“Does $2 trillion seem like enough to you?” That’s the two trillion million dollar question. I’m surprised that Congress passed a $2 trillion bill in just over a week, but no, it doesn’t seem like enough. Let me elaborate…

During the Great Recession, analysis of the economic effects of fiscal policies (mine included) would often go something like this:*

1. Determine the near-term budgetary cost of each major provision of the bill
2. Apply an appropriate “bang-per-buck” fiscal multiplier to the cost of each provision (essentially reflecting how well targeted the provision was to people with a high marginal propensity to spend) to spitball the GDP impact of each program
3. Sum the likely GDP impacts from various provisions and calculate a total counterfactual percentage change in U.S. GDP from the change in fiscal policy
4. Compare the boost/hit to GDP to the existing output gap—how far actual GDP was depressed relative to potential GDP, the level of output consistent with full employment and stable inflation. Does it close the hole, or make things worse?
5. Use the estimated percentage change in GDP to make back-of-the envelope calculations about job gains/losses or changes in the unemployment rate.**

This doesn’t strike me as the appropriate treatment of the CARES Act, for two reasons.

First off, policies that stimulate aggregate demand (e.g., unemployment benefits, tax cuts) and thus boost employment will likely do the former to a lesser extent than usual, while the latter remains further constrained by public health policy (e.g., stay-at-home orders, closures of non-essential businesses). The Keynesian re-spending multiplier effect would almost certainly be dampened if factories, stores, restaurants, and bars must remain shuttered and if consumption preferences have been temporarily altered by health concerns. No amount of tax cuts (or interest rate cuts, for that matter) will induce a rebound in airfare sales until the health risks of flying greatly subside. And statistical relationships that were estimated from post-war, sans-pandemic data could be quite misleading when public health mandates are deliberately restraining the consumption of many goods and services we (normally) like to consume, or labor supply in many sectors.

Second, we have no idea how big the hole will be—in terms of the output gap or job losses—and we won’t for a while. Advanced estimates for 2020Q1 GDP (January—March, catching just the beginning of the U.S. crisis) won’t be released until April 30, and the advanced estimates for 2020Q2 GDP (April—June) won’t be released until July 30. (Preliminary GDP data are released as an advanced estimate, then a revised second estimate, then a revised third estimate, and later multi-year revisions; the Bureau of Economic Analysis release schedule for GDP data can be found here.) Job loss numbers for April—likely far worse than the March report due to the timing of layoffs and surveys—won’t be released until Friday, May 8. Macro forecasting models are also estimated from sans-pandemic data, and adaptation of such models to stay-at-home orders and an unknown duration of this pandemic pause is mostly ad hoc guesswork; take these forecasts with a considerably bigger grain of salt than usual. That said, here’s some suggested related reading on forecasts for the U.S. economy:

• The Economist (4/1/20): How high will unemployment in America go?
• CNBC (4/1/20): US companies cut 27,000 jobs before the worst of the coronavirus shutdown, millions more coming, Moody’s says
• Business Insider (3/26/20): JPMorgan slashes its GDP forecast for next quarter, now sees a 25% contraction and an imminent recession despite ‘Herculean’ stimulus measures
• Goldman Sachs (3/20/20): US Daily: A Sudden Stop for the US Economy

“But as usual, something can be said,” to borrow a line from John Kenneth Galbraith. With the CARES Act we’re looking at something more like a lifeline to the shuttered U.S. economy rather than a traditional stimulus package trying to jump-start economic activity (though much of the bill will still serve as traditional Keynesian stimulus). We’re deliberately trying to pause nonessential economic activity, to ameliorate the harm of COVID-19 to our population and our hospitals. And in the interim we need to cushion the loss of income for households and keep businesses from failing or firing everyone. (I would recommend Josh Marshall’s similar take from his perspective of running Talking Points Memo, a small business, for the last twenty years). Paul Krugman is aptly calling this “disaster relief with a dash of stimulus” (his recent, related column is also worth a read). But for thinking about the scale of policy responses to date, I think it’s perhaps more constructive to frame and separately analyze the CARES Act as follows:

• Lifelines to households
• Lifelines to state, local, and tribal governments
• Lifelines to businesses, big and small
• Emergency funding for hospitals and health-related agencies
• A grab bag of corporate welfare and misc. business tax write-offs, sold as lifelines

Let’s think about the scale of the first three lifelines, then zoom back out to the whole package. (The fifth is too depressing to touch at the moment and I’m not the person to speak to the fourth.)

Household Lifelines: The major lifelines to households in the CARES Act are the $1,200 checks, expanded unemployment benefits, and increased safety net spending. These major income support provisions are estimated at $592 billion ($290 billion for the checks, $260 billion for unemployment benefits, and $42 billion for food security and housing programs). To put this in perspective, employee wages and salaries in the United States totaled $9.4 trillion in 2019Q4 (measured at an annualized rate). So the income support provisions would amount to transfers effectively replacing 6.3% of annual wages and salaries. But the emergency unemployment benefits only last for four months, and the checks and other income support measures will essentially be exhausted in the second quarter of 2020. So we’ll likely be be replacing 22.4% of wages and salaries in the second quarter but only 2.8% of wages and salaries in the third quarter.***

So if the pandemic’s forced curtailment of economic activity hasn’t ceased by mid-June, Congress will need to significantly expand such income support measures. A group of Senate Democrats recently proposed more comprehensive legislation for lump-sum payments that would send additional checks in July and October if 1) the public health crisis is ongoing or 2) the unemployment rate is rising. I’m a big fan of such automatic triggers for fiscal stimulus, rather than trusting Congress to enact subsequent stimulus measures as proves necessary (see discussion below of the Recovery Act of 2009).

