Rutgers University Macroeconomic Policy CARES Act Economic Analysis Paper

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Assignment 2
Aggregate Economic Analysis
Assignment 2
Macroeconomic Policy Analysis
Aggregate Economic Analysis
Due on: November 9, 2021, 11:00am
Getting the Paper
On the assignment page on Canvas you can find the following policy articles:
•
“Short-Run and Long-Run Effects of the CARES Act”
•
“The Infrastructure Investment and Jobs Act”
•
“Negative Interest Rate Policies – Initial Experiences and Assessments” (until page 27)
•
“The Fed’s New Policy of Average Inflation Targeting”
Choose and download one of these articles for your group based on your preferences.
Expectations
Please read the paper and address the following points:
1. Describe, in detail, the main policy or policy proposal that is discussed in the article.
2. Provide some background on the current state of the economy against which the policy is
proposed or analyzed (use other sources if necessary).
3. Describe the authors’ analysis and evaluation of the policy considered and its predicted
consequences.
4. What is your overall opinion on the authors‘ analysis? Do you agree/disagree?
The articles differ in length and in some cases, one can skip certain parts of the article which are not
important for answering the given points.
Presentation Slides and Write-Up
Please create a set of presentation slides in which you address the given points. The presentation in class
should be based on the slides submitted, so please make sure that the slides are really “presentable” (in
terms of grammar, spelling, format, …). You can provide more detailed explanations by writing an
additional text that refers to the slides (this is the write-up). Probably the best way to do this is to use
1
Assignment 2
Aggregate Economic Analysis
the “add notes to slides” feature that most standard software provides. Please answer the questions in
the given order, and provide an introduction and conclusion slide.
Submit your slides and the explanatory write-up (one per team) with all relevant information included
through Canvas by using the upload function on the assignment page. The assignment will be graded
both on content as well as presentation of the contents.
Presentations
To successfully complete the assignment, students are required to attend the presentation session on
Wednesday, November 10. Selected teams will present their work in class, and all groups have to
attend the session and should be able to present their work, if selected.
2
https://budgetmodel.wharton.upenn.edu/issues/2020/4/8/short-run-effects-of-the-cares-act
Published on 4/8/2020
Summary: We estimate that the $2.3 trillion CARES Act will dampen the fall in GDP in the second
quarter of this year (2020 Q2) from an annualized rate of 37 percent to 30 percent, and will produce
around 1.5 million additional jobs by the third quarter (2020 Q3).
Key Points
Without the CARES Act, PWBM projects that U.S. GDP would have fallen at an annualized rate of 37
percent in 2020 Q2, with the unemployment rate reaching 12 percent by 2020 Q3.
PWBM estimates that the CARES Act will dampen the short-term decline in GDP to a 30 percent
annualized rate in 2020 Q2, with the unemployment rate reaching 11 percent by 2020 Q3.
We project that the CARES Act will produce around 1.5 million additional jobs by 2020 Q3 and increase
GDP by $812 billion over the next two years.
Short-Run Economic Effects of the CARES Act
Introduction
On March 27, 2020, the United States Congress passed and President Trump signed the Coronavirus Aid,
Relief and Economic Security (CARES) Act. The $2.3 trillion CARES Act provides immediate relief to households
and businesses in many forms, including cash payments to low- and middle-income households, enhanced
unemployment benefits, and loans and grants to small businesses that maintain their payroll.
This brief pairs the PWBM short-run forecasting model with the standard “fiscal multipliers” approach to new
government policy, to report the economic impact of the CARES Act. Without the CARES Act, PWBM predicts
an 11 percent annualized drop in 2020 Q1 GDP followed by a 37 percent annualized drop in 2020 Q2 GDP,
similar to predictions from other recent private and public sector forecasts. The unemployment rate would
reach about 12 percent in 2020 Q3. We estimate that the CARES Act mitigates some of these losses, with GDP
falling by 30 percent on an annualized basis in 2020 Q2 GDP and unemployment increasing to 11 percent in
2020 Q3. We estimate that the CARES Act would create about 1.5 million additional jobs by 2020 Q3.
Fiscal Multipliers
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Table 1 shows a summary of ranges of so-called “fiscal multipliers”—the amount of additional output
generated for each dollar of government spending—that the Congressional Budget Office used to analyze the
2009 American Reinvestment and Recovery Act (ARRA).1 Notice that the greatest multipliers are attached to
provisions that provide money for government purchases and transfers of cash into low-income and recently
unemployed households. These types of programs typically get cash into the hands of households who are
most likely to spend it quickly, which generates the most aggregate demand and the greatest stimulative
effect. By contrast, putting money into the hands of people and institutions who are more likely to save it is
not as likely to generate an immediate short-term boost to the demand for goods and services. Therefore, the
range of multipliers for provisions like unemployment insurance—from 0.4 to 2.1—is higher than the range
for provisions such as tax relief for higher-income households—which is estimated between 0.1 and 0.6.
