Impact of the Novel Coronavirus on the U.S. Economy
Gross Domestic Product, Consumer Price Index, and the unemployment rate are important indicators as to the overall health of an economy. While these numbers naturally fluctuate and their ideal values shift over time, most economists agree that the current numbers to strive for are a GDP growth rate of roughly 3%, a CPI of 100 (indicating no inflation), and an unemployment rate of 5%. Unfortunately, due to the outbreak of COVID-19 and the huge amounts of closures that have occurred, the U.S. economy fell into a recession, with a high level of unemployment. At its peak in April of 2020, the unemployment rate had reached 14.7%; by April of 2021 it has fallen to only 6.0%. While this number has improved and remained steady over the last few months, it is still higher than pre-COVID rates. GDP is currently rising at a rate of 4.1% per year, while the current CPI annual percent change is 1.7%. While on the surface these statistics may not be alarming, the recession brought about by the pandemic has intimately affected people’s lives. Over the course of 2020, 20.6 million jobs were lost in the U.S., the highest number of jobs lost in one year that the U.S. has seen since the Great Depression of the 1930s. Many small businesses are closing permanently because they are unable to stay afloat when they cannot serve dine-in meals or must do so at limited capacity. Black-owned small businesses in particular are suffering the impacts of COVID-19 disproportionally. Many are not receiving stimulus checks and loans that they should have qualified for, therefore resulting in them not getting the government aid that they should be receiving. Large corporations that are better prepared to weather the pandemic, such as Google and Apple, are receiving a large amount of money from stimulus checks, thereby taking that money away from the businesses that really need it. Even now, as vaccines become available, difficulties remain in reopening the states so that our economy can flourish again. Vaccine distribution is unequal, with states receiving different quantities not correlating to the state’s population, and vaccine production and distribution is costly. Despite the large demand for vaccinations, large quantities of the vaccine are being discarded because they expired before they were used (as people did not show up to their vaccination appointments). All of these inequities stand in the way of our economy making a full recovery.
Explanation: Due to the pandemic and businesses being forced to shut down, many people have lost jobs as their companies are earning only a fraction of the income that they once earned. This inefficiency led to a recession, as shown in the above graph, where the U.S. economy is operating below full employment.
Under the Trump Administration, the CARES (Coronavirus Aid, Relief, and Economic Security) Act was passed to help alleviate the effects of the pandemic on the U.S. economy. The act was government spending in the form of a $2.2 trillion stimulus package intended to increase aggregate demand and therefore bring the economy out of the recession. One component of the act was that it gave stimulus checks to the businesses that have been the most affected by the pandemic, such as restaurants. The act also includes a Paycheck Protection Program that offers loans to small businesses. If the businesses retain their employees (rather than laying them off due to financial struggles), the businesses do not have to pay back the money that they borrowed. This program is meant to give businesses an incentive to retain their workers, which in turn provides additional job security and hopefully prevents more people from losing their jobs in this difficult season. The act also froze student loan payments until September 30, 2021 as another way to help those struggling financially due to the pandemic. The CARES Act added an additional $600 per person per week to unemployment insurance under the condition that the state government cooperates with the federal government. Unfortunately, not all states have done so, resulting in their citizens not receiving this additional support.
Under the Biden Administration, the American Rescue Act of 2021 was passed. This act increased federal funding for SNAP (the U.S. food stamps program) and extended unemployment benefits. The act also makes student loans tax-free through 2025, which will affect the finances of many incoming college students. The child tax credit has also increased $2,000 per child to $3,600 per child, a substantial increase. Medicaid and the Children’s Health Insurance Program (CHIP) ensure that the vaccine is free so that finances do not pose a barrier to people getting vaccinated.
I believe that the loans to small businesses will be effective because they can help support those businesses through these times of struggle. In addition, since the businesses don’t have to pay back the loans if they retain their employees, there is incentive not to lay off any workers. This will hopefully help reduce the number of people collecting unemployment benefits and might help to provide some job confidence. However, I do not believe that the stimulus checks that go to everyone making below $75,000 are very effective. These checks do not take into account how COVID has affected those people’s financial situations. For example, my grandparents qualified and got a check in the mail, but they didn’t need the money and COVID hasn’t affected their finances at all. This indiscriminate handing out of money might result in the government overspending or spending unwisely, and it is not targeted support.
