CARES Act and COVID-19: Analyzing Economic Impacts on Businesses, Workers, and Households

On January 7th, 2020, researchers from China discovered a new virus, severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), which causes the disease COVID-19. The virus was discovered in Wuhan, China. The first case of someone contracting COVID-19 after traveling from Wuhan was reported on 21st January in the United States. The Centers for Disease Control and Prevention (CDC) confirmed the first possible instance of community transmission in the USA by early February. By this time, the S&P 500 had started a sharp sell-off that continued to March 23rd, thereby losing 33.9% of its value compared to its peak before the outbreak (Schroeter, 2020).

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Trump's administration intervened immediately by putting up nonpharmaceutical intervention policies to control the virus. On January 31st, travel restrictions were imposed on China, and the restrictions were expanded to several other countries by mid-March. Social distancing measures were taken, including closing schools, group gatherings were banned, and the closing of restaurants and bars. By March 23rd, these statewide social distancing measures had affected 90% of the total population. By early April, 90% of the states had issued an order for people to stay home.

By studying the economic impacts of past pandemics, we learn that there are three significant ways pandemics affect the economy, increased mortality rate, absenteeism and illness, and the behavior of avoidance to reduce infection. These three channels reduce the labor force size and fasten productivity and demand. The US economy has experienced extremely large shocks to both demand and supply since the outbreak. From the supply view, several businesses were closed down due to the social distancing measures, or some voluntarily closed to stop the spread of COVID-19 and flatten the curve. The few that remained open could not operate normally because they faced several disruptions. On the demand side, several consumers had been forced to stay home, or they limited their movement voluntarily to avoid contracting the disease. Consumers also changed their demand method by increasing home-cooked meals that replaced restaurant foods, which increased their demand for washing and cleaning supplies.

The downturn of demand began in early March in some states even before the lockdown, and it reached its peak by the end of April. The daily credit card spending decreased in March, and it only recovered to above 0% slightly in June. Seat dinners and traffic congestion were significantly reduced by over 20% when restaurants were limited, and stay-at-home measures were implemented. Similarly, the weekly occupancy of hotels had decreased by 56% in the first few weeks of the outbreak.

There was a decrease in the number of open small businesses on the supply side, the number of hours worked by employees, and the number of employees working hourly in March and April. After stay-at-home, measures were put in place in mid-March, the number of working employees reduced from 15% below working conditions to 55%-60% below normal working conditions. As of July 13, employees working using home increased to 25%-30% below normal working conditions; this was after states had begun lifting their stay-at-home measures. The hardest hit was business picking up again, such as employees getting back to work, restaurants opening, and trying to make customers again. People were traveling, staying in hotels, and generally traveling again.

While the pandemic's long-term effects are uncertain depending on how the disease will progress, the initial negative shock was unexpected. In March, people lost their jobs due to businesses' closure starting from 282,000 the week of 14th March to 6.9 million about two weeks later. Weekly UI claims were high but decreased steadily through the next few months. On May 9th, the number of individuals receiving UI benefits peaked at 24.9 million, representing more than 16% of the 155 million non-self-employed force of civilian labor reported in February. These unemployment numbers do not include those receiving assistance through Pandemic Unemployment Assistance (PUA) in the Act of CARES. 80.6% increase in unemployment from February to May was due to temporary layoffs.

The quarterly gross domestic product(GDP) fell at an annual rate of 5%, and investors predict that the virus's containment measures have dealt the economy a huge blow. Estimates from the Organization for Economic Cooperation and Development (OECD) show that the COVID-19 containment measures will reduce the USA's GDP by 7.3% in 2020 in case a second wave does not occur or by 8.5% if the second wave occurs.

Stock market valuations represent the current value of the expected future net earnings of firms. The S&P 500 index reaction to the CARES Act news gives the implication that the markets expected the law to have a significant impact on the US economy. A decline in the trend began due to the outbreak of COVID-19, and a reversal was noted on the day Congress started finalizing the CARES Act. The market capitalization value of the S&P 500 went up by 13.3% between the 23rd and 27th of March, and this was the week when the bill was passed.