Table 1. Total Output Effects of the American Recovery and Reinvestment Act by
Category
DOWNLOAD DATA
Total Output Multiplier
Category
Low Estimate
High Estimate
Purchases of goods and services by the federal government
0.5
2.5
Transfer payments to state and local governments for infrastructure
0.4
2.2
0.4
2.1
Transfer payments to state and local governments for other purposes
0.4
1.8
One-year tax cuts for higher-income people
0.1
0.6
0
0.4
Transfers to persons (unemployment benefits, education transfers and food
stamps)
Business tax provisions primarily affecting cash flow
Source: Congressional Budget Office Working Paper 2015-02
We apply these multiplier ranges to estimate the economic effects of the CARES Act. Of course, current
economic conditions differ substantially from conditions in the Great Recession. But, the multiplier values are
still informative when applied to different “bases.” This approach is common for short-term modeling,
although multipliers will vary based on economic expectations and other conditions.
Although lower-income and recently unemployed households will spend a large share of their stimulus
benefits, there are limits on the effects of the stimulus because many sectors are simply unable to meet
demand due to stay-at-home orders. Therefore, for programs that deliver money directly to households that
fall into categories such as transfers to persons and one-year tax cuts for higher-income people, PWBM picks
multipliers that are at the bottom of the ranges shown in Table 1.
Direct government spending on goods and services, focused primarily on infrastructure and healthcare, will
likely stimulate more demand in the current environment. A large fraction of this money is directed to cashstrapped state governments and healthcare facilities who will quickly spend the money. Therefore, PWBM
applies fiscal multipliers that are slightly above the bottom of values shown in Table 1 for the following
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https://budgetmodel.wharton.upenn.edu/issues/2020/4/8/short-run-effects-of-the-cares-act
Published on 4/8/2020
categories: purchases of goods and services by the federal government, transfer payments to state and local
governments for infrastructure, and transfer payments to state and local governments for other purposes.
Many of the CARES Act fiscal programs designed to help businesses offer tax benefits that might not affect
businesses’ current investment decisions. Nonetheless, if the tax abatement is the difference between a
business closing and staying open, the effect on demand is considerably larger. Therefore, PWBM uses
multipliers that are in the middle of CBO’s estimated ranges for provisions described as business tax provisions
primarily affecting cash flow.
The CARES Act
In Table 2, we list the major spending provisions in CARES, estimates of the effects based on CBO’s range of
fiscal multipliers, and PWBM’s estimate of the effects on output adjusted for current economic circumstances.
Table 2: Major Spending Categories for the Coronavirus Aid, Relief and Economic
Security Act
DOWNLOAD DATA
Total Effect on Output
Category
Estimate
Estimate
Using Low
Using High
PWBM
Outlay
Multipliers
Multipliers
Estimate
$260
$111
$553
$111
$290
$123
$616
$123
$42
$18
$89
$18
$377
$107
$584
$132
$510
$0
$22
$11
Unemployment Benefits: $600 per week
unemployment benefit increase; Pandemic
Unemployment Assistance; 13-week extension of
benefits
One-time Checks: Direct payments of $1,200 per
adult and $500 per child to middle- and low-income
families
Income Support: Increases in SNAP, child nutrition,
housing support, and child and family services
Small-Business Loans and Grants: Loans of up to
$10 million to small businesses with forgiveness
provisions for funds used to meet payroll, mortgages,
rent and utility obligations; emergency grants for
small businesses
Loan Programs for Large Businesses &
Governments: Loans to directly support airlines,
transportation, national security, the U.S. Post Office.
Funding a $4.5 trillion lending facility with the Federal
Reserve available to businesses and state and local
government.
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Published on 4/8/2020
Total Effect on Output
Category
Estimate
Estimate
Using Low
Using High
PWBM
Outlay
Multipliers
Multipliers
Estimate
$72
$25
$131
$38
$150
$53
$263
$105
$225
$87
$435
$174
$32
$12
$59
$20
$20
$3
$12
$3
$280
$23
$207
$68
$25
$9
$45
$9
$2,283
$570
$3,016
$812
Transportation Support: Infrastructure grants to
local governments, support to transportation
providers to avoid employment and wage reductions,
suspension of related taxes and fees.