State/Municipal Lifelines: State and municipal budgets are about to get absolutely walloped, likely way worse than they did during the Great Recession. The major CARES lifeline here is $150 billion in grants to state, local, and tribal governments and a $30 billion education grants fund. There’s also $25 billion for infrastructure grants, some of which will go to state and local governments. For a sense of scale, state and local budget expenditures totaled $3.1 trillion in 2019Q4 and their revenue collections totaled $2.8 trillion (both on an annualized basis). So the grant money in the CARES Act could offset a decline of up to 6.5%-7.4% in state and local government revenues, or help pay for an increase in state spending of up to 5.7%-6.5%—one or the other, not both. On this front, the CARES Act gets worse marks than the American Recovery and Reinvestment Act (ARRA) of 2009—the largest fiscal stimulus response to ameliorate the Great Recession—despite this state fiscal relief proving woefully inadequate during the Great Recession.

ARRA provided roughly $153 billion in additional grants and Medicaid funding for states, which could have replaced either 8.0% of state and local governments’ pre-recession revenue or 7.4% of their spending. Excluding those federal transfers, state and local tax revenue fell 6.8% during the Great Recession, while spending surged 9%. And these figures understate the severity of sub-federal budget shortfalls: States were actively hiking tax rates and slashing programs as their revenue base collapsed and safety net spending automatically increased. State and municipal budget cuts and tax hikes threaten to significantly compound the economic fallout from the coronavirus, just as they continuously slowed recovery for 3.5 years after Great Recession had ended.

The Fed’s forthcoming loan/loan guarantee program, which is being backed by $454 billion from the CARES Act, is supposed to support up to $4.5 trillion in lending to businesses, states, and municipalities. There’s not enough public information about this loan facility to assess its likely efficacy, or how much non-business lending to expect. Regardless, I think Congress will need to get serious about state fiscal relief by funding a greater share of Medicaid, as we did in 2009-11, and to refocus aid to municipalities from subsidized loans to grants. State fiscal relief via Medicaid matching rates also boasts the shortest policy implementation lag of any fiscal policy: The payment infrastructure is there to instantly bolster state budget coffers with just two votes and a stroke of a pen.

Small Business Lifelines: The U.S. Treasury Department recently released the details of its new Paycheck Protection Program, which authorizes $349 billion in forgivable loans to cover payrolls and incentive employment retention. This is a great policy, and I hope there’s a ton of take-up. But if the program does take off, I’m dubious that $349 billion will cover demand for long enough, as I loosely sketched out in this post. The Economist recently estimated that the program could cover compensation for at-risk workers for up to seven weeks. Regardless, I hope Congress is willing to satiate unlimited take-up so long as the pandemic pause must persist. And if take-up languishes, Congress will need to go back to the drawing board stat. (Federally subsidized mortgage refinancing programs struggled with take-up during the Great Recession, but we never revisited the issue.)

Zooming Back Out: The Committee for a Responsible Federal Budget’s budgetary analysis of the CARES Act suggests the price tag will total $2.27 trillion. To put that in perspective, U.S. economic output was $21.7 trillion in 2019Q4 (at an annualized rate), so the cost of the stimulus bill is equivalent to 10.5% of annualized U.S. GDP. Even netting out the loan/loan-guarantee fund and misc. business tax write-offs (provisions furthest from traditional Keynesian stimulus), the CARES Act totals $1.5 trillion, or 7.1% of GDP. That’s not chump change. But again I don’t think it will be enough, particularly for the three lifelines discussed above.

To put that overall price tag of the CARES Act in perspective, ARRA was initially estimated at a $787 billion price tag, amounting to 5.4% of U.S. GDP as of the quarter before its enactment.**** ARRA was effectively spread out across 2009-11, whereas the CARES Act will be heavily concentrated in 2020, so this is undoubtedly a larger near-term fiscal response. On the other hand, ARRA was way too small, which should have been obvious to policymakers in 2008-09, and was painfully obvious in 20/20 hindsight. Monetary policy remained stuck at the zero-lower bound until prematurely lifting off in December 2015, and the U.S. labor market had not fully recovered within a decade of the Great Recession’s onset. ARRA should serve as a painful reminder that it’s better to err on the side of bolder when it comes to U.S. fiscal policy: The risks from overshooting vs. undershooting are asymmetric, and much graver from undershooting.

More importantly, this isn’t a question of how much money we throw at the fallout from the pandemic. First and foremost it’s a question of providing all necessary resources to the public health response. And it’s a question of throwing adequate, sensible lifelines to those people, businesses, and sectors adversely affected by the pandemic pause required for the public health response. Neither the framing of the CARES Act as “Phase Three” stimulus (its predecessors were paltry) nor the initial discussion of “Phase Four” measures bode well on this front… but I’d be more than happy for Congress to throw another $2 trillion at infrastructure when inflation-adjusted U.S. Treasury rates are negative. Related suggested reading:

• Vox (3/26/20): The $2.2 trillion stimulus can’t be the last thing Congress does on coronavirus by Dylan Matthews

*See this EPI report by Josh Bivens for a great overview of methodologies for estimating GDP and employment responses to fiscal policies.

**As a rule of thumb, the U.S. unemployment rate falls about 0.4 percentage points for every 1% increase in output growth (a relationship known as “Okun’s law,” see pp. 180-181 in Blanchard’s Macroeconomics 7th Ed textbook).

***This BOTE calculation for 2020Q2 assumes 100% of the checks and safety net spending are distributed in between April and June, and that 75% of the four-month unemployment benefits are distributed between April and June.

****ARRA’s price tag was later revised up to $840 billion, or 5.7% of GDP. The price tag of the CARES Act will almost surely be revised up as economic forecasts used to ballpark mandatory spending, such as unemployment benefits, prove overly optimistic.