The Gigantic Flaws in the $1.9 Trillion COVID Relief Bill

Tim Kane
8 min readMar 8, 2021
Photo by Clay Banks on Unsplash

The Senate approved a $1.9 trillion coronavirus relief package Saturday, March 6th. It will always be marred by the strict partisan vote for passage, with not a single vote from any Republican Senator. Yet setting the partisanship aside, a closer look at the expenditure formulas reveal some big money unfairness that treats some states very unfairly. The people of Florida lose out big time.

The legislation now goes back to the House of Representatives, where a slim Democratic majority will presumably rubber-stamp it on a party-line vote. Apparently, the only risk of non-passage under Speaker Pelosi is that the fringe-left Dems will defect over the absence of a minimum wage increase. But what’s in the bill? That much money could have been spent as $5700 per American, but instead a few Americans will get $1400 checks and the bulk of the expenditures will go …?

If you’ve been a bit disappointed in the coverage so far, you’re not alone. I have yet to find an article in the papers or online that provides a link to the actual legislation (it’s here) or even the bill’s official number and title (H. R. 1319 ‘‘American Rescue Plan 4 Act of 2021’’).

SOURCE: https://www.bls.gov/news.release/pdf/empsit.pdf

Let’s dispense with the fiction that this amount of fiscal stimulus is necessary as economic relief. The economy is already far along the path to recovery in terms of GDP growth and unemployment rates thanks to earlier actions. And no, $1.9 trillion is not comparable to tax cut legislation of earlier eras — incorrectly described as $1.4 trillion in scope — because those were 10-year budgetary assessments. The current bill is $1.9 trillion in one bite.

There are lots of potential problems with so much spending that have been voiced by liberal and Democratic economists, notably Larry Summers, which concern me greatly. I wrote a book about the dangers of debt with Glenn Hubbard a decade ago (BALANCE, which you can buy on Amazon for $12), and am honestly surprised how quickly the political class has given up any sense of restraint in the years since. I mean, it’s just gone. There really are no consequences to overspending by any conceivable amount. It won’t end well for the dollar or for the public. But you know what, Cassandra be damned, that’s just a lost cause until the crisis comes. So let’s move along to some of the other problems in this bill.

Less than one percent of the relief goes to fighting COVID. Literally. With one in seven Americans already vaccinated, and the end of the pandemic on the horizon, the legislation doesn’t have much to add to the billions of dollars already allocated. But the authors had to make a superficial effort at “fighting the virus” so they larded up billions more.

No, relief legislation will push 1.9 trillion dollars in completed debt-financed expenditures out to the people of the country, but they won’t do it directly. Once we look carefully at where the money goes, and how it goes, it’s not a good deal for the average American at all. Again, I’m not talking about the scenario where the U.S. dollar loses credibility in a decade and inflation destroys your nest egg, I’m just talking about the damage to basic incentives in the summer of 2021.

Flaw #1: The Phaseout Hammer

If Congress were to give 330 Americans the $1.9 trillion directly, it would mean a check of $5,757.57 for each individual. A family of five would get a nice, fat check for $29,000. Can you say “Happy Easter”?

If the Senate had a sense of fun, it could have mandated a national lottery to make 1.9 million Americans instant millionaires. Just imagine President Biden pulling out 2 ping pong balls, roughly 1-in-173 odds, and that your birthday was on one of them.

Instead, President Biden will sign $1400 checks to *some* Americans. The media are pretending this is extraordinarily generous. These will go to taxpayers (including dependents) to individuals making up to $75,000 per year but not more than $80,000. Originally, the phaseout was drafted as $100,000 per year, but Senators decided that anyone making 80k to 99k shall also get nothing.

Phaseouts are a challenge in fiscal policy. While the idea has some moral justification — drawing lines and setting up qualifications for who among us deserves government aid — the practical application acts like a tax. For every dollar a person makes above the first threshold but below the cap, their entire benefit is taxed away. Consider the working mother with two jobs, including overtime. If she made $80,000 last year instead of $75,000, maybe working some really hard hours during the holidays, then the effect is the she literally cost herself a $1400 check. And if she has a couple of kids at home, she may have cost herself two more $1400 checks for her dependents. So she earned an extra $5000 in working income at the expense of $4200 in government money. That hurts.