Direct Aid to State and Local Governments:
Minimum of $1.25 billion to each state.
Health and Disaster Spending: Spending directed
toward hospitals, other healthcare providers,
preparedness, FEMA’s disaster relief program,
veterans and defense health, and other federal
agencies. 2
Education 3
Individual Taxes: Penalties waived for COVID-19related early retirement withdrawals, required
minimum distribution suspension, other additional
provisions.
Business Taxes: Payroll tax credits for employers
keeping employees at a loss, relaxing interest
deduction and operating loss caps, defer employer
payroll tax payments for 2020. 4
Other Spending
Total
Sources: For expedience, estimates follow JCT and category classifications follow CRFB.
Notes: Outlays from various provisions may be repaid to the federal government in future years.
Unemployment Benefits: The largest component of this provision is a $600 weekly, four-month increase in
benefits, which should reach eligible claimants very quickly. Other parts of this policy include several programs
to extend benefits. All of the parts of this program fall in the transfers to persons category for multipliers.
Based on this categorization, PWBM estimates that this $260 billion program will generate a total $111 billion
increase in GDP over the next two years (2020-2021).
One-time Checks: This provision directs checks of $1,200 per adult and $500 per child to low- and middleincome families. As with the increase in unemployment benefits, this stimulus is most closely related to the
transfers to persons category used to analyze ARRA. PWBM estimates that this $290 billion program will lead
to a $123 billion increase in GDP over the next two years.
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Income Support: The Supplemental Nutrition Assistance Program, housing support, and other programs
receive higher funding under the CARES Act. As with the unemployment benefits, these provisions are
directed toward low-income households, and fall into the transfers to persons category for multipliers. PWBM
estimates that the $42 billion allocated to these programs will increase GDP by $18 billion over the next two
years.
Small-Business Loans and Grants: This program includes $366 billion in loans to small businesses, but with
generous forgiveness programs, particularly for firms that maintain employment. Although some of these
funds will likely directly benefit the business, a significant share of these funds will go directly to households in
lieu of unemployment insurance, which falls in the transfers to persons. Therefore, PWBM estimates that this
program will increase GDP by $132 billion over the next two years.
Loan Programs for Large Businesses & Governments: This $510 billion program has $56 billion for direct loans
to transportation-related firms and the U.S. Post Office. The remaining $454 billion is used to insure the
Federal Reserve against losses in its loan facilities. As we do not know how much takeup there will be in this
program or what the losses might be, we exclude this component from the analysis. PWBM estimates that the
$56 billion in direct loans, however, will generate about $11 billion in additional GDP over the next two years.
Transportation Support: The CARES Act supports transportation with direct grants to states for infrastructure,
aid to providers to avoid furloughs and job cuts, and a reduction in transportation-related taxes. These
programs span the four categories: transfer payments to state and local governments for infrastructure,
transfers to persons, business tax provisions primarily affecting cash flow, and a one-year tax cut for higherincome people. PWBM estimates that this $72 billion program will increase GDP by $38 billion over the next
two years.
Direct Aid to State and Local Governments: Aid to state governments will increase spending from state
governments scrambling to mount a fiscal response to coronavirus outbreaks. Using the multipliers associated
with the transfer payments to state and local governments for other purposes category, PWBM estimates that
this $150 billion in spending will increase GDP by $105 billion over the next two years.
Health and Disaster Spending: Healthcare and disaster spending covers $55 billion for FEMA’s disaster relief
and other federal agency spending; the other $170 billion is allocated to healthcare providers, Medicare, and
preparedness. This spending is related to two ARRA categories: purchases of goods and services by the federal
government and transfer payments to state and local governments for other purposes. PWBM projects that the
$225 billion in spending in this category will raise GDP by $174 billion over the next two years.
Education: Most of the $32 billion dedicated toward education goes toward a fund to support all levels of
education. There is also a provision that $7 billion of the funds are allocated toward student aid. The closest
categories for these expenditures are transfer payments to state and local governments for other purposes and
transfers to persons; therefore, PWBM projects that this program will increase GDP by $20 billion over the next
two years.
