March 27, 2020

How Can Fiscal Policy Help Address a Coronavirus-Induced Recession?

The recent outbreak of COVID-19 has caused a severe public health crisis as well as substantial economic disruption for every American. Policymakers have been considering legislation to help manage the pandemic and mitigate the economic burden on families and businesses. Below is a quick recap of legislation that has been enacted.

Legislative Actions to Date

As an initial response, policymakers enacted legislation in early March that provided $8.3 billion in emergency funding for public health agencies and coronavirus vaccine research. That bill appropriated an additional $7.8 billion in discretionary funding to federal, state, and local health agencies and authorized another $500 million in mandatory spending through a change in Medicare.

On March 18, the Families First Coronavirus Response Act was enacted to provide economic support to those in need. That legislation includes a number of key components, including:

  • Enhancing unemployment insurance benefits
  • Increasing federal Medicaid and food-security spending
  • Requiring certain employers to provide paid sick leave as well as family and medical leave (and expanding tax credits for those employers to offset the cost of providing such leave)
  • Providing free coverage for coronavirus testing under government health programs

As a follow-up, lawmakers enacted a $2 trillion stimulus package on March 27 to address the near-term economic impact the virus is having on families and businesses. Some of the key items in the legislation include:

  • Direct payments to taxpayers. Taxpayers with annual incomes up to $75,000 (or $150,000 for married couples) will receive payments of $1,200; that payment amount will gradually phase out for higher-income earners with a cap at an annual salary of $99,000 (or $198,000 for married couples). Families would also receive an additional $500 per child. The Joint Committee on Taxation estimates that this provision would require nearly $300 billion in funding.
  • Further expansion of unemployment benefits. Such benefits would be significantly expanded under the legislation — extending jobless insurance by 13 weeks, boosting unemployment benefits by up to $600 per week for four months, and expanding eligibility requirements to include more categories of workers.
  • Economic support for small businesses. Totaling about $380 billion, that support largely comes in the form of federally guaranteed loans available through June 30. Additionally, portions of the loans spent on payroll, rent, or utilities are eligible for forgiveness.
  • Financial assistance for companies in need. Approximately $500 billion in loans will be used to assist distressed companies. Of that sum, about $450 billion will support loans to businesses, states, and municipalities through a new Federal Reserve lending facility.
  • Federal aid to hospital and healthcare providers. About $150 billion would be provided to help hospitals, community health centers, and other healthcare providers prepare for and respond to the pandemic.
  • Various tax incentives. Businesses would be allowed to defer payroll taxes, which fund Social Security and Medicare; a number of other tax benefits would also be provided.

Will More Support be Needed?

While the legislation enacted thus far may help mitigate the economic burden from COVID-19, many analysts believe that further support may be needed.

As the Brookings Institution notes, fiscal policy can be used now to cushion the economic downturn as much as possible. However, they suggest it should also aim to set the appropriate conditions for the economy to recover once the restrictions on economic activity are removed. As such, multiple fiscal packages may be needed. Brookings notes that after an initial stimulus is enacted, the United States could allow subsequent payments to those in need to vary with health and economic conditions over time.

If major economic disruptions continue in the coming months and further support is needed, the Progressive Policy Institute (PPI) notes that future stimulus should be structured in a way that is directly tied to the health of the U.S. economy. That structure, according to PPI, should include expanding automatic stabilizers — features of the tax code and social safety net that offset fluctuations in economic activity, causing taxes to fall or federal spending to rise during an economic downturn — as those features are more responsive to changes in economic conditions.

Furthermore, scholars at the American Enterprise Institute (AEI) note that providing support to businesses, especially small- and mid-size businesses, will also be crucial. To allow for a sufficient economic recovery, AEI suggests that the United States cannot allow such businesses to shutter. Not only would many Americans lose their jobs, but it would also take a long time for new businesses to form, raise capital, and hire new workers.

The Center for American Progress suggests that the United States can learn from the economic measures taken by other countries to inform current and future responses. Specifically, such responses should involve prioritizing support to those who cannot work, providing relief to keep small- and mid-size businesses intact, suspending or reducing tax and housing payment obligations to avoid defaults, and providing direct support to crucial sectors in need such as healthcare.

Whether a future response is needed will be an ongoing conversation; such plans are yet to be developed and the policy landscape remains highly fluid. There is a critical role for the federal government in responding to this unprecedented situation, which includes complex and unique threats to our economy and public health.

Related: What is SNAP? An Overview of the Largest Federal Anti-Hunger Program

Image credit: Photo by Cindy Ord / Getty Images


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