The CARES Act - the economic response to the upheaval caused by coronavirus in the United States


The coronavirus pandemic has ruthlessly laid bare the faults in the US social welfare system. For one thing, a safety net that is full of holes, leading to a lack of social cover in these times of crisis, is making it even harder to stem the rapid spread of the virus. And for another, the pandemic is hitting the most vulnerable people the hardest. In this situation, Congress has put together a support package worth more than $2 trillion, aiming to put relief in place quickly. But as it won’t be able to solve the structural problems, there will be limits to its implementation.  

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Everything closed: Cinema in an empty street in Minneapolis.

A considerable proportion of the US population lives in a precarious economic situation. According to a survey, 40% of Americans would struggle to pay an unexpected bill of $400. Many small businesses, which comprise the backbone of the economy in the United States as well, only have sufficient cash reserves for a few weeks to fall back on in times of hardship. This makes the consequences of social distancing and the related brutal collapse of the economy all the more serious. Following medical advice has had the effect that many people and businesses have seen their income dry up, with virtually nothing to replace it. A social safety net to catch them in this situation barely even exists – it is up to the individual federal states to decide on unemployment benefits, while health insurance is usually the responsibility of employers. But the coronavirus has destroyed more jobs at once than ever before. Since mid-March, there have been more than 15 million new applications for unemployment benefits. It is predominantly the many people living in low-income households who are unable to work from home, which further exacerbates existing inequalities. The economic fallout of the coronavirus is hitting the most vulnerable people the hardest. 

In response to this crisis situation, Congress has put together the CARES Act, a rescue package worth around $2 trillion to help people and businesses in need. According to a breakdown announced by NPR, the official public radio station of the United States, $560 billion out of the package will go directly to US citizens, $500 billion to large businesses, $377 billion to small and medium-sized enterprises, $340 billion to the federal states and local governments, $150 billion to the health sector (mainly hospitals), $44 billion to education establishments and $26 billion in social institutions, such as food banks. 

Direct, earnings-related payments 

As a result of the limited social safety net, it is particularly important that money can be channelled directly to many Americans, so that they can continue to buy food and pay their bills. Otherwise, their very lives will be in danger, and the entire economy could collapse. These payments to around 209 million Americans will be paid to the citizens in the form of either credits directly into their accounts or cheques sent through the post. All US citizens who filed a tax return in 2019 showing income of less than $75,000 p.a. will receive a one-off payment of $1200. This amount is scaled down for higher incomes up to $99,000, above which payments cease. Additionally, parents will receive a one-off payment of $500 for each child. The $1200 was calculated on the basis of one month’s working hours at the national minimum wage of $7.25 per hour, which is extremely little in many urban areas and certainly not enough to cover the cost of living for most people. 

Even so, these cheques are important, as they will be many people’s only income in the next several weeks. However, there are problems with implementation, meaning that payments will not be received quickly enough in all cases. The first cheques are supposed to be issued in the next few days, but it could take until August, depending on whether and how people filed tax returns in the last few years. As there is no countrywide reporting obligation in the United States, the government cannot simply send cheques out to all citizens, as they do not even have their addresses. The cheques must therefore be paid out by the tax offices, which makes it difficult to reach people who have paid no tax but are very poor, such as Americans whose income was so low that it wasn’t even taxable. 

Direct payments of this kind have been used twice previously in times of economic crisis – following the attacks of 11 September 2001 and after the banking crisis of 2008. Even though they are frequently compared to an unconditional basic income, along the lines of the fledgling system in place in Alaska, these are only one-off payments and there are no means tests. As a result of the severity of the economic downturn and the uncertainty as to how much longer lockdown will continue, the idea of issuing further cheques is being considered, but they would also be subject to income limits.

