesses – excluding the financial sector – is just 6.53 percent. A lot of sectors are in the 1 to 4 percent range. Even a slight slowdown can put a lot of enterprises out of business.
The lengths of the shutdowns are unknown. The direct and indirect medical costs are unknown. The negative multipliers are incalculable.
Donald Trump, and many others, imagine that when the pandemic is brought under control, our economies will bounce back up, like a fighter who has been knocked down but jumps up short of a 10 count ready to battle even harder. That is ridiculous.
The negative economic consequences cannot be stopped. Nor will they disappear by themselves.
But they can be ameliorated.
The 2008 bailout is the most obvious – and the most meaningful – comparison to this bailout. It was promoted, sold and run by Henry Paulson, who had been CEO of Goldman Sachs, and Ben Bernanke, Chairman of the Federal Reserve, a coven of big bankers. He is now associated with PIMCO, a $1.91 trillion investment management company and Citadel, a $32 billion hedge fund – the sophisticated, modern form of payoff.
The public face of the bailout was the Troubled Asset Relief Program (TARP). It authorised $700bn (later reduced to $475bn), to buy “trouble assets” from big banks that had made stupid and reckless purchases. The hidden face was much bigger. It put between $16.8 trillion and $29 trillion into the largest financial institutions in America and around the world.
They saved the banks, the bankers and their bonuses. But everyone else was screwed. It took six years for the real economy – by many measures – to even return to pre-crash levels. Think of it as government by finance, of finance, and for finance.
It was a model that Treasury Secretary Steve Mnuchin and Senate Majority Leader Mitch McConnell were eager to adopt when responding to the coronavirus pandemic. Their proposal was to give $500bn to Mnuchin, which he could use however he wanted.
However, the power of the purse is with Congress. It might not always seem that way because they abdicate their responsibilities, but the constitution says it is. Congress has a Democrat majority. Even two years ago, the Democrats might have rolled over for Mnuchin and McConnell as they rolled over for Paulson and Bernanke. Now, they have awakened. They had their own proposals.
Instead of trickle down, their vision was build up from the bottom. That is good.
The most surprising policy is the most sensible: $1,200 to everyone who files their income tax with incomes below $75,000, tapering off to zero at $100,000, with an additional $500 per child.
It is not limited to everyone who pays federal income tax. Nearly half of Americans do not and that half needs it the most. But filing is necessary to exclude high earners.
Unemployment benefits will continue for an extra 13 weeks, will be expanded to cover freelance, gig and furloughed workers, and unemployment benefits will increase by $600 per week across the board for all workers claiming them. Given that, as of January, the average UI check was $385 per week, this is a massive increase.
There should also be $350bn in loans for small business – which will be forgiven if they keep their employees on. So it is actually a subsidy with coercion. It must be repaid if it is not used in a way that supports the whole economy.
There is $100bn for hospitals.
The package had to get through the Senate and it had to have Trump’s nod of approval.
The $500bn for big businesses remained.
In some quarters, cognitive dissonance clanged louder than church bells. An op-ed in USA Today said “bailout for airlines and cruise lines is socialism for the undeserving rich”. During their fat years, they used their money for share buybacks and excessive executive compensation instead of saving for an emergency. Yet there are reasons we want the US airline industry to survive. We want Boeing to survive in spite of the greed-driven mess they made out of the 737 MAX. They have too many real employees who make decent money. I do not know if we would miss cruise lines. Trump refused to say that government funds should not go to his own hotels, resorts and golf courses. When he was asked who would watch where the money went, Trump said, “I’ll be the oversight.”
The Democrats stepped up. They demanded a provision that would stop funds going directly to Trump or his family by adding a clause that included top members of the executive branch, members of Congress and their families. They also prohibited the money from going to stock buybacks and excessive domestic compensation. There will be an oversight board and an inspector general.
Nonetheless, Zach Carter of Huffington Post wrote that it “is not an economic rescue package, but a sentence of unprecedented economic inequality and corporate control over our politics that will resonate for a generation”. He views the restraints as “purely cosmetic” and “toothless”. More significantly, he notes that “$425 billion … can be leveraged 10 times over by the Federal Reserve, resulting in a multi-trillion-dollar program”. That gooses it up to the sort of fun numbers that were taking place behind the curtain after 2008. Meanwhile, the New York Times did a story, In Fine Print of Stimulus Package, Special Deals for Certain Industries. It demonstrated that the unprecedented rescue package was still, at least in part, business as usual.
In spite of the negatives and the risks, the package represents a real political and philosophical change. We are at last moving on from Reagan’s “The most terrifying words in the English language are: ‘I’m from the government and I’m here to help’,” to “We need the government to help. Nobody else can help. Here we are.” That new and improved attitude is not limited to America. It is showing up in the UK and in Germany, as well.
It is not instant or total salvation, but it is cause for long-term optimism.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.