Episode 56: The CARES Act Explained

Welcome to the Workplace, a podcast by Cal Chamber. I'm Alan Zarenberg, President and CEO of the California Chamber of Commerce. And today on the podcast, we'll be discussing the $2.2 trillion CARES Act. That's a coronavirus Aid, Relief and Economic Security act that was just signed by the President and passed by Congress and what it means for businesses and employees during the coronavirus crisis. Joining me to work through the details and also the broad economic consequences is Dr. Chris Thornberg, founding partner of Beacon Economics. Welcome, Chris. And Chris was on our show three weeks ago and a lot has certainly happened in the last three weeks.

Absolutely, Alan, and it's great to be back with you so quickly. It certainly has been an interesting few weeks.

My firm, like many forecast organizations, are just scrambling day by day to get and just understand what's happening out there. And you know, I think there's a lot more clarity today than it was a few weeks ago. Obviously, we are in the midst right now, particularly here in California, although much of the nation is rushing behind us. But we are in the midst of a truly historic public health economic lockdown, if you will.

To control the virus, to not let it get out of out of control. But of course, as hard as we're working, and I think particularly here in this state, we'll find out successfully as we're working to get in front of the virus. We're of course also getting a glimpse of the significant economic consequences of that public health mandate. Obviously yesterday we saw the unemployment insurance numbers, over 3 million initial claims dwarfing any previous record. We've never seen anything quite like that hit the U.S. economy. And of course, it's jarring. It's jarring to everybody. Now, what we have been sort of thinking on here at Beacon Economics about what this all means for the economy, it's probably worse than you think and better than you think. Same time it's worse. Clearly the shutdown is going to have a profound impact on the second quarter GDP where it ends up at negative 5, negative 8%. No one's quite clear. But then go the next step. Understand that this is not the Great Recession. We're not talking about a permanent shift in the structure of the economy, millions of people permanently losing their jobs. This is a short term disruption in economic flows driven by this public health mandate. And when that mandate is removed, which hopefully it can be in the next two months, you're going to see people quickly get back to work, quickly go back out to restaurants. In fact, by that point in time, there's Going to be a lot of pent up demand and we expect a very strong third quarter which will make up for much of the damage that happened in the second quarter. The important thing here is that we're not only of course going to have that balance, but we have all this government intervention now too. Chris.

So let's talk about that for a minute on both sides of the aisle. And I think when you spoke three weeks ago, you know, you told people to prepare for things like this, but we didn't know at that time that government was going to shut, certainly here in California, shut a lot of businesses down with a shelter in place, unless you're a truly essential business. And we were able to get that broadened to a lot of businesses because they do want to work. And I think we see here, and maybe you can comment a little bit, this started out as what you're talking about is a macro with this shelter in place for a lot of people, whether it be here, New York, other states, we have individual businesses that are impacted. That has led to this jump in unemployment claims that wasn't apparent three weeks ago. And so how do you feel like that's going to manifest itself now in the future here in the economy? And even though we can, you can foresee a strong third quarter, what do we need to do to get through that? And how does this cares act help us all get through that?

Yeah, great, great questions. And that's exactly right. That's the way, that's the way to think about that. We have to get to the third quarter and the key is to understand the fundamentals of the economy which were good when this situation happened and they will be good again relatively rapidly. The question is, the longer we're shut down, obviously there's going to be some stress in certain parts of the system. Households near the edge may be cut off from, from their source of income. That can lead to more dramatic long term consequences. Businesses on the edge can also get pushed maybe past the point of economic breakdown. And we want, as a society, what we need to do is get in front of that problem by providing those households, those businesses, the support they need to get from here to there so they can come back in the third quarter when demand returns after the mandate. And I think in some ways this bill is actually a good step in that direction. In fact, I would argue in many ways just the overarching aspect of this, a $2.2 trillion plan is extraordinary, particularly given the speed at which it's happened. It's important to remember that Much of the fiscal stimulus plans that went into place during the Great Recession came in really well after the recession had actually begun. And they were heavily fought over in many different ways. And we really ended up with a muddled package here. We have candidly less of a long run issue for the US Economy, but you have a very, very rapid response in a truly dramatic fashion, over 2 trillion, as you noted.

