and haven't heard about the CARES Act? We'll bring you up to speed! It's an economic

relief bill of historic proportions to help soften the financial shockwave of COVID-19.

Many of us are starting to feel the effects of the CARES Act on a personal level. You

might have gotten a stimulus check or have filed for unemployment for the first time.

But lots of us are trying to get a sense of how it's affecting the country at large.

Do huge, government stimulus programs actually work? And who is ultimately going to foot

this bill?

There's no sugarcoating it, we're in a grim economic period in history. During times

like these, governments have two major tools at their disposal to keep things from spiraling

out of control. Monetary Policy and Fiscal Policy.

Monetary Policy can be used by a government's central bank to create more money and make

borrowing easier. For example, back in March the US Federal Reserve began buying back hundreds

of billions in bonds, which essentially injected more cash into the economy. It also slashed

interest rates to nearly zero -- which lowered the price of loans for people and businesses.

But in a crisis, simply flexing the monetary policy isn't enough, it has to be coupled

with Fiscal Policy. This is when a government shifts its own spending levels to influence

the economy. This looks like increases in government spending, gifts, or loans, authorized

by Congress. The largest American fiscal program in the last century was The New Deal in the

1930's. The Federal Government spent money building roads, parks, and libraries to put

people back to work. Another approach is to send cash directly to people or businesses. This

was done in 2008 and now! If you received a check from the government in the last few

weeks, or a grant to your small business, that's Fiscal Policy in action.

So, to recap: monetary stimulus is designed to create a more hospitable environment for

its citizens to spend their money. Fiscal stimulus means the government steps in and

does the spending itself. While both of these tools are usually used together in the event

of a crisis, it's fiscal stimulus that has the most dramatic and immediate effect. It's

impossible to know how effective this version of it will be until more time has passed.

Thankfully, we do have the benefit of some past examples to get a sense of how fiscal

stimulus has played out.

Following 9/11, Congress passed a $15 billion stimulus package in loans and direct aid to airlines

in an effort to save the industry. The results were mixed. The program did meet the goal

of preventing an industry implosion, and once all loans were repaid the treasury posted

a 300 million dollar profit. However, critics point out that it wasn't an outright success

since it basically rewarded reckless companies who “got everything they asked for and responded

by laying off thousands of employees and reducing service."

We saw stimulus utilized on a grander scale to slow the economic freefall of 2008. When

a housing crisis ballooned into one of the worst recessions in our country's history,

two major programs rolled out. First, The Troubled Asset Relief Program, or TARP, created

a 700 billion dollar program to buy “troubled assets” from failing banks, help the auto

industry and protect homeowners facing foreclosure. It helped steady a teetering financial system

and ended in the black, posting a profit again of 15 billion dollars. But, like the previous

bailout, it was criticized for seeming to reward rather than punish risky and irresponsible

behavior by Wall Street.

If TARP was designed to stop the bleeding, the American Recovery and Reinvestment Act,

or ARRA, began the healing process. It provided 831 billion dollars to three main programs:

temporary relief for families and businesses, expansion for food assistance and unemployment

benefits, and increased spending for infrastructure and educational projects. Critics at the time

called the plan a big-government blank check that didn't do enough to help the working

class. Though economists today generally agree that things would have been much, much worse

without it. In 2012, the Congressional Budget Office reported the ARRA raised GDP and lowered

unemployment by creating as many as 1.7 million jobs.

So here we are in 2020, in the midst of a global crisis, and already dozens of countries

have rolled out their own versions of fiscal stimulus. Italian lawmakers are working out

details on a 28 billion dollar plan to support laid off workers and issue loans to businesses.

India's stimulus is focusing on even more basic needs by issuing 23 billion dollars

to give food to poor families that were locked down. Germany's numbers to date are near

one of the highest at 189 billion, followed by China at 169 billion.

But by an enormous margin, the American CARES act takes the cake. In fact, our program is

over twice the size of all other countries COMBINED!. This 2.3 trillion dollar bill would've

been inconceivable a few short months ago, yet today, the broad opinion seems to be that

it hasn't gone far enough. Case in point, the 350 billion dollar fund to help businesses

maintain payroll was exhausted in a matter of weeks, leaving millions of businesses out

in the cold.

Now, we all know there's no such thing as a free lunch. So the big question is -- who's

going to be financially responsible for this 2.3 trillion dollars life raft?

Surprise, it's us. Tax-payers are ultimately going to be on the hook for this -- and any

future bailouts. With the passage of CARES, the total federal debt is now 25 trillion.

Technically, 6 of that is money the government owes to itself, so 19 trillion is a more commonly

used figure. For context, our country's entire GDP was 21.7 trillion for 2019! So

what are the possible consequences for a country racking up such an enormous amount of debt?

It's been long-held economic wisdom that a country should avoid exceeding 90% of its

GDP in debt so that their growth doesn't get crushed under the weight of debt payments.

Before the stimulus bill, America was clocking around 87%.

But in the last few decades, economists are increasingly questioning this idea. They

look at the fact that last fiscal year, interest payments tracked around 1.7% of GDP, while

back in 1999, they were 3% of GDP. Based off of those numbers, we could potentially have

50 trillion dollars in debt and still keep the interest from racking up. But that's

just interest. How do we pay back the principal?

The hard truth is that, just like a family household, we're either going to have to

cut spending, or raise income. Yeah, that means taxes! Realistically, it would have

to be a mix of both. Simply cutting your way out of this would require a 25% decrease in

federal spending - which is more than the budget of the entire US military - a number

so extreme it would probably CAUSE another recession. Which would require more stimulus, etc.

You know where this is going. And a tax hike in the near future would be very unpopular.

Yikes! We're doomed!

Surprisingly, probably not. Experts believe that the US could continue to take on even

more debt, as long as inflation stays low. Thankfully, according to William Gale, a fellow

at the Brookings Institute, “There are powerful forces keeping inflation low”, like technological

advances and globalization. Things that are unlikely to disappear! As long as GDP is able

to grow faster than interest payments, we should be okay.

So, the answer to “Does economic stimulus work?” depends on how you define success.

Recent versions have left large groups out in the cold and have been slow to turn things

around. But in hindsight, the majority of economic experts believe they are necessary,

and while imperfect, keep bad situations from getting much worse.

These programs aren't free, and we will end up paying the “bill” with slower economic

growth in the future. Stimulants -- in finance and medicine -- have limited benefits that

decrease with use. But just like an emergency stimulant given by a doctor, they can be the

difference between life and death.

And that's our two cents.

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