Regrets? Yes, Regrets About the CARES Act

An article in The Wall Street Journal says that Bill Gates has regrets that the world was not better prepared for the pandemic.  While clear when vision is 20-20, would we make the same statement without the benefit of hindsight?  Should the world have been better prepared?  Quite possibly, although it is hard to predict the occurrence of black swan events, and even harder to know exactly how to prepare in advance for the specific unknown details of such an event.  An asteroid striking Earth would be a black swan event.  How should we prepare for that?  On the other hand, pandemics have happened in the past, there are some similarities to how they have played out, and some nations seem better prepared than others.

Judging past policy actions during the coronavirus episode should be done with ample humility and with consideration for the difficulties and uncertainties we all have in looking ahead.  Still, there are cases in which judgements must be made, if for no other reason than to discourage future mistakes.  So I am going to engage in a bit of hindsight myself.

The coronavirus pandemic not only sparked regret from Bill Gates, but more importantly led to a flurry of government action, all taking place while under a ticking clock.  In those circumstances, legislation will most certainly be flawed.  But the CARES Act and related legislation has some flaws so big that they must have been knowable and ignored.

For instance, who votes to enact legislation that pays the majority of newly unemployed workers more than they were making when employed, and more than their still-employed fellow workers are making?  The $600 weekly federal ‘supplement’ to state unemployment benefits is, by itself, more than many of the newly unemployed were earning in their previous jobs.  Laid off workers, on being called back to work, are facing a cut in income! 

The federal government mailed out $1200 checks per adult, with a $500 bonus per child, to the vast majority of families in America.  While a seemingly sensible response to a government-caused recession, this too was not done with careful forethought.  The goal was to fund those harmed by the economic downturn, those losing their jobs or dealing with child care issues or other pandemic-caused expenses.  But these funds went to everyone below a (generous) income limit, including those who were not harmed directly, and perhaps not even indirectly, from the downturn.  As one example, retired individuals living on social security definitely did not see their social security income decreased by the economic downturn.  Why did they receive this bonus? 

Meanwhile, businesses were helped by a hodgepodge of features, but with seemingly little thought – other than business size – for their heterogeneous treatment in the legislation.  Here, a guiding philosophy could have easily been to first help those whose business was literally taken away by government fiat.  When the government seizes property from private individuals, there is the idea of just compensation.  We have enshrined this principle in the Fifth Amendment of the U.S. Constitution, in the so-called Takings Clause, that persons shall not “be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”  In this usage “property” is a bundle of rights including the right to own property and to use it, in this case, to earn a living.  The Takings Clause is rightly considered to prohibit government from taking property, including abridging property rights, without just compensation.  In issues of eminent domain, the concept of just compensation often comes down to an issue of fair market value.

Under this principle, the government would have first acted to pay businesses that were directly shut down by government edict.  Legitimate law-abiding businesses were shuttered, and even though this was done ‘for the public good’ the owners of those businesses should be compensated for the lost use of their property - their lost business.  This would include many small businesses, such as restaurants forced to close or to only sell take-out, hairdressers and nail salons, gyms, and other non-essential retail outlets.  This would also include hospitals, which were directed to halt elective procedures.  Compensation for government takings, including takings for the public good, is a bedrock philosophical position that should have guided government action in this situation.  Judgements might well be made regarding the size of business losses given the existence of the coronavirus and customer behavioral changes, but the basic principle remains that compensation is due for government-ordered closings.

This does not preclude aid to other businesses.  The government obviously has the ability to help other businesses that were not directly shuttered by government edict but which still suffered large losses due to the pandemic. This decision is more discretionary, and political.  It is akin to the decision to help households harmed by the pandemic.  For instance, hotels and airlines were sorely injured, not by government edict, but by changes in consumer behavior.  A government – a society – might well choose to provide aid to such businesses for a variety of reasons, including their importance in maintaining current or future economic functions.

In any case, our government’s response to this pandemic was blunt, and failed to efficiently direct resources to where they were most needed.  It also failed to direct payments where they were owed by the philosophy enshrined in our constitution of just compensation for government takings.  Finally, some policy actions seem to have been designed not to facilitate a speedy return to normalcy – if that is even possible – but instead to slow down any such happening.

Some of our leaders are apparently willing to double down on their previous approach, with additional spending of $3 trillion, including payments of $1,200 per person to most Americans.  Other than an income limit and a maximum household payment of $6,000, these would again be across the board.  These payments would presumably also go to those unemployed already receiving higher unemployment compensation than the pay they received while working, to retired individuals living on social security, and to individuals being paid via the Payroll Protection Program and hence receiving their pre-crisis wage.

When the Year of the Virus is over, when we have increased our debt from 80% of GDP to north of 115% in less than two years, when taxes are increased to pay for the additional debt service this entails, when our favorite spending programs are facing cuts from the resulting budgetary pressure, then we will ask if all the coronavirus-related government largess shouldn’t have been more carefully and efficiently directed to those most deserving and most in need, instead of being spread around profligately.  But then that will be in hindsight.

Posted: May 20, 2020 by Dennis W. Jansen