The behind-closed-doors negotiations are over. The White House and top Democrats hammered out an agreement March 25 that provides an economic stimulus package of $2.3 trillion to fight the effects of the coronavirus. It is the most significant amount of economic stimulus in modern history.
The official name of the stimulus package is the “Coronavirus Aid, Relief, and Economic Security Act.” The 880-page CARES Act was signed into law by President Donald Trump on March 27.
Naturally, in this type of agreement, there are going to be winners and losers, both on the business and home fronts. Senate majority leader Mitch McConnell referred to the stimulus package as a “wartime level of investment into our nation.”
The breakdown of how the money will be distributed suggests that Congress is throwing money at several different constituents that include individuals, businesses, and state and local governments.
A list of the winners and losers could run on indefinitely. Here are the seven I’ve focused on at this point in the proceedings.
Individuals Win Time
I don’t think there’s anyone that needs the money more than the American middle and lower classes. These are the people who don’t have a lot of savings to begin with; the coronavirus has put many Americans in dire straits like they haven’t seen since 2008.
The federal government is giving $1,200 to each adult making $75,000 or less. A couple earning $150,000 or less would get $2,400. The amount of the payment scales back between $75,000 and $99,000. Those earning more than $99,000 get nothing unless you are the head of household, which phases out at $112,500—couples earning more than $198,000 also get nothing. Families also get $500 per child.
These are one-time payments that do not count as taxable income. The IRS will calculate the amount you receive based on your 2019 or 2018 tax returns.
In total, individuals will receive approximately $300 billion in direct payments.
Considering that 69% of Americans have less than $1,000 in a savings account — and 45% don’t have anything — this is money that will help keep the wolves from the door. But not for long.
More important than the one-time payments to individuals and households are the additional unemployment benefits going to those who’ve lost work as a result of the coronavirus. The $260 billion estimated cost will likely move higher as the pandemic takes hold.
For self-employed, freelancers, and independent contractors who typically don’t qualify for these benefits, it’s a godsend. Under the CARES Act, these people will get half the average state unemployment benefit plus $600 per week. That extra $600 will last for four months. Based on the national average for state unemployment benefits, that works out to $940 per week.
Also, people who quit their jobs as a result of the coronavirus are eligible for benefits they usually wouldn’t.
Stimulus Package Favors Big Businesses
In a Trump presidency, there was never any chance big businesses weren’t going to be one of the biggest recipients of government aid. One only needs to look at Trump’s corporate tax cut to see where his allegiances lie.
The CARES Act sets aside approximately $500 billion in loans and grants for big business.
The airline industry, which has suffered about as much as any industry from the coronavirus, will get $60 billion. Of that, the airlines themselves get $25 billion of $32 billion in grants meant to help airlines maintain their payroll. As part of these grants, airlines will not be allowed to pay dividends until September 2021.
In addition to the payroll grants, the Treasury Department will make available loans and loan guarantees worth $25 billion. These loans come with strings attached, including prohibiting dividends or share repurchases for the life of the loan (a five-year maximum) plus an additional year after repayment. As part of the loan package, companies can’t cut their staff count by more than 10% throughout the loan.
However, it is the $454 billion that Congress has allotted to the Treasury that will help big businesses. That’s because the injection provides the Fed with as much as 10 times the leverage for making loans to the private sector.
“The government has stepped into the breach in a dramatic way, and has made Treasury the Federal Reserve’s deputy,” said Peter Conti-Brown, a Fed historian at the Wharton School of the University of Pennsylvania. “The Federal Reserve has become your friendly neighborhood loan officer.”
The critical thing to keep in mind is that once the $4.5 trillion in loans are paid back, that money is given back to the Fed and removed from the private banking system. It’s only meant as a bridge through this economic crisis, not as permanent stimulus.
How much of this $4.5 trillion do you think small businesses are going to be able to get their hands on when massive companies are lining up for loans? Very little.
Further, Americans for Tax Fairness point out that corporations and businesses will get 54% of the $2.3 trillion in financial assistance, including $280 billion in the form of tax cuts. Meanwhile, workers, families, hospitals, schools, and state and local governments will have to divvy up the remainder.
Big Business, as was the case in the Trump tax cut, are the biggest winners.
Lobbyists Are Camped Outside the White House Front Door
Despite the fact we’ve changed the way most of us do business due to the coronavirus, lobbyists are having a field day to get their client industries a more significant piece of the stimulus package pie.
New York Times columnist Ken Vogel recently wrote about the Washington lobbyist community and what they’re doing to get for some of their clients.
“Across the country, companies see a chance to cash in, do some good for the country or both, making virus outbreak response one of the few thriving sectors of the economy,” Vogel wrote March 28.
“And because so much of the business runs through Washington, the rush has created new opportunities for those who can offer access, influence and expertise in navigating bureaucratic hurdles and securing chunks of the relief package Mr. Trump signed into law on Friday.”
Various federal agencies directly related to the coronavirus are working day and night on issues that affect them. For example, the Food and Drug Administration are working tirelessly to ensure that people aren’t selling fraudulent products to deal with COVID-19. Add to this a surge in applications for vaccine and treatment trials and you have a perfect opportunity for lobbyists to grease the squeaky wheel.
However, not every lobbyist is working on behalf of clients.
