Unsanitized: How the CARES Act Led to the Pandemic Surge

It’s all about the missing state and local aid. This is The COVID-19 Daily Report for July 6, 2020.

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First Response

We return from a holiday weekend to continued uncontrolled outbreaks in the south and southwest, and tentative steps toward shutting down that which was reopened. Texas, Michigan, and Arizona closed bars, California locked up dine-in seating in restaurants, and larger chains are rethinking reopening plans as well. The closures don’t even have to be official: States that opened early and saw cases rise have seen reversals at restaurants and other business activity, as people suddenly don’t want to put themselves in danger for the meat loaf special for some reason.

Most of the leaders in these states won’t commit to new lockdowns, and you won’t catch them admitting error on opening too soon. But it’s important to understand the dynamics underlying this second half of the first wave, and why we failed where so many other developed countries succeeded. It goes back to the CARES Act.

The legislation, as you recall, paid people for staying at home during the lockdowns, which was an important step at that time. The goal was to use the unemployment system to keep people safe, alive and afloat while the country tried to manage the outbreak. (The PPP also paid businesses to keep people on payroll, but unemployment was the more dominant mechanism here.)

What the CARES Act did not do was protect cities and states who were about to lost giant chunks of tax revenue as a result of this plan. Not only were millions of people coming off of payrolls (Many states do tax unemployment but some, like California and New Jersey, do not), but reduced economic activity was crushing sales tax revenues as well as use taxes like road tolls. States were staring at hundreds of billions of dollars in shortfalls, and unlike the federal government, they could not borrow their way out of trouble or keep their budgets unbalanced.

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The CARES Act supplied $150 billion to states but only for emergency coronavirus spending not accounted for in state and local budgets. So it could not be used to plug increasing budget holes. The continued shortfall was closer to $1 trillion, and it grew every minute that cities and states remained locked down.

This weighed heavily on cities and states, and unquestionably played a role in the timing of the reopening. While most developed countries waited until their average case counts were quite low before letting people back into the world, states were pressured into salvaging their economies and bringing in some semblance of revenue by throwing open the doors. This was a direct result of not having any guarantee from the outset that state and local budgets would be taken care of.

The result has been catastrophic, and the states that opened early know it. It’s hard to disassociate the budgetary desperation with the ideological impulse in conservative areas to back the president by trying to roar back with the economy. Greg Abbott and Ron DeSantis would have probably reopened even if they had billions in reserve to weather the lockdown. But look at my home county of Los Angeles, no home to Republican lickspittles, which clearly reached a breaking point where it felt the need to generate more revenues by getting retail and restaurant spaces going.

There’s no doubt that the official reopening orders gave many residents confidence to venture back out when they should have stayed home, leading to the wider outbreaks. And there’s no doubt that these businesses and these cities and states are now in far worse position economically than if they waited it out. Restaurants that managed to survive in March and April, only to open and face a downturn in July, are much less likely to persevere. Just in the immediate term, food purchased in the expectation of reopening will not get used. Workers brought back will be sent home. The start and stop was economically and emotionally jarring, and it risks a wider failure.

It also has put all other businesses at greater risk, by increasing the amount of virus. It makes it hard to send people back to offices or other less perilous activities. This hurts local economies even further, and this damage was precipitated by depriving them of a safety net in the initial bill.

This association between the lack of state fiscal aid, premature reopenings, and sustained epidemics isn’t particularly novel. Eric Levitz of New York Magazine made substantially the same case last week. But he pulled his punch, blaming the issue on Republicans. The CARES Act bill passed 96-0 in the Senate and virtually unanimously in the House. Democrats worked hard and took credit for the main economic survival pieces, the ones that created the incentive structure to reopen early. You cannot wedge this into a partisan framework.

And you certainly cannot turn around and call the CARES Act a solid crisis response when it ignored the central feature that set cases spiking out of control. The CARES Act was hastily assembled and didn’t fit together logically. It created a scenario where cities and states would be ruined if they followed proper public health guidelines. And it subsequently set in motion the horrific social and economic outcome we’re mired in today.

This is crunch time for the next coronavirus response bill, and maybe this time state and local aid will make it into the deal. But the damage has been done. By waiting for months to ensure mayors and governors that they won’t be left behind, Congress put them in an impossible position, induced them to open prematurely, and severely damaged the recovery. Not “Republicans,” Congress, with the most bipartisan bill in recent memory.

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