Yet the CARES Act cannot properly be called a stimulus bill, as an examination of the various provisions shows, nor should it be a stimulus bill. The act really is industrial policy in all but name, with a large dose of cronyism thrown in. One major provision, a federally provided $600 weekly addition to unemployment insurance, will delay a recovery until August. The law is a disgrace and the only person in Congress who comes out looking good is Thomas Massie, a Republican member of the House of Representatives from Kentucky’s 4th Congressional District. Massie insisted on a quorum but failed to get a voice vote.
This is from David R. Henderson, “The Anti-Stimulus Bill,” Defining Ideas, April 23, 2020.
On bailing out airlines:
One other prediction is that for the next year or two, people won’t want to fly as much. That makes the subsidy to airlines one of the worst aspects of the CARES Act. Without subsidies, would some airlines go bankrupt? Absolutely. Would that mean that airplanes would vanish into thin air, so to speak? Absolutely not. Indeed, you have probably flown on airlines that were in bankruptcy. Adding to the dysfunction is that to qualify for the subsidy, airlines must fly a minimum number of times a week, even if they carry few, or no, passengers. So the subsidies cause airlines to waste valuable employee time and millions of gallons of fuel by flying almost empty planes.
Two airlines, JetBlue and Spirit, realizing the idiocy of this, petitioned the Department of Transportation (DOT) to let them drop certain routes. According to the Wall Street Journal, “JetBlue had asked permission to temporarily suspend service to cities including Albuquerque, Minneapolis, Dallas and Houston. Some of those are major hubs for competitors, and JetBlue said it was struggling to fill flights.” The Journal article noted that passenger numbers “have fallen by 95% or more from pre-pandemic levels.” And how did the DOT respond? It denied most of JetBlue’s and Spirit’s requests to cut routes and/or flight frequency. The DOT stated that the airlines had “not persuaded the Department that we must strike a different balance.”
On how we are guaranteed massive unemployment at least through the end of July even if all the lockdowns end immediately:
I’ve saved one of the worst provisions of the CARES Act for last: the $600 per week addition to normal state unemployment insurance (UI) benefits through the end of July. This one provision assures that whatever recovery we have, it will not begin until August. If you believe that the federal government should supplement state unemployment benefits, the responsible way to do that would have been to increase benefits as a percentage of previous pay. State unemployment benefits typically cover about 50 percent of previous pay. Putting philosophical objections aside, could it have made sense for the federal government to add, say, 30 percentage points so that UI would cover 80 percent of previous pay? That would have made workers who lost their jobs almost whole, while still maintaining some incentive to work.
But by adding $600 per week, the federal government ensured that over 10 million, and possibly 20 million, unemployed workers would be paid more by remaining unemployed than they would be paid if they return to their jobs. I warned about this on March 25 while the bill was still being debated. Interestingly, a restaurant owner named Maria Martz commented on my post on April 8 that she applied for Paycheck Protection, but that it requires her to retain or rehire the same employees. She then wrote, “My employees will make more money getting unemployment, so why would they want to keep working???” Indeed. She beat fellow restauranteur Kurt Huffman to the punch by 13 days. In the April 21 edition of the Wall Street Journal, Huffman wrote that many of his employees are making hundreds of dollars more per week by staying unemployed than by returning to work. Jamie Black-Lewis, owner of two spas in Washington state, thought she hit the lottery by getting enough money through Paycheck Protection to keep her employees on the payroll. Wrong! Many of them were angry because they realized they would be paid more if she laid them off. Asked the frustrated Black-Lewis, “On what planet am I competing with unemployment?”
Do read the whole thing, especially if you want a response to your comments.
READER COMMENTS
Jerry Brown
Apr 26 2020 at 2:53am
Professor, I did read your other article you linked to.
Yes, for some low paid workers a 600 dollar a week bonus in the unemployment check might mean they would rather try to collect that than look for and accept a new different job. But if the job they got laid off from- got the pink slip from- calls them back and asks them to return to work at their previous pay and working conditions, well I think they just lost their unemployment status. And very shortly will lose that unemployment check. So I don’t really know what you are so worried about here. Maybe some of the lowest paid people in the country (who were actually on the books and paying taxes) lost their jobs but end up benefitting a tiny bit for a short time? That isn’t a crisis to me.
But in the mean time maybe they can pay the rent, and buy food. and pay the utility bills. Why is that so bad?
David Henderson
Apr 26 2020 at 9:37am
You wrote:
Actually, they didn’t. To get unemployment benefits you need to be (1) previously employed, (2) out of work, and (3) looking for work. There is NO requirement that you accept a job.
Jerry Brown
Apr 26 2020 at 11:53am
Well Professor, I will check that out on Monday but will take your word for that in the meantime. It has been a long, long time since I was last laid off by a construction company and filed for unemployment only to be called back two weeks later to the job. It was my understanding at that time that if I didn’t return then I was ineligible for unemployment compensation- at least for a period of time. Of course I wanted to return to the job so it wasn’t like I argued about it. But maybe the rules have changed, or I never really understood them.