Vogel writes that long-time Republican fundraiser Mike Gula, whose firm has made millions off of the Washington political scene, is leaving the lobbying arena to set up Blue Flame Medical, which sells hard-to-find medical supplies.
During this time of crisis, what better way to serve your country than to set up a for-profit business that benefits directly from other people’s misery.
Once a lobbyist, always a lobbyist, I guess.
Real Estate Investors Win Through Tax Relief
By now, you know that lawmakers in Washington are unable to obtain loans, grants or investments from the federal government. That includes President Trump, Jared Kushner, and the rest of his immediate family.
“We wrote a provision, not just the president, but any major figure in government, Cabinet, Senate, congressmen — if they have majority, they have majority control, they can’t get grants or loans, and that makes sense,” Senate Minority Leader Charles Schumer (D-N.Y.) said in a CNN interview. “Those of us who write the law shouldn’t benefit from the law.”
As Schumer said, it makes sense.
However, it now appears that Trump and his family, including son-in-law Jared Kushner, could benefit from the CARES Act after all.
According to the New York Times’ Jesse Drucker, the $500,000 limit on losses from real estate investments deductible against investors’ nonbusiness income, such as capital gains from stocks, has been lifted for this year and retroactively for the previous two years. The change is expected to cost taxpayers $170 billion over the next 10 years.
University of Southern California professor Ed McCaffery wrote an opinion piece for CNN on March 28 that did an excellent job explaining why the change is good for real estate investors.
“Under the change, our rich taxpayer couple — and this applies only for individuals, not corporations — can now deduct an unlimited amount of “excess losses” in real estate against income from other sources,” McCaffery wrote.
“So now real estate moguls with lucrative day jobs or bountiful capital gains from other investments can go back to living tax-free, the Kushner way, before limits were put in place as part of the 2017 tax reform bill.”
Also, the USC professor reminded readers that these investors could refile their 2019 and 2018 taxes to get refunds on their taxes.
The rich get richer.
Small Businesses Lose Because It’s Not Nearly Enough
I know what you’re thinking. How can small businesses be losers when they are eligible to receive $350 billion in loans, loan guarantees, and investments from the CARES Act?
The legislation allows businesses with 500 or fewer employees to apply for loans of up to $10 million to cover payroll, utilities, insurance premiums, and other essential expenses.
Obtained from banks and financial institutions that participate in the Small Business Administration’s lending network, these businesses can even apply to have the loan forgiven for funds used during the eight weeks immediately following the loan’s approval. A 4% interest rate would apply for any of the funds not used in those eight weeks.
What’s not to like?
However, when you consider that there are 31 million small businesses in this country employing more than 59 million people, is $350 billion going to be enough? I highly doubt it.
“We are cautiously optimistic that this will provide the cash flow that small businesses needed yesterday,” said Kevin Kuhlman, senior director of federal government relations at the National Federation of Independent Business. “But we’re worried it may be too little too late.”
A bigger concern is that the SBA’s lifeline won’t happen nearly fast enough to help small businesses struggling to stay afloat. The small business agency is trying to make loans over the next two months equal to 13 times the number of loans it provides on an annual basis. This could go spectacularly wrong.
Hospitals and Healthcare Were Forgotten
All you need to do is watch some of the reporting being done from hospitals across the country to know that the $100 billion allocated to health care isn’t nearly enough to get the nation safely through the coronavirus.
New York University economics professor Roman Frydman and former UBS chief economist Lawrence Hatheway recently wrote an opinion piece in Barron’s highlighting why the largest stimulus in history isn’t nearly enough. Part of their focus was the meager amount given to the health care industry.
“In scenarios that are increasingly spoken of as the norm, over one-third of the U.S. population—some 100 million people—will at some point be infected by the virus. If 3-5% require hospitalization (as seems to be the case, based on available data), some five million hospital beds will be required over the life of the pandemic,” Frydman and Hatheway wrote March 29.
The duo goes on to suggest that the severe shortage of beds combined with the cost of staffing and equipment necessary to take care of coronavirus patients, $100 billion is downright paltry. They finish by stating that until the country widens its relief efforts, both in terms of the size and scope of it, Americans will continue to suffer.
I don’t think that’s more clear than in the healthcare industry.
Individual Taxpayers Didn’t Get Nearly Enough to Save Them
Just as in the Great Recession of 2008, the 1% are likely to rebound from this economic distress a lot faster than the remaining 99%.
As Frydman and Hatheway stated in the previous section on healthcare, $2 trillion isn’t nearly enough to put average Americans at ease. Who knows what the final number will be, but it’s going to be a lot higher. Perhaps as much as five to 10 times higher.
Skeptics who’ve called Universal Basic Income a socialist pipe dream are now probably wishing that something like this was part of the American social safety net at this point. There are millions of people who might not get the direct one-time payments from the government because they didn’t file taxes in 2018 or 2019. These are some of the poorest and most vulnerable in this country.
How is it that real estate investors are going to benefit, but poor people aren’t? It makes absolutely no sense.
As Frydman and Hatheway suggested, the “size and design” of the $2 trillion stimulus package is nowhere near sufficient to do the job it’s intended to do.
For this reason, despite the direct payments and increased unemployment benefits, I believe ordinary American taxpayers lose the most from this economic stimulus package.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.