On March 27, U.S. President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act coming with a $2.2-trillion aid package to revive the economy hard hit by the novel coronavirus pandemic. On March 23, the U.S. Federal Reserve pledged unlimited quantitative easing to keep the markets functioning.

This emergency stimulus aid is the largest of its kind in U.S. history. However, whether it will stimulate and stabilize the economy remains to be seen, especially as it offers only limited support for production and demand.

Nitty-gritty of act

The 854-page CARES Act provides four categories of support measures: ensuring workers are paid and employed; providing assistance for workers, families and businesses; supporting the healthcare system in the fight against the coronavirus; and maintaining economic stabilization and assisting the severely distressed sectors.

Financial support will be injected into many areas. Taxpayers will receive a tax rebate credit of up to $1,200 plus $500 for each qualifying child they have. On top of whatever base amount an out-of-work person receives from the state, the law has added another $600 per week from the federal government.

The U.S. practice of coming up with economic stimulus policies to restore the economy dates back to Franklin Roosevelt's New Deal in the 1930s, a package of projects, reforms and regulations to offset the impact of the Great Depression. More economic stimulus plans were activated in the five economic recessions in 1964, 1971, 1975, 1981 and 2001.

After the financial crisis in 2008, the U.S. Government adopted a number of fiscal policies such as tax reduction, purchase of non-performing assets, provision of guarantees and infrastructure construction, spending nearly $3 trillion on various programs during 2008-10. Compared with its predecessors, the CARES Act provides more funds for a wider range of areas in different forms.

Its complex content reflects the contentions of different interest groups, not only in the distribution of the funds but also in the adjustment of administrative practices. Though the law has been signed, some areas are still unclear, which allows the White House a relatively big discretionary space during its implementation.

Impact on economy

The novel coronavirus outbreak has disrupted both the manufacturing and service industries in the U.S.

The service industry accounts for about 80 percent of U.S. GDP. While some companies have continued providing service online, the rest have encountered difficulties in transforming from offline to online operation. To develop a new business format, it is essential for both consumers and businesses to develop new consumption habits. Technical hurdles must also be removed to establish an Internet-based platform.

The pandemic might take an even bigger toll on manufacturing activities as workers have to operate machines in factories. The absence of even a small number of employees may affect the production line. Not only small and medium-sized enterprises face operational difficulties, in this period of economic contraction large enterprises' innovation capabilities and differentiated products might be impacted as well. Grabbing market shares and maintaining liquidity might be the key to their survival.

Relying on funding from the CARES Act alone can delay the rate of bankruptcy, but it will also lead to further agglomeration of risk.

Also, the act doesn't support the demand side strongly. The continuous growth of the economy over the past decade made Americans let their guard down vis-à-vis potential economic downturns. The habit of spending more than saving, together with the sharp rise in unemployment, has caused many people to run out of cash.

According to data from the U.S. Bureau of Economic Analysis, the personal saving was only 7.5 percent of the disposable income in the U.S. in December 2019. The situation of balance was a little bit improved in the first two months of 2020 to 7.9 and 8.2 percent, respectively.

Consumer spending in 2019 was $13.3 trillion. Going by this figure, even if the entire 330-million population gets a $1,200-tax rebate per person due to the CARES Act, which would come to a total of $396 billion, still then it can maintain the consumption level of Americans for only 10 days, based on last year's statistics. The actual amount would be much less since a large number of high-income groups and children will not get the rebate.

Worse still, the pandemic has seriously affected the public systems in populous states with a strong economy, such as New York and California. The complexity of administrative procedures and the cost of the pandemic will affect the distribution of the tax rebate fund to a considerable extent.

Global effect

Since the U.S. economy is closely linked to the global economy, as the pandemic spreads, the weakening global market demand will make it more difficult for the U.S. to export. The pandemic will increase the difficulty in keeping its supply chain stable. Taking expansionary fiscal and monetary policies in a weak demand environment will not only lead to the formation of asset bubbles, but may also cause serious structural imbalance in economic and social development.

It is not clear who the specific beneficiaries of most of the funds in the CARES Act are. Boeing, which has been in difficulties in recent years, may meet its definition of being a key aviation company that maintains national security and obtain loan support. But energy companies that have been hit hard by the falling global oil prices will fail to benefit directly.

After the implementation of tax cuts last year, the U.S. fiscal deficit has soared rapidly, and increased economic activity cannot offset the negative impact of the declining tax revenue. The additional fiscal expenditure will increase the financial pressure on the federal government and lead to a larger national debt, which will be transferred to the investors worldwide who hold U.S. dollar assets.

Even though, Nancy Pelosi, the Democratic Speaker of the House of Representatives, said Democrats have begun discussing the need for the next round of relief programs.

Although other countries are taking measures to respond to the impact of the pandemic and the Group of 20 members reached a consensus on coordinating their response to the crisis at a recent extraordinary virtual summit, they might not follow the U.S. approach. Unlike the U.S. whose currency and treasury bonds are considered safe havens in the investing world during crises, most economies lack the resources needed for a large-scale economic stimulus plan. Moreover, the sovereign debt crisis that erupted in many European countries after the 2008 financial crisis has also made them wary about overdrawing on future revenue.

The author is a research fellow with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Sudeshna Sarkar

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