The good and the bad in the government’s stimulus plans

The packages passed by Congress are a double-edged sword

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(Collegian file photo)

By Arnav Mehra, Collegian Columnist

In 2008, countries all over the world suffered from an incredibly vicious recession. In the United States alone, the immediate effects were disastrous — 8.7 million people lost their jobs. But so were the long-term ones: income inequality worsened, fertility rates dropped and young people struggled to find employment for many years after the recession.

In 2020, we again suffer from an economic crisis caused by the COVID-19 pandemic. It is far more sinister than its predecessor — in merely four weeks, a whopping 22 million people have filed for unemployment claims, two and a half times more than the unemployed in 2008. The catastrophe caused by the virus has not only infected the hospitality and reality sectors, but has metastasized to all sections of the economy: approximately 3.4 million business jobs like architects, lawyers and consultants have vanished.

The U.S. government has acted promptly to address its mistakes, passing legislation like the CARES act, a two trillion dollar package providing aid to individuals, small businesses, big corporations and state and local governments. While Congress has put in a copious amount of monetary resources, not all these efforts have had an equal effect. Some provide incredible relief to many Americans, but many others do little to improve the stuttering economy.

Let’s first start with measures intended to help individuals. Under the CARES legislation, many Americans making up to $75,000 will receive a $1,200 stimulus check and a $500 payment for each child, with incomes o $75,000 getting reduced payments. Moreover, in a massive expansion of unemployment benefits, each unemployed individuals will receive a $600 check for four months on top of state benefits. Many of these benefits will first impact people in New York, perhaps the hardest-hit state in the country. As senate minority leader Chuck Schumer astutely noted, for many individuals the “federal government will pay your salary, your full salary for now four months,” empowering some Americans to remain afloat during these difficult times. Due to the significant funds the government is providing to vulnerable workers, I believe that this part of the government’s stimulus scheme is incredibly beneficial and commendable.

Despite this, the ways the government is dealing with small businesses is not adequate. Although the government pumped $370 billion in loans for small businesses under the CARES act, these funds have already been extinguished, leaving many small businesses struggling to pay their workers. Democrats and Republicans are trying to negotiate another $250 billion into the program. Even if they do manage to get it through, broader problems will remain that will prevent the money from being used efficiently. Notably, without any guidance from the government, banks handling the loans prioritize giving credit to firms who already have a relationship with them. It is imperative for Congress to pass regulations alongside any new funding stating that banks cannot favor certain groups based on previous relationships.

Another key issue with the stimulus plan is the government’s unregulated bailouts of many big corporations:  $500 billion tax-payer dollars are already being handed over to them, and the Federal Reserve has been authorized to deploy four trillion dollars in loans, much of which was used in 2008 to save massive corporations. The issue does not lie with bailing out big corporations themselves —  they are critical to the economy because they hire copious American workers, and bailout loans turned out to be a profit for the government after the previous recession. Rather, the problem lies with the sheer mismanagement of funds that these corporations do. For example, since the years following the recession when airlines were bailed out, these companies spent a whopping 96 percent of their cash profits on buying stock buybacks, in order to make both their investors and executives, who are often paid in shares, much richer. These funds could be easily spent on investing to improve airline quality or boosting stagnant worker wages. Concerningly, Trump has recently removed the government watchdog supervising the bailouts, which makes it easy for companies to further abuse these funds. By investing in such companies whose main aim is to only benefit shareholders and executives, and not improve the business itself, the government is only further promoting inefficient companies. To alleviate this issue, the government must pass regulations preventing companies from engaging in buy-backs.

The CARES act is a historical, unprecedented act that the American people should be somewhat proud of: it shows the government has better understood that markets are incapable of healing a recession. The fundamental structural issues with the legislation, however, prevent it from doing its job correctly. That is why the government must act quickly and fix these obstacles as soon as possible. Otherwise, the government won’t be able to care for the American people after all.

Arnav Mehra is a Collegian columnist and can be reached at [email protected]