April 17, 2020 Reading Time: 5 minutes

The CARES Act, a $2 trillion expenditure package aimed at mitigating the damage to the economy from COVID-19 and the corresponding lockdown, is a mixed bag. Some of its programs support a speedy recovery. Others seem likely to drag it out.

Consider the Paycheck Protection Program (PPP). The PPP offers $349 billion in credit to small businesses, typically with 500 or fewer employees. Loan recipients will not have to make any payments for six months. Moreover, if (1) at least 75 percent of the loan is spent on payroll, (2) the rest of the loan is spent on mortgage interest, rent, or utilities, and (3) the business maintains its pre-pandemic personnel at full salary, then the balance of the loan is forgiven.

The PPP is intended to preserve employment relationships and prevent viable small businesses from failing. The local sushi bar might have enough cash on hand to make rent for a couple months if it sacks its wait staff. But, when the pandemic ends, it will take time to rehire old employees and replace those who have moved on. 

Similarly, if a construction company goes under because its revenues have plummeted in the last month, it will take time for the labor and equipment to find their way to other firms. The costly reallocation process turns a V-shaped recession, where output bounces back as quickly as it plummeted, into a U-shaped recession, where output remains low for a long time before a recovery sets in.

By providing forgivable loans to small businesses who maintain personnel, however, the PPP makes it more likely that these businesses will be in place and well-staffed to ramp up production as soon as it is deemed safe to do so.

The recovery-promoting effects of the PPP will be undermined, to some extent, by other policies in the CARES Act. Consider the changes made to unemployment benefits, which have been extended by 13 weeks and ratcheted up by $600 per week through July.

Unemployment benefits vary by state. But, in all but twelve states, one is eligible to collect unemployment benefits for 26 weeks (6 months). The extension under the CARES Act pushes that out to 39 weeks (9 months). The maximum duration in the remaining twelve states is presented in Table 1.



The extension alone is unlikely to matter much, as most people return to work much sooner than that. From 1994 to 2010, Henry S. Farber and Robert Valletta report, only 20.4% of those eligible for unemployment benefits remained unemployed for more than a month; 12.1% for more than two months; 7.7% for more than three months; 5.1% for more than four months; 3.4% for more than five months; and 2.2% for more than six months. 

From 2008 to 2010, duration increased. But, even then, only 4.2% of those eligible for unemployment benefits remained unemployed for more than six months. Farber and Valletta estimate that extending benefits in response to the Great Recession increased the duration of those who would have otherwise been unemployed for at least six months by a mere 0.09 months (2.7 days).

Why do most people return to work so quickly? They do so, in part, because unemployment benefits are not very generous. Again, benefits vary from state to state, but most states pay between 40 and 60% of prior earnings, subject to state specific minimums and maximum.

Increasing unemployment benefits by $600 per week through July is far from trivial. To come up with a conservative back-of-the envelope estimate for each state, let’s assume everyone collecting unemployment benefits today would have otherwise received their state minimum. 

Prior to the extension, state minimums ranged from $5 (Hawaii) to $178 (Washington) per week. With the extension, those minimums increase to $605 (Hawaii) and $778 (Washington) per week. That is equivalent to a $15.13 (Hawaii) and $19.45 (Washington) hourly wage for someone working (or, in this case, not working) 40 hours per week. Similar estimates for each state are presented in Table 2 alongside the current minimum wage. 


DIST. OF COLUMBIA$50$600$650$16.25$14.00$2.25
NEW HAMPSHIRE$32$600$632$15.80$7.25$8.55
NEW JERSEY$103$600$703$17.58$11.00$6.58
NEW MEXICO$82$600$682$17.05$9.00$8.05
NEW YORK$100$600$700$17.50$11.80$5.70
NORTH CAROLINA$15$600$615$15.38$7.25$8.13
NORTH DAKOTA$43$600$643$16.08$7.25$8.83
RHODE ISLAND$53$600$653$16.33$10.50$5.83
SOUTH CAROLINA$42$600$642$16.05$7.25$8.80
SOUTH DAKOTA$28$600$628$15.70$9.30$6.40
WEST VIRGINIA$24$600$624$15.60$8.75$6.85

Simply put: anyone currently receiving unemployment benefits who would otherwise make less than $20/hour—or, roughly $40,000 per year—has very little incentive to return to work before July—or, longer, if the program is extended. Those who would otherwise earn the minimum wage would lose between $2.25/hour (Washington, DC) and $10.95/hour (Georgia) if they go back to work.

In the last four weeks, 22 million Americans have filed for unemployment. That’s roughly 13.36% of the labor force. Many of these Americans make less than $40,000. Few of them will return to work before July.

Perhaps the increase in unemployment benefits turns out not to matter very much. Perhaps the virus lingers on and we are all locked down through August. I find that unlikely. Wuhan was locked down for just 76 days. But, if the virus dies out and a recovery is possible before that, why discourage it?

Let me be clear: I am not opposed to helping the least well off. I am opposed to requiring the least well off to remain completely unproductive in order to receive that help. Give them money. But let them work as soon as it is safe to do so.

Most people having a hard time today are facing a consumption-smoothing problem. Their income is temporarily lower. Their income will rebound when this is all over. They have bills to pay and kids to feed. They do not want their current consumption to fall to the same extent as their current income, and would borrow against their future income if they could. 

In the absence of well-functioning credit markets, the government might make matters much better by helping people smooth out their consumption. And, from a budgetary perspective, it would be relatively cheap to do. 

Suppose the government borrowed $1.65 trillion to extend every man, woman, and child in the US a $5,000 loan at 0% interest for two years. With interest rates on two-year Treasuries currently around 0.25%, the government would incur an interest expense of roughly $8.26 billion. And, with some minor tweaks, like making individuals (households) earning more than $100,000 ($200,000) in 2020 repay the loan in one year and reducing the amount extended to children, it could lower the cost further still. Most importantly, it would be able to provide the assistance that is needed without discouraging people from returning to work when it is safe to do so.

Policymaking is not easy. And policymaking in a pandemic is harder still. The CARES Act is a huge expenditure package. Some of it is likely to promote a speedy recovery. But some of it will drag the recession out unnecessarily. 

Perhaps this is the best we could hope for. I would like to think we could do better. At the very least, we should not do worse. If extending the increase in unemployment benefits looks likely, we should push for no-strings-attached checks instead.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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