The American Rescue Plan: Impact on Business

A business sign with the words “Sorry we’re closed due to COVID-19” that is meant represent businesses that need government assistance to weather the pandemic.

Pandemic related shutdowns have impacted the livelihood of both businesses and consumers over the last 15 months, and the government has responded by providing much needed relief to both parties. However, when compared to the CARES Act, the recently passed American Rescue Plan [ARP] has shifted more of its focus toward consumers. This means the degree of impact that this stimulus provides will likely be determined more by the way individuals spend their stimulus.

Analysis of the CARES Act on Business

Analyzing previous stimulus packages and their short-term efficacy may provide insight into how to project the impact of the American Rescue Plan. In the CARES Act, some businesses received direct relief in the form of payroll tax credits and delayed payments of social security taxes, but the largest source of small business relief came in the form of loans that need not be repaid if certain conditions were met, called the Paycheck Protection Program (PPP).

Indirect relief also came via support provided to low to middle-income level individuals in various forms. For example, lost wages for workers were supplemented through extended unemployment benefits and many Americans received direct stimulus payments from the Treasury Department.

One issue with early version of pandemic related stimulus was that the outlook for the pandemic was so uncertain that individuals did not spend their stimulus payments. Only 15% of recipients reported spending the initial stimulus payment, with the rest using it to save or pay down existing debt.

CBO Finds Overall Positive Impact, but at High Cost

According to a Congressional Budget Office (CBO) study from September, the CARES Act and subsequent provisions is projected to add $2.9 trillion to the federal deficit. While many developed countries have been running fiscal deficits for years with no impact on interest rates, some worry that it could reach a breaking point. On the other hand, the bill is expected to raise the level of GDP in 2020 by 4.7% and 3.1% in 2021. This means for every dollar spent on the bill, GDP is projected to rise by $0.58.

The CBO also found that the PPP program saved about 106 million job-weeks in 2020. This means every dollar provided to PPP resulted in $0.36 of additional GDP, much less efficient than other provisions of the bill.

What to Expect from the American Rescue Plan?

The ARP provides less relief to businesses directly than previous stimulus measures. The CARES Act contained approximately $650 billion in the PPP fund alone, while the ARP act has around $50 billion total in grants and loans for businesses. Most of those funds are targeted at restaurants, closed venues, and minority-owned businesses.

For most businesses, the impact from the ARP act will come from increased demand. Direct payments were not effective for businesses in prior stimulus, but there is much less uncertainty now that we are more than a year into the pandemic. Effective vaccine distribution and the eventual relaxing of lockdown measures could help to drive a dramatic rebound this summer, especially in sectors like hospitality that were avoided for the past year. Extra cash in American’s pockets should only add to it.

Early projections for the results of the ARP act estimate the U.S. economy reaching full employment one year earlier and an increase of 4 million jobs in 2021. Pre-pandemic GDP levels are now projected to be reached by the end of 2021, versus CBO estimates of 2025. However, given the instability of the pandemic, numbers and projections will likely changes as more data becomes available.

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