The COVID-19 crisis has had various economic and industry-specific impacts in the United States. Consumer behavior and industry trends have adapted to the new normal that we live in. The US government enacted the CARES act in response to the crisis, which faces praise and criticism. In this term paper, you will discuss recommendations that would lesson criticism on the government’s actions regarding some of its short-term response policies and suggest short and long-term policies that would help address the new adaptive society. Below is an overview.
In December of 2019, the first case of COVID-19 was reported in Wuhan, China, marking the start of a global pandemic and the precursor to economic instability (WHO). In February 2020, the National Bureau of Economic Research officially stated that the United States was experiencing an economic downturn, ending the longest period of economic expansion. In March 2020, cases of COVID-19 had increased within the United States, resulting in government-mandated shutdowns and stay-at-home orders. By April 2020, the unemployment reached a high of 14.8%, with every state experiencing higher unemployment rates than the Great Recession.
Switching focuses to the financial markets, on March 9, 2020, the Dow dropped 7.79%, followed by a 9.99% decrease three days later and concluded with a 12.9% drop on March 16, 2020. With rising unemployment, a pandemic in full swing, and government-mandated shutdowns, investor confidence plummeted, causing a significant stock market crash. Despite the omnipresent threat of the pandemic, rising unemployment, and the continued mandated shutdown, the market miraculously rebounded, and unemployment by December 2020 had reached 6.7%. Congress and the Federal Reserve injected $2.3T as stimulus funding. They reduced interest rates to near-zero, aiding in the recovery of the financial markets and the stemming of rising unemployment.
Examples of the impacts of the CARES Act that can be observed:
Debt – The CARES Act is not funded by raising taxes, but by a sleight of hand that amounts to printing money. The Treasury borrows money by selling bonds to banks, not only domestically but also internationally. The process of bank borrowing is known as balance sheet expansion, where the Fed digitally creates and lends banks as much money as they need to purchase the bonds even though banks don’t have the money. With the Fed’s money digitally created, the banks purchase the bonds from the Treasury, and the Treasury sends out stimulus payments. This process could have many destructive consequences; for example, with the increase supply of money, the value of every dollar decreased.
Interest rates – After CARES Act passed, the Federal Reserve has used normal discretionary and emergency powers to set interest rates to near zero, which promises virtually unlimited loans to banks, purchase mortgage-backed securities, and create vast quantities of new “money” in many other ways. In the past couple of months, financial market expectations for future inflation and interest rates have risen sharply following a vaccine-fueled improvement in the economic outlook. There is no question that recent market movements would lead to markedly higher interest rates by next year. Many analysts have stated that it is best to raise interest rates to cool the economy.
Inflation – Provided by the CARES Act stimulus, people have more money to spend, and they purchase more, which creates more demand while increases the prices. However, even if inflation increases, it will be a cost worth incurring to defend production and employment. In general, relatively higher inflation will be tolerated as one of the ways of financing the servicing costs of public debt. It is anticipated that the reversal of the global economy will be reflected in rising inflation and rising interest rates. The new long-term trend of rising inflation and interest rates will likely commence and accelerate as the virus eventually disappears.