Unsanitized: Yes, the CARES Act Really Did Induce Premature State Reopenings

Also, state unemployment systems still delaying claims. This is The COVID-19 Daily Report for July 13, 2020.

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First Response

The coronavirus pandemic is spinning out of control in much of the United States. In early June new cases were dropping to around 20,000 a day; yesterday there were 15,300 new cases just in Florida. This could be due to backlogged cases all being completed at once; because of that the precise nature of the curve is obscure.

But we do know that in the last week, death counts are rising, reversing a three-month trend. And while cases may be hitting a plateau, we have weeks of increases to work through that could be translated into more death. Rising cases in nursing homes again, when the new surge was thought to be mostly among young people, is really worrying. “We do expect deaths to go up,” said Adm. Brett Giroir, the administration’s testing czar, yesterday.

The initial location of many of the surges—Florida, Texas, Arizona, South Carolina—has led partisan Democrats to comfort themselves with thinking that this is somehow a Republican problem, a story of incompetence and rushed reopenings that put the public in contact with one another again. (You didn’t hear this out of Democrats when the initial outbreaks were mostly in blue states in the northeast, but let that go.) 

There’s no question that many Republican governors, particularly ones loyal to Trump, wanted to jump-start their economies, and were slow to recognize the public health impact. But last week I posited a different theory, that the paucity of state and local fiscal aid in the CARES Act created a desperate situation, where states and cities had to consider an early reopening so their budgets didn’t completely nosedive. This worked at cross purposes with the CARES Act provisions that induced unemployment so people could stay home. The PPP—which was formally silent on whether workers kept on payroll had to come to work but functionally probably did induce business owners to recall people to get something out of them—didn’t help matters.

Could you test this theory? Could you see whether states that rely on tax revenues that weren’t coming in during the early months of the crisis were more likely to reopen? Philip Rocco, an assistant professor of political science at Marquette University, gave it a try. And he found a persistent correlation there. It does appear to be the case that state budget desperation was a factor in premature reopenings. And that makes the CARES Act’s missing piece—a state rescue—a proximate cause.

Read all of our Unsanitized reports

Rocco explains his experiment and shows his results here. It’s a nifty little model. He used the Kaiser Family Foundation database for reopening and assigned a value to states that have reopened.  He then measured this against state income tax policies, while adding controls for taxable resources, rates of cases, state population totals, and even whether the state has a Republican governor and how heavily it voted for Trump. Holding all of that constant, here’s what he found: “a shift in states’ revenue share derived from the income tax from 5 to 10 percent is associated with a 43 percent increase in the probability of reopening.” And even if you look at only Republican governors—so testing the idea that the real reason for premature reopenings is political party—there is still an effect (an increase of about 12 percent in probability within the same changes in reliance on income tax).

That’s a statistically significant result. It’s definitely a crude model. It misses the handful of states that don’t charge an income tax, which happens to include Texas and Florida. At the city level you could say that sales tax is a greater variable, though that would be rather laborious to test. (Anecdotally, the surprising swiftness of reopening in Los Angeles could have something to do with cratering sales tax revenues, which fund improvements to mass transit that are scheduled to be completed before the 2024 Olympics).

“The instructive thing to take away,” Rocco told me, “is that even in solidly blue states, you see differences” tied to reliance on income tax. And it makes intuitive sense. For example, it was May 7 when California Governor Gavin Newsom announced that the state faced a $54 billion revenue shortfall. That same week, he announced a phased reopening, and phase 2 came just days later, with phase 3 by the end of the month. There’s at least a correlation between the reality of the shortfall sinking in and the move to reopen.

If economic precarity played a role in reopening, and induced states to reopen early, then the CARES Act could have put states at ease by ensuring fiscal support. Nearly four months later, no such support has arrived, practically every state has reopened, and we have virtually the same level of outbreak we did then, completely wasting the lockdown. The CARES Act structure helped lead to that outcome. “This is, I think, very much the story,” Rocco said.

You can put on a partisan hat, blame it on Trump, blame it on idiots like Ron DeSantis and Greg Abbott and Doug Ducey. They certainly all were bad at their jobs. But you can’t discount that the CARES Act’s lack of fiscal aid nudged states to reopen early. We now have some evidence suggesting that to be true. And the effect of that was catastrophic. 

Unemployment Stories

Given the state of the virus and subsequently the economy, we desperately need to maintain enhanced unemployment benefits. Michael Sainato has a great piece at our site today talking to several people getting the benefits and how they have little hope if it runs out. But we do have to acknowledge that running this key welfare transfer through state unemployment systems has its problems. Here’s the sad story of a freelance ad copywriter in Los Angeles trying “thousands of times” to get his claim processed, and so far failing, 10 weeks after initially applying.

Yes, eventually, most people get through, and they get the money owed from the initial claim at that time. But two things on that. First, if it takes weeks, people might run out of money, lose their apartment or their car, and a real parade of horribles while they wait. That delay is not costless.

Second, this is where the CARES Act follow-up comes into play. If Congress changes, as has been suggested, from a $600 enhancement to, say, $300, what happens to all of those people who’ve been trying for weeks to get processed? In theory they should get the $600 enhancement for the weeks they missed, and then $300 when it changes over. But state unemployment systems are antiquated and I could see problems with them adding one flat benefit for some weeks and a different flat benefit for others. This will be something to watch.

Days Without a Bailout Oversight Chair

108. The Wall Street Journal reports that the Treasury Department and the Federal Reserve were fighting over how to set guidelines for the slow-moving Main Street Lending Program, with Treasury favoring a “more conservative approach.” In real terms, this means that Treasury didn’t want to lose any money on the loans, when Congress’ full and stated intention was that they authorized the money to be used, aka “lost.” This is a real scandal, with the executive branch implementing a legislative directive wrongly, holding back funds that were supposed to go toward economic rescue. Sounds like a job for that bailout oversight chair!

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