Individual Taxes: Most of these provisions, which include a suspension of the required minimum distribution
for retirement accounts, suspension of penalties for COVID-19 related early withdrawals, and charitable
deductions, benefit higher-income households. The ARRA category one-year tax cuts for higher-income people
describes these provisions. Therefore, PWBM projects that this $20 billion program will generate an additional
$3 billion in GDP over the next two years.
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Business Taxes: This category includes a $55 billion tax credit for businesses that keep employees at a loss.
This provision will likely work in lieu of unemployment insurance, therefore it is categorized as transfers to
persons. The remaining $225 billion are various tax credits, some of which will be repaid in the future, and are
most closely related to the ARRA category of business tax provisions primarily affecting cash flow. Together,
PWBM projects this $280 billion program to generate $68 billion in additional GDP over the next two years.
Other Spending: Other, non-categorized spending is estimated to have an average multiplier of all of the other
categories. PWBM projects this $25 billion in other spending to increase GDP by $9 billion over the next two
years.
Total Effect on GDP
Of course, changes in GDP do not capture the total benefit of the CARES Act. The CARES Act provides for a
more-robustly funded healthcare system and provides substantial relief for people who may need help with
their living expenses. In addition to these direct effects, however, we project that the GDP effects will be
substantial.
PWBM estimates that the CARES Act will increase GDP by $812 billion over the next two years. In 2020 Q2, we
expect that GDP will decline by 30 percent annualized compared to 37 percent annualized in the baseline
economy (i.e., absent fiscal stimulus). Although the increase hardly covers the GDP lost from the pandemic,
the effects on jobs will be substantial. PWBM estimates that this increase in GDP will lower the unemployment
rate from about 12 percent to 11 percent in 2020 Q3, producing around additional 1.5 million jobs by 2020
Q3.
PWBM will analyze further stimulus as Congress considers additional initiatives to fight the pandemic and
stabilize the U.S. economy.
This analysis was produced by Alexander Arnon, Zheli He, and Jon Huntley.
1. Congressional Budget Office, 2011. “Estimated Impact of the American Recovery and Reinvestment Act
on Employment and Economic Output from July 2011 Through September 2011.” Charles J. Whalen and
Felix Reichling, 2015. “The Fiscal Multiplier and Economic Policy Analysis in the United States: Working
Paper 2015-02.” ?
2. The outlays for certain Medicare provisions and federal health-related agencies are uncertain. ?
3. The outlays for student-aid and student loan provisions were not estimated. ?
4. The outlays for certain small business tax write-offs were not estimated. ?
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https://budgetmodel.wharton.upenn.edu/issues/2020/5/5/long-run-economic-effects-of-cares-act
Published on 5/5/2020
The Long-Run Fiscal and Economic Effects of the
CARES Act
Summary: PWBM estimates that the CARES Act increases GDP by about 5 percent in 2020 while
lowering GDP by 0.2 percent in 2030.
Introduction
The $2.3 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act provides immediate relief to
households and businesses in the form of cash payments to low- and middle-income households, enhanced
unemployment benefits, loans and grants to small businesses that maintain their payroll, and additional
programs. PWBM previously estimated that the CARES Act would boost GDP by $812 billion over the next two
years, which is about a 5 percent increase through 2020.
This blog post pairs the PWBM short-run forecasting model with the PWBM Dynamic OLG model to report the
long-run fiscal and economic impact of the CARES Act. We evaluate the long-term effects of the CARES Act
under two recovery scenarios: a “V shape” recovery where the economy recovers by 2021, and a “U shape”
recovery that is complete by 2023.1
The Recession
Figure 1 shows the simulated path of GDP for four different scenarios: the “V shape” recovery and the “U
shape” recovery, each with and without the CARES Act. In all four scenarios, actual GDP is falling below
“potential GDP,” defined as the maximum sustainable output of the economy. In the absence of the CARES
Act, GDP falls 13 to 14 percent below potential in 2020 in the “V shape” and “U shape” recoveries. The CARES
Act increases GDP by about 5 percent relative to either recovery unassisted by the CARES Act.
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Published on 5/5/2020
Figure 1. GDP Under Simulated Recession Scenarios with and without the CARES Act
Percent Deviation from Potential Output
DOWNLOAD DATA
0.0%
-5.0%
-10.0%
-15.0%
2020
2022
V Shape Recession, No CARES Act
U Shape Recession, No CARES Act
2024
2026
2028
2030
V Shape Recession, CARES Act
U Shape Recession, CARES Act
The CARES Act
The CARES Act was designed and passed to provide relief to households, governments, and businesses
impacted by the 2020 coronavirus pandemic. It has a wide range of provisions including direct transfers to
households, loans to business, tax deferrals, tax reductions, grants to state and local governments, and more.
