Challenges and Effects of U.S. Covid-19 Policies
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A conference paper, The Challenges and Effects of Policies Implemented in U.S. Under Covid-19, published in Advances in Social Science, Education and Humanities Research, volume 631, the proceedings of the 2021 International Conference on Social Development and Media Communication. The paper states that it examines which factors hindered the fiscal and monetary measures taken in the United States and how effective those policies were, focusing on the CARES act, PPP and other fiscal policies. It reports unemployment falling to 3.5% at the end of 2019 and rising to around 15% after April, and GDP drops of 3% in the first quarter and 9% in the second quarter. It uses a statistical model of income composition and a simplified regression of the bankruptcy rate against monthly market data. The paper concludes that the measures helped the labor and financial markets, though inefficiently.
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Advances in Social Science, Education and Humanities Research, volume 631
Proceedings of the 2021 International Conference on Social Development and Media Communication (SDMC 2021)
The Challenges and Effects of Policies Implemented in
U.S. Under Covid-19
Xingzhi Ma1,*
University of Miami, Economics Department, Coral Gables 33146, U.S.
*Corresponding author. Email: mikemaxingzhi@outlook.com
ABSTRACT
Under the invasion of Corona Virus, known as covid-19, strict lockdown has been enforced as strongly in all other
countries as in the U.S, in the primary purpose of countering any further dissemination. With such circumstances
incurring severe economic crisis are the high unemployment rate and low liquidity, reaching an unprecedented level
after the 2008 financial crisis. Though U.S. government has imposed fiscal and monetary remedies to save the
economy, the result seems unsatisfactory. This paper will discuss which factors hinder the implemented remedies and
how effective these polices are in the give period. With the quantitative model and statistical graph, the results
extrapolated in the several latest researches show the effectiveness of monetary policies such as direct and indirect
government transfer. In the model, it can be seen a decreasing trend of bankruptcy rate among small business and
recovering stock market on graphs. From the policies analysis relative to market reaction, we conclude that these tools
indeed, though inefficiently, help the economy in the scope of labor market and financial market.
Keywords: economic crisis; covid-19; employment; fiscal policy; monetary policy
With this unprecedented status, it may seems
1. INTRODUCTION essential to discuss the severe situation and proper
treatments with primary evaluation. The main purpose
At the end of February 2020, Corona Virus, named of this paper is to find out the effectiveness of policies
as Covid-19 by WHO, began to outbreak in the United and their preliminary achievements. On the application
States. The unemployment rate in the US skyrocketed to side, we will also draw a comprehensive image at the
around 15% after April. The annual inflation rate in may end about information of financial and labor market
was 0.13% with an adjusted rate of 0.95%, while in based on the policy implementation. In this paper, some
September, the official CPI was recorded a 1.41% challenges for police makers that impede the progress of
inflation rate with an adjusted rate of 1.9% [1]. With the policies implemented are addressed and summarized,
sudden decreasing economic growth and increasing for instance, the lack of liquidity between different
unemployment rate in the first quarter, the United States sectors and the fail of stimulus because of the spending
government started to implement monetary, fiscal and composition, and the policies implemented and their
other policies to stabilize the economy. On the monetary effects on the US economy are discussed. In particular,
side, the unconventional monetary policy such as this paper will mainly focus on the CARES act, PPP and
“quantitative easing”, “forward guidance”, “extended other fiscal policies and their effect on the recovery of
liquidity operations” and the “adjustment of interest the US economy.
rate” were mainly used to accelerate the liquidity and
vitality of economy and to increase the demand. On the This paper will compare and identify the policies
fiscal side, Trump’s administration also used and its implementing date corresponding to the reaction
government transfers, such as unemployment insurance of market on a timeline. Graphs and data will be
and economic impact payments, to help individuals and presented to show the influences of policies on other
firms. However, the effects of policies seems faint. The aspects such as the income and spending composition.
US economy and the stock market was continued to For example, on the analysis of unemployment,
fluctuate and began to bounce back in a slow rate. statistical analysis model will be used to show the
income composition and therefore to evaluate
unemployment benefits. Similarly, simplified regression
Copyright © 2022 The Authors. Published by Atlantis Press SARL.
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Advances in Social Science, Education and Humanities Research, volume 631
model of bankruptcy rate is used to find the relation rate in 2020 if covid-19 did not happened. The financial
between policies and market reaction on monthly scaled market was also reached a historical high point at the
charts. beginning of 2020 in the last three years starting from
2017 [2].
2. THE US ECONOMY
2.2. The US economy under Covid-19
2.1. The US economy before Covid-19
The shutdown of economy brought considerable
Prior to the shutdown, the unemployment fell to damages to the US economy. As the covid-19 began to
3.5% at the end of 2019, even less than the Fed’s spread out, the US GDP Q1 has a drop of 3% and a drop
expectation. The unemployment was at a historical low of 9% in Q2. In the historical context, as shown in the
level. The growth rate reached around 3% in 2020 Fig.1, the 2020 recession drove the economy down into
before the covid-19. The economy was in a constant a much deeper level comparing to the previous recession
increasing trend and Fed expected even a higher growth [3].