The spread of COVID-19 had a significant impact on unemployment. From March, when the lockdown was imposed on states, the level of unemployment kept rising unexpectedly. Evidence of a collapse of the labor market was seen after March's job report. In April, the unemployment rate increased to 14.7%, however in May, it decreased to 13.3% with the reopening of the economy and businesses calling back workers. The CARES Act was significant in helping workers remain connected to firms and, in turn, helped put those firms in a position to hire back workers as the lockdown measures were lifted. Research by Autor et al. (2020) using payroll data from ADP shows that the PPP saved between 1.4 and 3.2 million jobs through the first week of June.

In any crisis, a big concern impacts businesses' bankruptcies and failures, leading to a higher level of unemployment. The increase in unemployment fuels default because demand and income fall; some companies close, and they also lay off workers; however, layoffs also help businesses stay afloat. PPP's role in enabling businesses to stay afloat is by giving companies loans that they can waive, allowing them to meet their expenses as they face a demand shock. This liquidity enables several businesses to sustain themselves instead of filing for bankruptcy. Other elements of the CARES Act that might have helped companies avoid bankruptcy are providing liquidity for small businesses and sole proprietors by claiming expanded unemployment insurance. Their employees would also be able to claim developed UI if they were placed on temporary layoffs. The loans enable businesses to defer expenses such as mortgage and rental.

COVID-19 had a significant impact on low-income households. CARES Act expanded insurance benefits for the unemployed and economic impact payments, which provided direct income to Americans. This is especially significant to families with low incomes and a low capacity to borrow or reduce consumption. It was estimated by Parolin, Curran, and Wimer(2020) that the CARES Act would lower the poverty rate by 11.3% if households were given access to these benefits. The rise in income in April under the CARES Act was due to the Economic Impact Payments, while the increased revenue in May is a result of the expanded UI.

Congress put across various sources of cash support, which targeted the most vulnerable and those who experienced layoffs due to the lockdown; this was to ensure liquidity in households during the crisis. They were transferred to households directly in the form of an expanded employment insurance benefit, an extended time duration over which these benefits could be claimed, and economic impact payments. PPP also helps businesses with cash support to pay rent and other expenses and provides incentives for companies to retain their employees. Unemployment decreased from 14.7% in April to 11.1% in June, as businesses reopened. There has also been a significant decline in the number of workers claiming UI benefits.

The CARES Act authorized the treasury department to make Economic Impact Payments to eligible individuals, and adults received up to $1200 and dependent children up to $500. Families making less than $150000 a year with two adults and two dependent children would receive $3400. Internal Revenue Service(IRS) reported that it sent out close to $267 billion to 159 million Americans. Expanded unemployment insurance, Mortgage forbearance, and Credit, protection for student loan borrowers, federal waivers for welfare programs, and paid medical and family leave are some of the impacts of the CARES Act on households, income, and jobs, and on businesses and the financial sector.

Conclusion

In conclusion, the American government has equipped citizens with resources to maintain their livelihoods. Over 6 million Americans filed for unemployment during the beginning of the pandemic, therefore affecting the American economy. The surges of liquidity and replacement of income targeted the most vulnerable income groups.

References

Barbier, E. B. (2020). Greening the post-pandemic recovery in the G20. Environmental and Resource Economics, 76(4), 685-703.

Hafiz, H., Oei, S. Y., Ring, D. M., & Shnitser, N. (2020). Regulating in pandemic: evaluating economic and financial policy responses to the coronavirus crisis. Boston College Law School Legal Studies Research Paper, (527).

Miles, D., Stedman, M., & Heald, A. (2020). Living with COVID-19: balancing costs against benefits in the face of the virus. National Institute Economic Review, 253, R60-R76.

Schroeter, John. Brainwashed : Cutting Through the COVID Confusion, John August Media, LLC, 2020. ProQuest Ebook Central, https://ebookcentral-proquest-com.ezproxy.liberty.edu/lib/liberty/detail.action?docID=6372145