Case Study 2 — The CARES Act: The Largest Fiscal Intervention in U.S. History
On March 27, 2020 — twelve days after the WHO declared COVID a pandemic — President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The bill was $2.2 trillion — the largest single fiscal intervention in U.S. history.
What the CARES Act did
- **$1,200 direct payments** to most adults ($500 per child)
- $600/week enhanced unemployment benefits (on top of state benefits)
- $669 billion Paycheck Protection Program (forgivable loans to small businesses that kept workers on payroll)
- $500 billion Economic Stabilization Fund (loans to large businesses, state/local governments)
- $150 billion to hospitals and healthcare providers
The CARES Act was followed by additional fiscal packages: the Consolidated Appropriations Act ($900B, December 2020) and the American Rescue Plan ($1.9T, March 2021). Total COVID fiscal response: $5T+.
The multiplier assessment
The fiscal response was massive — roughly 25% of GDP over two years. The economy recovered remarkably fast: GDP returned to pre-pandemic levels by Q1 2021 (vs. Q4 2023 for the 2008 recovery without comparable fiscal support).
The multiplier literature suggests that the transfers to households (stimulus checks, enhanced UI) had high multipliers (recipients spent most of the money). PPP had moderate effectiveness (kept some workers on payroll but also subsidized businesses that would have survived anyway). Some of the money was saved (the pandemic savings spike — Chapter 10), reducing the short-run multiplier but contributing to the 2021 spending surge.
The inflation tradeoff
The $5T+ fiscal response — combined with supply disruptions — contributed to the 2021–23 inflation surge (Chapter 23, 29). Was the tradeoff worth it?
The case for "yes": the fiscal response prevented a depression, saved millions of jobs, supported households through a public health crisis, and kept the economy functioning during the shutdown. The cost (inflation) was large but temporary; the benefit (no depression) was permanent.
The case for "we overdid it": the American Rescue Plan ($1.9T, March 2021) was passed when the economy was already recovering. Larry Summers and Olivier Blanchard warned it would be inflationary. They were right. A smaller package might have supported the recovery without triggering 9% inflation.
The honest assessment: the first two packages (CARES + December 2020) were clearly justified — the economy was in freefall and needed massive support. The third package (ARP, March 2021) was probably too large given the state of recovery — it turned what would have been moderate inflation into a 9% inflation surge.
Discussion questions
- The CARES Act passed Congress 96–0 in the Senate. Why was bipartisan support so strong? What does this tell you about fiscal policy during crises?
- Was the $1.9T American Rescue Plan too large? What would you have done differently?
- "The fiscal response prevented a depression but caused inflation. That was the right tradeoff." Evaluate.