After the $2 trillion CARES Act was passed earlier this year, we asked an important question. Are we doing stimulus right?
Unconventional grammar aside, it was the right question, because the CARES Act was not only the largest stimulus package in history, it was filled with these new and unprecedented programs whose future effect was unclear. Would they actually work? Would we have an economy we even recognized on the other side of the shutdown?
We concluded at the time that some of the programs held great promise, while others were questionable. Ensuing months have largely confirmed that assessment, with initiatives like the paycheck protection program and expanded worker’s compensation successfully rescuing many small businesses and supporting families. Other initiatives, like the corporate lending programs intended to minimize large-scale layoffs, fell flat due to bureaucratic dysfunction. Those were missed opportunities.
And then there were the stimulus checks. These were what they were: a short-term adrenaline shot to consumer spending — helicopter money that was sorely needed by some households and essentially a windfall for others. But fine. Membership has its privileges.
Now that Congress and the White House have come together in the final days of the year to deliver the economy yet another relief package in the shape of a supplemental $900 billion stimulus deal, the question of whether we are doing stimulus right is worth revisiting.
There have always been two parts to the question. The first is whether we are applying the right medicine, i.e., the right programs. The second part concerns the dosage, the appropriate amount of medicine. Too little won’t save the patient. But too much can backfire and even create dependencies.
The latest relief package is in large part a reload of the most effective programs from the CARES Act. In short, it ups the dosage of the medications that had the most effect earlier in the year. That feels like the right pathway, but quickly brings us to the harder part of the question.
Corporate finance students learn that adding debt to a business’s capital structure creates the opportunity for greater returns for investors through the added leverage, even while it increases risk. Economies are not the same as businesses, but much of this logic carries over.
For example, one line of thinking holds that if the economy grows as expected it will render today’s deficits something of a nothing burger to future generations. Think about your grandparents having to incur a $10,000 mortgage to purchase a family home in 1945. Back then, it would have been a significant amount. Now imagine that somehow the home is passed down to you with the original mortgage still in place — with only interest having been paid over the years. You would likely be thrilled to take the home under those circumstances. Such a mortgage would be insignificant on an average home today.
The stimulus bills of 2020 are meant to be like that mortgage — an economic tool that allows us to build (or preserve) a robust economy that we otherwise wouldn’t have in the future. Frankly, even if all they do is help avoid the kind of recession that strips away a decade of growth, as other major recessions have done, this is money well spent. Our kids will be glad we did it.
But debt always carries risk. If we use too much it or the future doesn’t play out how we hope, it can have the opposite effect, where the interest becomes an impossible weight to carry. This is the scary realm of moral hazard, where our generation’s lifestyle ends up being paid for by future generations.
And then there is another risk from all this stimulus. Dare we say it? Stimulus addiction.
There has always been a certain level of healthy inter-dependency between government and private enterprise. Capitalism has long depended on just the right balance of governmental support and oversight for a vibrant economy. But the wrong kind of government intervention undercuts competition by picking winners and losers and dampens entrepreneurism through expectations of ongoing support of the status quo. These kinds of concerns arise frequently in the context of targeted, government subsidies, excise taxes and regulatory moratoriums. Such policies risk creating dependencies that prop up industries and undermine innovation.
Stimulus packages like the ones we’ve seen in 2020 bring these risks but in a bigger, scarier way. We are frankly in new territory, where in one way or another the entire economy is dependent on the success of these programs. The goal, of course, is to save the economy, but if we create dependencies that stifle economic vitality, we could be risking just as much over the long run.
To be fair, I’m not worried that this week’s relief package will take us to that dark place, even though we will have piled onto the national debt approximately $3 trillion of stimulus spending in 2020. These are staggering sums, but to some degree, there wasn’t much of a choice to be made. We needed the economy working today, because otherwise people would go hungry. That is the short-term reality that looms largest in everyone’s mind. That is also why support for this most recent package — both in Congress and from the public — has been overwhelming.
But this logic only works in the short term. Many are already calling for more, and we may well need another dose before this is over, but if a year from now, we are still talking about the next stimulus package, we will be in troubling territory. The challenges to be faced by the new Congress starting Jan. 3 and a new White House Jan. 20 are not easy ones.
Troy Keller, an attorney at Dorsey & Whitney LLP in Salt Lake City, advises companies on corporate law matters and government relations strategies.