The CARES Act Offered a Radical Experiment in Cash Transfers. Here’s What We Learned.

In March, as the world stared into a financial and epidemiological abyss, Congress acted more swiftly and dramatically to save the U.S. economy than during any crisis in American history. The CARES Act—signed into law by President Trump on March 27 after facing virtually no resistance in the House or Senate—appropriated roughly $2.2 trillion to help businesses, households, and governments survive the coronavirus crisis, potentially thwarting a wave of bankruptcies and defaults.

Early research strongly suggests that initial relief efforts for households and the unemployed pursuant to the CARES act were successful, notwithstanding weeks of chaos and uncertainty at state unemployment offices. A weekly $600 boost to Unemployment Insurance (UI) and one-time stimulus payments to most households actually drove personal incomes way up before the former expired at the end of July. University of Chicago economists Peter Ganong, Pascal Noel, and Joseph Vavra find that unemployment benefits were so generous that over two-thirds received more money in UI payments than they previously had in wages. Workers at the bottom of the income scale—who disproportionately work in service jobs either furloughed or terminated during the initial months of the pandemic—not only recovered lost wages but also received additional income that could be used to cover other expenses, pay down debts, or build savings.

That’s why in the first few months of the pandemic and accompanying economic crisis, poverty may have hardly budged at all, despite the unemployment rate reaching its highest level since the Great Depression. A working paper from June by economists Jeehoon Han, Bruce Meyer, and James Sullivan finds that without the CARES Act, the national poverty rate would have climbed from 12.5% to 16.3%; instead it only ticked up to 12.7%. In different terms, the CARES Act kept 12 million Americans from falling into poverty.

Many policymakers were gravely concerned with the generosity of cash benefits to the unemployed, believing that paying jobless workers more than their previous wages would make them unwilling to ultimately return to work. They thought the national economy faced a steep tradeoff between generosity towards struggling households and a rapid employment recovery. But subsequent research has proven these concerns to be unfounded, at least for now.

New research from Nicolas Petrosky-Nadeau and Robert Valletta at the Federal Reserve Bank of San Francisco finds little or no adverse effects from CARES Act benefits on job-seeking by the unemployed. Petrosky-Nadeau and Valletta compared unemployment benefits under the Act with workers’ “reservation benefits” in various sectors, the level of benefits required to make the jobless indifferent between remaining on benefits and returning to work. Despite the historically large bonus to benefits, they still remained below workers’ reservation benefit levels in nearly all sectors. The authors find that in practice, states that offered more generous unemployment benefits saw workers accept jobs faster than states with less generous ones.

While perhaps counterintuitive, the reason enhanced unemployment benefits had little effect on job-seeking is straightforward and firmly grounded in economic theory. Labor markets are not spot markets. The choice a person makes to either enter the labor force or stay on the sidelines is not merely based on the pay they would earn this week or this month, but on their expected wages in the long-run. A job generally provides a steady stream of income. As Petrosky-Nadeau and Valletta point out: “This persistent income stream implies that the value of a job offer is much greater than just the weekly paycheck. An informed job seeker will compare that income stream to UI benefits that may expire before they find another job.” The $600 UI bonus, in contrast, was visibly temporary and full expanded benefits did in fact expire at the end of July without Congressional action. It is further unlikely that after weeks of waiting for checks from overwhelmed and under-resourced state unemployment agencies that many workers were comfortable counting on benefits for more than short-term relief.

We can draw a few important lessons from this somewhat radical experiment in cash disbursements. First, in an economic crisis characterized by widespread unemployment and sagging demand, temporarily increasing unemployment benefits is unlikely to slow economic recovery. The problem isn’t that workers are too slow to find jobs, but that there are few jobs for which they can compete. Second, generous cash transfers in times of economic hardship can make an enormous difference for low-income people, keeping families out of poverty. On the other hand, the empirical evidence from the UI bonus does not imply that permanent UI benefits of the size allowed by the CARES Act would have no adverse effects on job-seeking.

Nevertheless, the CARES Act’s UI bonus and cash transfers are sure to serve as a benchmark and a model for congressional response to future economic crises we will inevitably confront.

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Ganong, Peter, Pascal J. Noel, and Joseph S. Vavra. 2020. “US Unemployment Insurance Replacement Rates During the Pandemic.” National Bureau of Economic Research Working Paper 27216. https://doi.org/10.3386/w27216.

Han, Jeehoon, Bruce D. Meyer, and James X. Sullivan. 2020. “Income and Poverty in the COVID-19 Pandemic.” National Bureau of Economic Research Working Paper 27729..https://doi.org/10.3386/w27729.

Petrosky-Nadeau, Nicolas, and Robert G. Valletta. 2020. “Did the $600 Unemployment Supplement Discourage Work?” Federal Reserve Bank of San Francisco Economic Letter. https://www.frbsf.org/economic-research/publications/economic-letter/2020/september/did-600-dollar-unemployment-supplement-discourage-work/.