Figure 1 Percentage change in GDP relative to business cycle peak [4]
On the aspect of unemployment, the pandemic have the previous huge shocks. The high job finding rates and
a bigger impact in the labor markets than the several the indicated potential high job recall rate reactivate the
huge crisis before. The labor market turned to be vitality of labor market [5]. Data from CEA (Fig.2)
inactive due to the close of major economic sectors show the escalated unemployment at which the rate
especially services-intensive industries. Despite the reached a peak in April was as high as 14.7%, signaling
sudden shock on the demand side of labor market, the a dangerous warning to the economy.
recovery took place in a much faster rate comparing to
Figure 2 The US unemployment rate in Q1 & Q2 [6]
The US stock market also seems bleak after the Other economic sectors such food, retail and
outbreak of pandemic and the enforcement of quarantine. relevant services received the most severe shock under
The prices reached a peak from February 12 to February the pandemic. Recorded by the CEA, the occupancy rate
19 and then drop dramatically over 37%. There were of hotel and restaurant was halved. With the crisis
numerous sudden crash and several circuit breaker took occurred, the personal saving saw its highest, met a rate
place between February to April. of 33% of the real disposable income.
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3. CHALLENGES AND POLICIES level of cash hold in hand and the model also indicates
IMPLEMENTATION that the reaction to stimulus was weaker in the high
income group and in the high economic sectors than the
3.1. Challenges lower sectors [10].
Different from the previous economic crisis, the 3.2. Policies implementation
stabilization tools are not working as well as before in
pandemic. In the case of Covid-19, the transfer of According to the detailed research of IMF, the
payment between different economic sectors are United States government under Trump administration
imbalances. Some economics sectors are still operating imposed several important policy, both fiscal and
under the pandemic while some sectors are closed, such monetary, to help to relief the contraction in the
as location based services. That some section has higher economy.
flow-out and some has higher flow-in in the current On the fiscal side, Trump issues several relief
circular flow leads the inadequate provision of liquidity programs such as Disaster Relief Fund for
in the market. This will further lead to an allocative Unemployment Benefits, Student Loan Relief, Paycheck
inefficiency. The cut in interest rate may not necessarily Protection Program and Health Care Enhancement Act,
boost the economic activities in a way of spurring the deferring collections of employee social security payroll
demands, for an effective demand failure may have a taxes, Coronavirus Aid, Relief and Economy Security
boundary by the financial constrains. In this case, fiscal Act (also known as CARES) etc. The CARES was
policies seems better than the monetary policies [7]. estimated to have a size of US$2.3 trillion,
Another challenge is the measure of unemployment. approximately 11% of the GDP, which designed to
It is crucial to construct a economic model for policy provide the bill for the basic safety of daily lives of
makers to forecast the future possible flow of labour individuals and families, while the Paycheck Protection
market. In a latest research, the difference between the Program, known as PPP, implemented at April 24, was
temporary unemployment and the permanent designed to provide loans to small firms. Almost 4.9
unemployment was considered in the model million PPP loans have been approved to date, for a total
construction which later indicated that the temporary of $518 billion in PPP aid disbursed [9].
unemployed who are waiting for the recalling jobs may On the monetary policy side, according to the IMF,
not influence the “tightness” of the labour market as the FED lowered the federal fund rate by 150bp in March to
high job finding rate increased the supple of labour. The 0-0.25bp. Other measures were applied to expand the
severity of unemployment was believed to be overnight repurchase agreements and reduce the costs of
over-addressed due to the assumption on the outflow swap agreements with other central banks as the foreign
regarding to the experience of past recessions. Much exchanges operations. Fed also supported the flow of
harder it is to impose any further policies without a credit and encouraged depository institutions to lend.
more precise prediction on the temporary The community bank leverage ratio was lowered to 8
unemployment as the job separation rate was took percent according to IMF.
account in the predictive model [8]. The implementation
of PPP also effected on the unemployment rate but in a Beside the QE, Fed also use forward guidance,
complex way. Small firms with different sizes (from extended lending programs and other unconventional
lower than 125 employees to more then 500 employees) monetary tools. According to SPD and SPF, the
reflect different economic reactions to the PPP [9]. forecasters were very optimistic about the economy,
which makes the Fed believe that the forward guidance
In the case of Coivd-19, households’ MPC was will continue providing the liquidity in markets and
influenced by several major factors. The anticipation of therefore help them to achieve their future economic
future income and the policies that affects their income goals [11].