Jerry Brown
Apr 26 2020 at 7:28pm
I just got off the phone with the director of human resources at one of the school systems here. Unemployment laws are administered at the state level so what may be true in California may not be true in Connecticut where I am. Short report of a long complicated conversation- what I claimed is true as far as the State of Connecticut and unemployment insurance. If the previous employer offers the same job at the same pay and working conditions- like location and hours to the laid off worker, then, while of course the state can’t make the person go back to work, they are no longer eligible for unemployment compensation benefits.
But what is true in Connecticut may not be true in California- so we could both be right 🙂
john hare
Apr 26 2020 at 4:30am
@Jerry,
Wealth comes from productivity, and productivity requires people to be productive. So incentivizing people to not be productive destroys wealth. I am fortunate in that my people are motivated enough to want to work, and that I pay well enough that the additional unemployment would not be quite as attractive as it is to some. Also, I have long term employees that understand that shutting down the company for a few months would destroy my customer base which would mean no company to come back to after the “benefits” ended.
For companies less fortunate, failing to serve their customers for a few months will destroy them as the customers will either go elsewhere, or decide they don’t need what that company supplies. Six months from not could easily see a cratered business landscape with the federal giveaways gone and the customer base shifted with many businesses gone as well.
Jerry Brown
Apr 26 2020 at 5:49am
John, we are similar in that we do construction if I remember from earlier correspondence? I have some understanding of that having been in that business for almost 30 years. If I remember correctly you do concrete? I do interior remodeling- there is a difference there in demand during an epidemic no?
Doesn’t matter, construction is a fraction of the economy. And your employees can not just decide to quit and get unemployment instead anyhow. You would need to lay them off. At least here in Connecticut.
But I thought Professor Henderson was more concerned that maybe the lowest paid workers- perhaps people like hotel staff would be looking at this as some bonanza. And all I can say is I hope it is for them while it lasts, but that ends as soon as their former employer asks them to return to work. But maybe the rules about collecting unemployment compensation have changed from what I used to know.
I realize that kind of assistance might throw a giant wrench into the Schumpeter creative destruction idea. But this thing is beyond normal parameters.
Scott G
Apr 26 2020 at 9:43am
Never have I been more impressed with David Henderson as I am now during the COVID-19 outbreak. He deserves much praise and recognition for his articles and debate these past few weeks defending property rights and liberty. Whereas I see other libertarian economists getting squishy in the face of Coronavirus, saying “this time is different, we need more government in our lives,” David Henderson is shining like the great economists F.A. Hayek, Milton Friedman and Adam Smith.
David Henderson
Apr 26 2020 at 10:32am
Wow! Thanks so much, Scott. You’ve made my day, and the day is just beginning. 🙂
Andrea Mays
Apr 26 2020 at 10:39am
Excellent piece, David. Are you working these blogs into a chronology of the fall and rise? A narrative of the recovery? Predicting how the details of the CARES Act will affect the economy? Your pieces already read like the economy’s diary. I hope someone else is doing this from the medical side in every country!
Thomas Hutcheson
Apr 26 2020 at 11:29am
The Paycheck Protection Program and the $600 top up are exactly what you should expect when we do not start with sensible nationally funded UI system that provides a high % replacement of lost wages including individually purchased health insurance and ACA enrollment. No Congressional action should have been necessary.
Years of failure to support taxation of net CO2 emissions may also come back to bite us one day when some dramatic environmental event sets of a hasty “doing something” about ACC.
Jon Murphy
Apr 26 2020 at 1:21pm
If the goal of the Act was to actually stimulate the economy and get people back to work, you might have a point. But it wasn’t. This Act’s purpose is to keep people at home and not working.
Thomas Hutcheson
Apr 26 2020 at 6:25pm
Not my understanding of the purpose, which I take as trying to compensate people for not being able to work. But if it was to encourage people not to seek work when laid off, how does the PPP do that better than UI that includes health insurance?
Thomas Hutcheson
Apr 26 2020 at 6:32pm
As for stimulus, that would work only if you believe that the Fed is more likely to buy enough financial assets to keep NGDP growing if they can buy newly issued USG bonds than bonds in private hands. I guess that’s possible but I see no evidence of that.
Matthias Görgens
Apr 26 2020 at 9:20pm
Having to compete with unemployment was how Germany had the effects of a minimum wage long before they enacted a minimum wage law only a few years ago.
Thanks to high mandatory insurances and employer contributions there’s already a big wedge between gross and net pay for low income earners. Add that unemployment assistance used to be relatively comfortable (relative compared to low paying jobs); and laws that make it hard to fire people, and you have an explanation for the high unemployment in 1990s Germany.
Unemployment peaked in 2005, and declined since then. That’s when Merkel came to power, incidentally. But most people see the harsh welfare reforms by the previous centre-left government as the key. (Companies also adapted. I guess they also got better at dealing with some of the labour laws over time. For example temp agencies added more flexibility to the labour market.)
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