Now, with that in mind, we know that's a big positive and it's going to help a lot get us through the next quarter to get us to that bounce in the third quarter. But when you start digging into the details, I'll tell you this, there's some things here that are really good. There's some things here we just don't know. And then there's some stuff here that's really not good at all.

Well, go ahead. Why don't you elaborate a little bit on those?

Yeah, sure. For example, let's talk about just basic support for households. One of the things they're doing is dramatically expanding the unemployment insurance program. They're expanding it to people who would might not typically get it. They're expanding the benefits up to an extra $600 per week for up to four months, which is big bump for those people who are getting laid off. You may get a level of support closer to the wage you lost than you would have under just a traditional unemployment insurance program. This is great, right? I mean, this is exactly the kind of supports the people who are being put on these job furloughs need help. They need to be able to put food on the table, pay your utilities to get to the point when the job comes back. Fantastic. Now, the other part of this was one I'm not so fond of. And it's probably one of the most dramatic things in here. And that, of course, is this $1,200 check going out to functionally every American. $2,400. You're married. And of course, an extra $600 per kid or something like that. This, to me, completely misses the mark. You're talking about a situation where they're lobbying money in Americans who candidly don't need it. I mean, Alan, you're going to be working through this crisis. I'm going to be working through this crisis. You and I may be eligible to get this check. That doesn't make any sense because remember, the mandate that's in place is trying to keep us from spending money to give us more money to spend. When the public health mandate says don't spend money, you're kind of pushing on a string, you're not really going to accomplish anything. And of course, with that in mind, you go to the other side of the fence and, you know, take homeless people because they're not involved in the tax system, they're not going to get anything. So this one really misses the mark for me. It's dramatic, but I think the vast majority of this cash isn't really going to help people. So, you know, like I said, a big hit on one side, not so much on the other.

So in terms of, I think we talked about this as sort of a bridge to a time when we don't have a health crisis where people have to be quarantined or isolated or stay in place. And what. So what do you think? So you said the government acted quickly. Is that a lesson we Learned from the 2008 recession when the government sort of sat on its hands and didn't know exactly what to do and led to a liquidity crisis?

Absolutely. And you know, that's, I mean, that's exactly right. Right. I mean, we waffled and waffled. But I'll tell you, you know, the difference between then and now, there's a couple things here. Sure, there's some lessons learned. But it's also worth noting that the way the Great Recession came on, it was much larger but much slower than the situation we're dealing with right now. At no point during the Great Recession did we have initial claims for unemployment insurance, anything over, you know, half a million six hundred thousand, nothing like the number we just saw. So in a very real sense, I mean, that just the dramatic headlines here, how fast, how sharp this has hit our economy, I think got people paying a little more attention in Washington, D.C. than of course, back in 2008 when candidly, even in the midst of the first couple quarters of that downturn, people were still debating whether or not we were having a recession. So it's a little different thing. But again, we're getting lots of support. We're getting it very quickly. Liquidity is another big part of this because to your point, okay, I just talked about supports for households and workers. What about the financial side of things? Well, already saw the Federal Reserve just cut rates like crazy even before the federal government. They've opened up enormous lending windows trying to stabilize the market through this giant equity market collapse. We know there's been some short run gobbing up of the credit machine, to use that metaphor, and they need to be there to backfill some short run liquidity. But the Federal Government, they can do only so much. Federal government can also do some things a little bit more directly, more so than the Federal Reserve can, because the Federal Reserve in many ways is limited to working through the banking system. One of the things that's in here, which I think is interesting and really I think is going to be a huge help is the federal government is more or less putting $500 billion into a fund that the Federal Reserve will be able to turn into about $4.5 trillion worth of short run lending. And this of course is an arms window. And it could go to businesses, but by the way, it can also go to state and local governments. You know, there's lots of issues in the financial world here. If suddenly cash dries up, everyone wants to save and you have businesses and, or governments that can't make certain short run, you know, borrowing they typically need to do that can create again a lot of stress in our economy that we don't need right now.

So when you talk about that, I mean there's a lot of things that aren't necessarily right on its face apparent. And this is an accelerator that's going to increase the economic activity through being able to borrow money. So if I can just talk about that for a minute on, on the loan side, I think we see something unique here is, is that these loans can turn, can be forgiven, they turn into grants if you maintain your payroll. Is this a good balance for both the employer and the employee and the economy?

