An eerie silence has settled across the country. Streets that were bustling with activity just a few weeks ago are now deserted. Schools and businesses are closed. The quiet fear of recession has gripped households and financial markets.
Nevertheless, amidst the quiet, history is being made. The largest stimulus package ever implemented in this country was signed into law in March. Despite delays and last-minute negotiations, the speed and scope of the $2 trillion plan is a real testament to the power of bipartisanship.
The stimulus package is enormous by any standards, containing a range of measures that are designed to relieve the short-term economic impact of the coronavirus and avoid the long-term impact of a deep recession.
But is $2 trillion enough? Compared to some other countries, $2 trillion is not very big. In fact, in relative terms, it is around half the size of the plans implemented by the UK, Germany and Japan.
The UK began to implement its unprecedented stimulus package in early March. With a total estimated value of over 380 billion pounds ($450 billion), the stimulus package represents over 15% of the country’s GDP. As the United States Senate was putting the final touches on the terms of the US fiscal plan, the German government agreed to one worth 750 billion euros ($810 billion). To put it into perspective, 750 billion euros is over 20% of Germany’s GDP. In early April, Japan also committed to a stimulus plan worth over 100 trillion yen (over $900 billion). Like Germany, this means that Japan’s stimulus plan will measure up to over 20% of GDP. In comparison, $2 trillion comes up to comparatively modest 9% of American GDP.
So, the scale of $2 trillion plan is large. Still, it is certainly not out of place in the world. But what about the substance of the plan?
In many ways, the plan closely mirrors those of other countries — fundamentally, it is a short-term relief package. Like those of other countries, the US stimulus plan also focuses on relief measures in the form of emergency grants, loans to distressed businesses and widespread unemployment benefits. It is designed to act a safety net for people and businesses, where the market has failed. It is not a long-term plan for the economic development of this country.
But how does it compare to the government’s response to the 2008 financial crisis?
The response in 2008 was powerful, coming through two key acts. First was the Emergency Economic Stabilization Act of 2008 (EESA), which included the famous Troubled Asset Relief Program (TARP). Second was the American Recovery and Reinvestment Act of 2009 (ARRA).
TARP set aside funds for the bailout of banks and the automotive industry in the United States. Like TARP, the coronavirus stimulus package includes a huge sum put aside for the bailout of key industries such as airlines. On the other hand, passed one year after TARP, the ARRA included major government investment projects in infrastructure and technology to upgrade and kickstart the American economy.
We can expect a very similar pattern of response to the coronavirus. First has come the major relief package, in the form of $2 trillion. If the impact of coronavirus is just temporary, then the relief package could be enough to help businesses and employees weather the storm.
But if coronavirus results in long-term unemployment and an ongoing reduction in demand across the country, then the government will need to find a way to kickstart the economy. At that point, like the ARRA, the second stimulus plan could come. This next plan would not just contain relief measures but would also include big government projects and a plan for the country’s longer-term economic development. It could be a plan that shapes the country for decades to come.