After its first few attempts to pass stimulus legislation failed last week, the US legislature got together and crafted a bipartisan bill Wednesday, which the Senate passed 96 – 0 that evening. The House is slated to vote on the bill—called the Coronavirus Aid, Relief and Economic Security (CARES) Act—on Friday, and President Trump has already said he will sign it. Most headlines hype this as a $2 trillion plan to blunt the effects of the coronavirus-related interruptions to business and everyday life, with lots of folks debating whether or not it will prove sufficient. Many others are already debating the wisdom of specific provisions. Here is a look at those provisions—although we will let you conclude whether they are wise or not. Wherever you fall on that, remember: Regardless of the wisdom of the initial allocation of cash, it eventually finds its way into the hands of businesses and individuals that spend it better. So while we don’t think this plan is likely to be a cure-all for the COVID-19 restrictions that ail the economy, it does look set to turbocharge the recovery that would likely have come eventually anyway.
We won’t cover every provision in this bill—which isn’t actually possible now anyway, as the full text only became public this morning and weighs in at a whopping 880 pages. However, we can detail some major provisions now. Without further ado, here they are:
Households will receive checks, subject to income limits. In the coming weeks, the IRS will begin disbursing payments to Americans with individual income up to $75,000 ($150,000 per couple) in the amount of $1,200 per adult and $500 per child. Every $100 earned above those marks reduces the payment by $5.[i] Math-whiz readers will likely readily see that means individuals with incomes of $99,000 and up won’t be getting a check. Ditto for couples with greater than $198,000 in income. These income limits are based on 2018 tax returns, unless you filed for 2019 already.[ii]
There are some noteworthy shifts to retirement savings—particularly for retirees. Like in 2009, the Senate bill suspends required minimum distributions for 2020. Of course, those in need of funds can still take withdrawals, but the bill would eliminate the requirement to do so. Additionally, the bill would grant workers below age 59 ½ who would ordinarily face a 10% penalty on early withdrawals a reprieve. Early withdrawals up to $100,000 would be exempted from the penalty, and the taxpayer would have three years to pay the ordinary income tax due on the transaction. To qualify, the taxpayer must be able to prove a hardship (layoff, business closure or illness).
The bill includes $500 billion in loans and assistance to big businesses. This is arguably the heart of the legislation, as it aims to act as a bridge loan to help companies experiencing coronavirus-related interruptions. It includes ~$58 billion in funding (part in the form of a loan, part in the form of a grant) for airlines and related industries like catering companies, which the firms are required to use a part of for payroll. It also includes ~$17 billion in funding for companies “critical to national defense” (read: Boeing). The remaining $425 billion aims to backstop other larger businesses, in the form of loans administered by the Fed.
Democrats demanded—and got—an oversight mechanism in the form of a Treasury Inspector General specifically tasked with monitoring disbursement of the aforementioned funds, akin to 2008’s Troubled Asset Relief Program. In case you were curious, the bill also specifically includes language preventing any Trump- or congressmember-controlled business from receiving funds.
Originally, media reports suggested businesses receiving funding, including Boeing, wouldn’t have to give the government an equity stake, unlike 2008’s bailout. But the version that passed the Senate on Wednesday evening contradicts this, at least insofar as airline aid is concerned. As The Wall Street Journal noted:
Legislation that cleared the Senate details the forms of investment that the Treasury secretary may make in connection with the grants, listing warrants, options, preferred stock, debt securities, notes or other financial instruments to “provide appropriate compensation” to the federal government for the provision of financial assistance.[iii]
Businesses receiving funding will be prevented from buying back their own stock. However, contrary to some earlier suggestions, these bans won’t be permanent. They will last for the duration of the loan plus one calendar year.
Small businesses will receive assistance under a separate, $350 billion facility. Like the big business facility, the aim is for this to act as a bridge loan, providing funding for up to 10 weeks. Early reports suggest small businesses wouldn’t have to repay eight weeks of the funding if they don’t lay workers off—or rehire those they did lay off by June.[iv]
Separately, the bill extends and increases unemployment benefits. The bill provides for up to $600 in extra weekly benefits (on top of state benefits), expands eligibility and extends benefits to four months.
State and local governments will have access to a $150 billion fund. This fund is primarily designed, again, to act as a bridge loan. State and local governments are feeling a twin pinch from the decline in sales and income taxes—the latter compounded by the federal government delaying the tax-filing and payment deadline to July 15—a move many states are matching.
Hospitals get $130 billion in funding under this bill. The government allocated the money to allow health care providers to acquire additional equipment and supplies.
Those are the bill’s major planks. The headline $2 trillion price tag is big. It, of course, may never reach that mark, as it is contingent upon businesses actually requesting and receiving money—much of which, in turn, depends on the duration of the COVID-19-related interruptions. If the disruptions end soon, this bill will likely never get anywhere close to $2 trillion. It is also likely the economic fallout wouldn’t approach anything near $2 trillion in that scenario. The stimulus would likely prove overkill.
If the disruptions to business prove lasting, it is highly unlikely this or any stimulus would offset the full economic damage. The government cannot fully replace the impact of lost business, confidence and investment stemming from a lasting interruption. An inconvenient fact of economic analysis is we can’t really even identify the extent of lost business with any certainty, which sort of hampers what some in media are calling “filling a hole.”
Moreover, as the structure of this makes clear, none of these provisions will hit the real economy tomorrow. The bridge loans may—and we stress may—help backstop some businesses while interruptions take place. But many of these provisions, including stimulus checks, are likely to come over a lengthy period of time, drawing out the economic impact over a period of (likely many) months. Unnamed Senate aides told The New York Times that those who receive tax refunds via direct deposit will see the first influx in the coming weeks. Those getting physical checks? Perhaps as long as four months. Even then it isn’t clear people will spend it right away. Lastly, there is the question of what they will spend it on. Grocery stores need no stimulus at present. The businesses that really need aid are closed right now and won’t open until the restrictions on business pass. Households in most need probably spend the money on basic utilities, food and rent. These checks are a lifeline, not a free pass for some retail therapy.
This echoes the point we raised in our recent commentary: The stimulus’s major impact is likely to arrive after most COVID-19 interruptions fade. In that way, it is capital that could, to an extent, supercharge a recovery. But it cannot offset the full impact of business interruptions, as long as they exist.
[i] “Will You Get a Coronavirus Stimulus Check?” Dan Caplinger, The Motley Fool, 3/25/2020. https://www.fool.com/taxes/2020/03/25/will-you-get-a-coronavirus-stimulus-check.aspx
[ii] $1,200 Stimulus for All? All You Need to Know About the US Coronavirus Bailout,” Lauren Aratani, The Guardian, 3/25/2020.
[iii] “Mnuchin Indicates U.S. to Take Stakes in Airlines in Exchange for Grants,” Siobhan Hughes, Kate Davidson and Allison Sider, The Wall Street Journal, March 26, 2020.
[iv] “Senate Plans Vote on $2 Trillion Stimulus Bill After Sealing Bipartisan Deal,” Emily Cochrane and Nicholas Fandos, The New York Times, 3/25/2020. https://www.nytimes.com/2020/03/25/us/politics/coronavirus-senate-deal.html
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.