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  • What's that you say? 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.

  • 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.

  • 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 US 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

  • 1930's. 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.

  • 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 dollar profit. However, critics point out that it wasn't an outright success

  • since it basically rewarded reckless companies whogot 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 dollar program to buytroubled assetsfrom 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 dollars. 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 and Reinvestment Act,

  • or ARRA, began the healing process. It provided 831 billion dollars 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 dollar 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 dollars

  • to give food to poor families that were locked down. Germany's numbers to date are near

  • one of the highest at 189 billion, followed by China at 169 billion.

  • 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 dollar bill would've

  • 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 dollar 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 dollars life raft?

  • Surprise, it's us. Tax-payers are ultimately going to be on the hook for this -- and any

  • future bailouts. With the passage of CARES, the total federal debt is now 25 trillion.

  • Technically, 6 of that is money the government owes to 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 payments tracked around 1.7% of GDP, while

  • back in 1999, they were 3% of GDP. Based off of those numbers, we could potentially have

  • 50 trillion dollars 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 that, 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 US military - a number

  • so extreme it would probably CAUSE another recession. Which would require more stimulus, etc.

  • 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 US 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 toDoes 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 thebillwith 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.

  • And that's our two cents.

  • Thanks to our patrons for keeping Two Cents financially healthy.

  • Click the link in the description to become a Two Cents patron

What's that you say? You've been hiding in your nuclear bunker for the last month

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B1 INT US stimulus fiscal government gdp economic policy

Will Economic Stimulus Save the Economy? (COVID-19)

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    Capalu Yang   posted on 2020/04/30
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