Yeah, now that, that's a separate part by the Federal Reserve lending program that's talking about. Now this is a small business loan and grant and we're talking something on the order about $400 billion of spending. And that's exactly right. But you have to have all sorts of conditions. You have to be able to show you took a certain loss because of this and you kept your folks and this and that. But yeah, one would argue that it absolutely encourages businesses maybe to make the right decision to keep people on the payroll as they try to muscle through this is immediately putting them on the unemployment insurance roles. For me the big problem is our business is going to understand this fast enough. Are they going to be able to figure out that oh yeah, I am eligible to this, thus I'm not going to worry about laying everybody off next week. We'll see.

Right.

I mean this thing's moving fast. There are a lot of places here and there, for example, even age. So local governments, I mean, how do you go about doing that? What are the systems that need to go into place. We have to remember that the money's there, but the money coming out of the government. Well, that's a separate conversation. We may find some of this money getting into the system a little slower than we might like.

Well, the people whose businesses are not necessarily essential might be happy that people, they might be back open when everybody gets their twelve hundred dollars. So there is that too. You know, execution by the government is going to be very important to make all these things work. So, so, you know, as you talk about the complicated aspects of it for an individual business, is this something they should be consulting with their accountant, their bankers? There are ways to get through this and that's what this CARES act or this federal legislation is about, is maybe a bridge to a better economy. How should people get help? Because their individual situation may be different. They're accountants, they're bankers.

What do you think? Yeah, well, you named it, right? The CPAs that kind of do their books. Their bankers should have some sense of this. You just got the rod. And those professionals who typically work these kind of programs for you, obviously the federal bureaucracy is wide and deep and.

You'Re gonna have to figure out how to get the right forms. And of course, you know, we should note that there's lots of direct aid in here too for hospitals, for. There's actually some social support systems. Airlines are getting a nice grant to help them through this. So there's all sorts of things going on right now. And yeah, people ought to look at it.

So maybe you can wrap up here with a little bit. I mean, I think this is as you're very familiar with the political process, I'm sure for the people that voted for this, there were a few things they thought were not necessary and some things they liked. And in order to put the package together, everybody had to join together. And so in the end here, there's a lot of good things, wouldn't you say, that are going to help bridge us to a better economy?

Yes, and I'm glad they got something done and they got it done fast. And I'm pleased. Right. I guess my only thing, and not to end on a down note, but.

You know, ultimately this package is going to cost US economy probably a trillion to 2 trillion. We just don't know because a lot of us can depend on how much of it's taken and what happens with those loans and everything else, but let's say it costs a trillion. Remember, the federal government was already on schedule to borrow a trillion dollars this year before this aid package had to be put into place. And, you know, at some point in time, there's going to be a reckoning. You know, wouldn't have been nice in the midst of that good strong economy if we'd run a little bit of a surplus. When the tough time came, we actually had the slack in the system. Unfortunately, the federal government obviously is a little out of control on that front. And, you know, we're going to come away with this with a lot more debt than we went into it with. And I think that that's something we really have to start paying attention to.

Yeah, I think that's, you know, based on a couple of historical events. The Great Depression and 90 years ago, the. The recession 12 years ago. I think you made a very good point there that in both of them, the government didn't act immediately. And one of the downsides here, and the good side is the government acted immediately.

We'll see how they can execute.

But when you do that, you. You're going to run the risk, obviously, of not considering all the consequences.

Absolutely.

Your perspective is very well taken and I think for everybody to know, and I think that's really what people need to know is, you know, when they, when they do get their check or when they're, most importantly, when they're a business here, how do they proceed? How do they make this successful? And I think, as your point is, very much so, how do they look at all this as a bridge to a better economy come third quarter of 2020?

Yeah, I mean, listen, the government's doing a lot of things here. It's not quite as grim as you're hearing in the standard hysterical press. It's going to be a rough quarter, but, you know, we can get back real quick. So hang tight. Don't let it get to you. We're going to get there.

Well, that's great advice and thanks for joining us, everyone. On the workplace, Stay up to date on the most critical issues for employers during the COVID 1919 crisis and comment. Share and subscribe to Cow Chambers podcast by visiting Cowchamber.