Explanation: In order to finance programs such as the increased child tax credit, the $600 increase in unemployment insurance, and the stimulus checks, the government will have to borrow money. This will increase the demand for loanable funds, shifting the aggregate demand curve to the right, which will result in higher interest rates. These higher interest rates could lead to crowding out (as businesses and consumers do not want to pay high interest rates) and the net exports effect (where the dollar appreciates and U.S. imports rise while exports fall), which would partially counteract the beneficial effects of the stimulus.
Explanation: The U.S. government’s expansionary fiscal policy in the form of increased government spending (CARES and American Rescue Plan Acts) aim to increase demand in the economy. As people have more money in their pockets, they will be able to spend more, hopefully bringing the economy back into equilibrium.
The Federal Reserve Bank has taken numerous actions to combat the effects of the recession. The Federal Funds Rate has decreased by 1.5% (now at 0%-0.25%) in an attempt to reduce the interest rates of other loans, such as mortgages and student loans. However, this will also result in decreased interest rates for people saving money, so this policy could end up hurting some people. The Fed has also pledged that interest rates will remain low until the U.S. economy’s inflation rate drops to only 2%. In March of 2020, the Fed pledged to purchase at least $500 billion in Treasury securities and $200 billion in “government-guaranteed mortgage-backed securities.” Through buying bonds, the Fed in injecting new money into the economy, thereby increasing the money supply and hopefully reducing the effects of the recession. Through these policies, the amount of bonds held by the Fed has grown from $3.9 trillion worth to $6.6 trillion worth. The Fed has also relaunched the Money Market Mutual Fund Liquidity Facility (MMLF), which loans money to banks, and has expanded repurpose agreement operations (making it easier for firms to take out short-term loans). The discount rate, or the rate at which the Fed loans money to other banks, has been lowered from 2.25% to 0.25%, a rate lower than it was during the 2008 recession. The duration of the loans have been extended from overnight to 90 days. The Fed has eliminated the reserve requirement so that banks are able to lend out more money, thus increasing the money multiplier and by extension the money supply. The Fed is allowing banks to lend money from their regulatory capital, and the Primary Market Corporate Credit Facility (PMCCF) was established to allow the Fed to loan money directly to large corporations with interest payments able to be deferred up to six months. The Secondary Market Corporate Credit Facility (SMCCF) was also established to allow the Fed to purchase existing corporate bonds.
I believe that eliminating the reserve requirement will help the economy by allowing banks to lend out more money, which will enable the money supply to increase by a larger amount. This will help pull us out of the recession because more money in circulation will allow loans to be more widely available, thus decreasing interest rates for consumers. This should help relieve the financial burden that many U.S. citizens are facing. Conversely, I think that the Fed’s decision to loan money directly to corporations may not make a big impact on the overall health of the economy. Since large corporations have the necessary resources to weather the pandemic, this policy will only help if those corporations use the Fed’s leniency to invest or otherwise contribute to the economy. Unfortunately, the businesses hit the hardest by the pandemic are small, family-owned businesses, and these businesses are not part of the PMCCF agreement.
Explanation: The Fed’s efforts to buy bonds, eliminate the reserve requirement, and decrease the discount rate have all been a part of an expansionary monetary policy. This has resulted in an increase in the money supply as new cash enters the market, a larger proportion of bank holdings can be loaned out, and it is cheaper for banks to borrow money.
Explanation: The current pandemic plunged the U.S. economy into a recession, resulting in high levels of unemployment. The Fed’s efforts to increase the money supply resulted in lowered interest rates, which encourages investment (it is cheaper to take out loans). As such, the demand for purchases requiring loans will increase, hopefully bringing the economy back into equilibrium.
Overall, the policies that aim to temporarily support small businesses and that protect jobs/provide unemployment benefits seem the most likely to succeed. Since the recession is caused primarily by the immense number of business closures brought about by COVID-19, simply giving people more money will not necessarily enable them to spend it. The economy cannot completely recover until it reopens, so I believe that the best policies to take in the interim are the ones designed to keep us afloat until then. However, one potential problem with this approach is that loan forgiveness and incentives to retain workers are not a guarantee that businesses will be able to survive (since each business is different, they need different funds to support themselves, and even with incentives to retain workers they may decide that they are better off laying people off). Without being able to control how small businesses respond to aid, the government cannot insure the success of these policies, but I still believe that working to support businesses in this time is the best method to help our economy recover in the long run.