In this analysis, we quantify the long-term effects of $1.7 trillion of the spending and revenue changes over
ten years.2 Although most of the spending is dedicated to direct payments to households, businesses, and
governments in 2020 and 2021, some of the programs involve changes to the tax code, which lower personal
and business taxes today but recoup some of the revenue in future years. For example, although the provision
that suspends the required minimum distribution for retirement accounts costs about $12 billion in 2020 and
2021, the money is taxed in the future and generates about $7 billion in revenue in 2022 through 2030.
Allowing businesses to offset 100 percent of net operating losses will cost the federal government $89 billion
in revenue through 2021, however, $63 billion of that will be recovered in higher revenue from 2022 through
2030.3 These future streams of revenue will help reduce the deficit and somewhat alleviate the crowding out
effect.
The Long-run Effects of the CARES Act
Table 1 shows the 5- and 10-year macroeconomic effects of the CARES Act in both a “V shape” and a “U
shape” recession.
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Table 1. Economic Effects of the CARES Act
Percent Change from Economy without CARES Act
DOWNLOAD DATA
“V Shape” Recession
“U Shape” Recession
“V Shape” Recession
Average
Year
GDP
Capital stock
Hourly Wage
Hours Worked
Debt
2025
-0.2%
-0.5%
-0.2%
0.0%
7.5%
2030
-0.2%
-0.6%
-0.2%
0.0%
7.5%
“U Shape” Recession
Average
Year
GDP
Capital stock
Hourly Wage
Hours Worked
Debt
2025
-0.2%
-0.5%
-0.2%
0.0%
6.7%
2030
-0.2%
-0.6%
-0.2%
0.0%
6.7%
The CARES Act appropriates about $1.7 trillion in additional, deficit-financed spending. This additional debt
crowds-out private capital, which has long-lasting effects on wages and GDP. In the “V shape” recession, this
additional spending leads to a 7.5 percent increase in the federal debt in both 2025 and 2030 compared to an
economy without the CARES Act. This additional debt crowds out productive, private capital formation, which
leads to a 0.5 and 0.6 percent drop in private capital in 2025 and 2030 respectively. Less capital makes each
worker less productive, which is reflected in a 0.2 percent drop in wages. Furthermore, less capital leads to a
0.2 percent decline in GDP in both 2025 and 2030.
The economic effects of the CARES Act in a “U shape” recession are very similar. In PWBM’s earlier analysis, we
found that a “U shape” recovery leads to significantly more federal debt than a “V shape” recovery in the
absence of the CARES Act. Therefore, the CARES Act raises the federal debt by 6.7 percent in 2030, which is
less in percentage terms, even if the additional debt from the CARES Act is the same in dollars. The effects of
the debt are very similar: The additional debt crowds out private capital, which falls by 0.5 and 0.6 percent in
2025 and 2030. This leads to a 0.2 percent fall in wages in the same years. The lower capital also leads to a 0.2
decline in GDP in both 2025 and 2030.
The deficit-financed CARES Act provides a short-term boost to GDP as well as relief to families, workers,
business owners, health care institutions, and governments affected by the pandemic. Moreover, the relief can
be especially valuable to people who have lost their jobs and businesses that are no longer able to produce
goods and services in this environment. Nonetheless, without fiscal policy to reduce the debt in future years,
the CARES Act will result in a small but long-term decline in GDP as the additional debt crowds out private
capital and lowers wages.
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https://budgetmodel.wharton.upenn.edu/issues/2020/5/5/long-run-economic-effects-of-cares-act
Published on 5/5/2020
This analysis was produced by Marcos Dinerstein and Jon Huntley.
1. Some forecasters anticipate the economic recovery having a “W shape,” which is defined by quarterly
output fluctuations that move as the pandemic intensifies and wanes. The quarterly fluctuations that
define the “W shape” smooth into a “V shape” or a “U shape” in PWBM’s Dynamic OLG model, which
simulates the economy at a yearly frequency. ?
2. As discussed in PWBM’s previous work on the short-term effects of the CARES Act, $454 billion is used
to insure the Federal Reserve against losses in its loan facilities. As we do not know how much takeup
there will be in this program or what the losses might be (if any), we exclude this component from the
analysis. ?
3. These calculations are based on CBO’s revised April 27, 2020 estimates. ?
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