COVID response was not a bailout

Abailout is the infusion of taxpayer funds into a targeted entity to avoid insolvency as a result of mismanagement. That’s simply not what we have here. When the pandemic hit, customers across the economy disappeared and large swaths of Main Street businesses experienced genuine cash-flow crunches.

I think it’s important to remember the scale of the impacts on the U.S. economy. In the past couple of months, we have seen a record onemonth decline in consumer confidence, a record onemonth decline in retail sales, 20 million jobs destroyed in the month of April, 10 times larger than the single largest previous one-month loss, the unemployment rate jumping by 10 percentage points or more, again, 10 times larger than ever before, and projections that the economy will contract by about 11 per cent in the second quarter of 2020.

During the worst year of the Great Depression, 1932, the economy contracted by 12 per cent. So the scale of the economic downdraft in the spring of 2020 is comparable to the worst year of the Depression.

The Federal Reserve and Congress saw the duress and set in to provide liquidity. The responses are not disproportionate, they are to everybody. The Fed saw huge amounts of financial market turmoil because everybody was trying to get their hands on cash. It pledged to provide as much liquidity for as long as possible, an open- ended guarantee. That wasn’t to a firm; it wasn’t to a class of assets. It wasn’t to any particular financial activity; it was to make sure markets continued to function in the face of this downdraft.

The Congress similarly provided large amounts of help to households, more unemployment insurance than was available to people previously not eligible and that lasted longer than ever before. Congress also wrote cheques to individuals, US$1,200 ($1,600) for each adult, US$ 500 for kids. The result of that was a transfer of government benefits of about $3 trillion in the month of April and that continued into May.

Households now have $ 2 trillion more in their bank accounts than they did in February. That’s the source of the increase in the balance sheets. That’s not coming from disproportionate help to the corporate sector. It’s because Congress took care of the families. It then set to take care of small businesses with the Paycheck Protection Program, the most successful thing it has done so far.

So, if there’s any disproportionality here, it’s toward households and families and the small business sector, not large corporations. The result is that we have a genuinely well-targeted attempt to preserve the cash flow needs of the private sector by the federal government. It will be an invaluable exercise for the history books.

It preserved the economy for two and a half months, and now the hard work of resuming growth has begun. This is not a bailout in any sense of the word — it’s simply an effective cash flow replacement program.

National Post Douglas Holtz- Eakin is the president of the American Action Forum. He has also worked as the chief economist of the President’s Council of Economic Advisers, the director of the Congressional Budget

Office and the director of domestic and economic policy for the John Mccain presiden

tial campaign.