Unemployment insurance extended 

In the United States, unemployment insurance is governed by the individual states. Benefits can be either quite generous, as is the case in Massachusetts, or very low, as in Mississippi. The differences are considerable and on average, there are unemployment benefits of between $1200 and $1600 per month. Although the population of the United States is four times higher than that of Germany, the two countries pay out approximately the same amount in unemployment benefits. On top of this, the criteria that must be met in the United States to qualify for any support are considerably tighter than Germany’s. In some states, for instance, there are mandatory drugs tests. There are also many employers who continue to keep workers on their books, but without giving them any shifts or hours. In such cases, the employees themselves must quit their jobs and then prove that they are nonetheless entitled to unemployment benefits, which is highly complicated. 

The CARES Act extends unemployment insurance considerably. For instance, payments will be increased by $600 per month for the next four months, across the whole country. Additionally, the group of employees who are entitled to benefits has been increased. Now “gig workers” (e.g. Uber drivers), part-time workers and the self-employed also qualify. However, the systems and the federal states are not designed to deal with the record flood of applications they have experienced in recent weeks. There are, for instance reports of servers crashing, long holding queues on the telephone and authorities that have been completely overwhelmed. In this crisis situation, structures have to be built up completely from scratch, which is bound to lead to delays in processing and, therefore, in payments. This shows just how difficult it is to improve a safety net that is full of holes precisely when it is working at full capacity. 

People losing health insurance along with their jobs 

The US healthcare system is very expensive and, despite Barack Obama’s best efforts to afford more people access to health insurance, there are still very many people with no cover. Furthermore, half of the population get their health insurance through their employer. This is a dual problem in the current situation. Not only have many people lost their health insurance along with their jobs, but it is even more important than ever for them to have decent insurance, in case they become infected with coronavirus. But they can no longer afford their own private insurance policies, as they have been left with barely any income – a vicious circle. Now many people are quite justifiably worried that they would not be able to afford treatment. There are reports of people having to pay up to $34,000 for COVID-19 treatment. A media story about a teenager who died of COVID-19 after being turned away from a hospital on the grounds of having no insurance later turned out to be a misunderstanding. But the number of people who shared the report on social media shows just how great these fears are. Admittedly, the White House has since clarified that the costs of COVID-19 tests and any treatment will not have to be paid for privately, but public faith in this vague promise is on the low side. 

Under the CARES Act, the health insurance situation overall will not be improved, but it earmarks $100 billion in immediate assistance to hospitals, to cover the extra costs of preparing new beds and treating patients. This money is expected to be made available in a very straightforward manner and what exactly it is spent on is in the gift of the Department of Health and Human Services. Over and above that, other institutions which are directly responsible for tackling the pandemic will also be supported, for instance if they need to buy PPE or are conducting coronavirus research. 

Support for businesses large and small 

The CARES Act contains various measures to help businesses ride out the period of economic shutdown. These measures vary between loans to SMEs and to industry. The former can apply for emergency allowances of up to $10,000 to cover ongoing costs, or take out loans at favourable rates of interest, which can be issued if companies do not let any staff go until at least June. Here again, there are reports of problems with making the payments, as so many details have not been clarified. But there is so much demand that Congress is already debating a new package of $250 billion for small businesses

The toughest political negotiations concerned the instruments for industry. Both Republicans and Democrats wanted to avoid any possibility of the CARES Act being labelled a “bailout fund”, as the banks’ bailout in the framework of the 2008 financial crisis came under a great deal of political fire from all sides. The Republicans’ suggestion was a fund from which the federal government could award loans to businesses basically unchecked. The Democrats wanted no part in this, because it looked like an uncontrolled “bailout”. The Democrats wanted to make sure that there would be no bonus payments to the senior management of any company making mass layoffs. Furthermore, they were insistent that companies such as airlines, some of which have in recent years spent ninety-six per cent of their profits on shareholder dividends and bonuses, should not be rewarded for their behaviour. In the event, there was to be a relatively independent watchdog, an Inspector General, to monitor how the funds are distributed along with a committee. Additionally, all money awarded must be made public. However, this solution is now itself once again in question, as Donald Trump has now, once again, rejected the chosen watchdog and it is unclear how the institution will now look. The parliamentary and public checks and balances on financial support to industry thus becomes another political hot potato and will remain correspondingly controversial. 

This article has first been published on and reflects the views from 10th April. Translation by Alison Frankland.