will play roles on their deposition decision. Thus, the
real situation turns out to be a negative trend as a 4. EFFECTS AND REACTIONS
decline of economy was predicted though the CARES
act was passed and impacted on the economy. Even though, many evidences indicate that the
After a construction of a heterogeneous model, Luis policies implemented aimed to counter the crisis in this
et al. find that there are too many factors that have to be years play a weaker role comparing to the previous
considered by the policy makers. Even though the crisis, the stabilization policies such as fiscal stimulus
researcher believes that much more works are needed in plan did effect on the economy in a certain extent. The
order to show the interrelationship between different unconventional monetary policies were less efficient
factor, the result of the model at least gives a deeper when dealing with economic difficulties in the case of
insight about the overall status of the reaction to the covid-19. The forward guidance was much more
stimulus such as the level of account balance and the tenuous than in settings with rational expectations and
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perfect credibility [11]. With an observation on the data According to the Bureau of Economic Analysis, the
on different macroeconomic aspects, the CARES act CARES effect in several way at the early stage. The
and PPP, the most “expensive” fiscal plan, were not unemployment was slightly reduced from 14.7 to 13.3
efficient enough, yet push the economy to bounce back after March. CARES act was believed to effect on
from further drop. income in a large extent. With the support of
unemployment benefits, the disposable income level
After the CARES act was enforced, data shows that
was elevated though a decline of consumption was
the low income group response actively much stronger
observed. In Fig.4, we can see an increase in general
than expected. A drop in income and liquidity of
consumption as social programs took placed from
payment results in the increase of MPC. In the Fig.3, we
March to May [12]. however, it is still mainly driven by
can see a decline of MPC with an increase of income.
UI and EIP since the Disposable personal income
The income group of below 1K has the highest MPC
experience a little decrease after March.
indicator of 5.6, and the income group of higher than 5K
has the lowest of around 3.
Figure 3 MPC by income group [12]
Figure 4 Disposable income composition [4]
To assess the effect of CARES Act and PPP, we can March. In addition, the aggregate Chapter 7 bankruptcy
also look up another indicator, which is the small filings, which refers to the liquidation of assets of small
business bankruptcies rate (specifically under Chapter companies, have fallen by 13% from the period
11). In the Fig.5, it can be observed that the (October 2019 to July) comparing with the same period
bankruptcies have successfully being spiked. The one year before [4].
overall filling rate has been declined in February and
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Figure 5 Bankruptcies per 100,000 small business [4]
Also according to the Council of Economic Advisers, other problems are exposed such as the loss of ability to
based on the historical trend (Fig.6), the economy acquire small loans and assets and the ability of
condition and PPP might be the cure to the Small reopening jobs.
Business bankruptcies. Beside the bankruptcies filling,
Figure 6 Total Small Business U.S. Chapter 11 Bankruptcy Filings, 2020 [4]
Figure 7 The US economy growth rate in Q1 & Q2 [13]
The announcement of CARES act effects the April when the CARES act was enforced. The effect of
confidence of financial market in a larger scale than in PPP was estimated to increase the level of employment
other economic sectors. In Fig.8, at the end of March, in eligible small firms between 2% to 4.5%. Though
after a 37% decline in the first quarter, the S&P index Placebo effect of PPP did not impact on the stock
bounce back as the information of CARES act appeared market, but it increased the employment rate in small
on the media and began to slowly recover after entering eligible firms as shown in Fig.9 [9].
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Figure 8 Effect of CARES Act to the Stock Market [13]
Figure 9 Effect of PPP Eligibility on Employment [9]
The latest research pointed out that high income crashing. The challenges people might face have been
countries announced larger monetary policy than lower identified when analyzing the economy, such as the lack
income countries. The interest rates in high income of liquidity between different economic sectors and the
countries become historically lowest comparing to inactive response to the stimulus, etc. We also found that
previous crisis reaction. The result shows that the effects the fiscal and monetary policies implemented by the US
of monetary policy is largely limited by the country’s government did stabilized the economy for certain
access to credit markets [14]. This finding further degree. The CARES Acts helped the household with
approves the conclusions of which states the results of their basic consumption and stimulate the aggregate
monetary policies under Covid-19 are unsatisfactory. demand. The PPP, on the other hands, helped small
business to raise the employment rate and helped them
5. CONCLUSION to solve the financial difficulties.
With series of discussion, it can be concluded that This paper mainly aims to provide insights to policy
the Covid-19 was considerably challenging to the policy makers, investors and market-engaged analyst, rather
makers even in the historical context comparing with the than constructive conclusion, due to the lack of precised
previous recession. The skyrocketing unemployment model. It might also have significance as a policy
rate and the falling financial market did not appear to be analysis for those who study labor market and financial
paused by the implemented policies. Although the market. But if more constructive quantitative analysis
effects of the policies did not reach the expectation, the are available, we might able to draw a comprehensive
unemployment rate and the stock market were conclusion about the effective of policies.
successfully being controlled and stabled from further
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Advances in Social Science, Education and Humanities Research, volume 631
AUTHORS’ CONTRIBUTIONS Massachusetts: MIT Department of Economics,
2020, pp. 8-9.
This paper is independently completed by Xingzhi
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