This analysis is oversimplified, but not wrong. The devil is in the details. But experience tells us that Congress pushing out big, fast bills like this does a historically bad job at making the details equitable. This is just another phaseout layered on top of hundreds of other programs with benefit phaseouts that accumulate with all sorts of weird and real disincentives. The impact: anti-work incentives that are especially problematic for steep phaseouts like this one.

Flaw #2: Aid to States and Cities

H.R. 1319 includes $350 billion for states and cities. The federal government will have to issue that much extra federal debt in order to redirect money unconditionally to states that could issue their own debt. Why? Not only is this a logical puzzle, but it is antithetical to the pillar of federalism in the Constitution. Nonetheless, roughly $195B to states, $42B to big cities, $60B to counties, and $18B to nonentitlement units (meaning small towns). How many hours of compliance will be taken up by local taxpayer-funded officials to investigate and apply for these funds, rightly terrified they won’t get their fair share?

How exactly will the aid be distributed? the scheme is explained in “Subtitle M — Coronavirus State and Local Fiscal Recovery Funds” on page 579 of the Senate legislation. The short answer, is that each state will get half a billion dollars plus a bigger block of funds based on their unemployed population. That latter block of funds is $170B overall, and the formula is pretty complicated:

“the average estimated number of seasonally-adjusted unemployed individuals (as measured by the BLS LAUS program) over the 3-month period ending with December 2020 [relative to] the average estimated number ... over the same period.”

That essentially means that if a given state had 7 percentage points more unemployed people in the 4th quarter of 2020 than it normally has, and the typical state had 3 percentage points more unemployed people, then the given state would get more aid. This is in essence a subsidy for states with the most anti-economy pandemic policies: the working states paying the tab for the lockdown states.

Which states benefit the most from the Senate’s formula? We can compare what portion of the $170 billion each state would get from an equitable distribution based purely on population to one based on the relative unemployment weighted population. My analysis compares the current state unemployment rate in Q4 of 2020 to the average rate during the years 2001–2019 (using Q4 months only).

As an example, Hawaii has had a much higher unemployment rate of 11.5 percent in recent months compared to its historical average of 4.0 percent. Consequently, it will get 1.0 percent of the $170B rather than 0.4 percent under a purely population-based split. That means Hawaii gets a formula-bonus of over one billion dollars. In contrast, the state of Arkansas actually had a lower unemployment rate at the end of 2020 than its historical average, so its aid bonus is actually a loss of $290 million. That doesn’t mean Arkansas will have to pay the feds, only that it would have gotten $1.48 billion but will now only get $1.19 billion. That’s a bit unfair, because Arkansas had quite high unemployment over the summer. More on that in a minute. In the tables below, I show the 10 states that gain and lose the most, and include LAC and NYC because that’s how LAUS data is presented. The Senate formula creates some very big winners, and one has to wonder if this is fair:

10 States that gain the most in the Senate’s State Aid Formula ($millions)

New York $2,481
New York city $2,317
California $2,174
Massachusetts $1,308
Texas $1,308
Hawaii $1,029
Los Angeles County $994
New Jersey $968
Virginia $469
Maryland $411

10 States that lose the most in the Senate’s State Aid Formula ($millions)

Florida -$1,889
Ohio -$1,408
Georgia -$1,317
Missouri -$933
North Carolina -$869
Indiana -$868
Wisconsin -$856
Alabama -$842
South Carolina -$815
Kentucky -$576

Some states chose excessive lockdowns that hurt their economies whereas others chose different policies. The bailout abrogates those consequences, making everyone fund the economically destructive choices of the few. The really odd thing about the Senate’s formula is that it basis the distribution of state aid based on unemployment during the 4th quarter of 2020 rather than the average rate during the entire pandemic. This takes money away from states that suffered high levels of unemployment during the spring and summer but then enacted policies that boosted their economies. Four states in particular meet this description: Florida, Michigan, New Hampshire, and Nevada. New Hampshire’s aid level is effectively cut in half: it stands to be granted $627 million, and would have gotten around $1.1 billion otherwise.

Communities that got back to work in September are paying the price for the communities that stayed tight. Places with local schools that stayed open, so that working families could work, are now giving up dollars to places that kept schools closed. Rural counties are now bailing out those big, rich coastal cities. They aren’t doing it voluntarily, rather they are forced to share unequally in the debt-soaked largesse directed to the failing economic models known as Chicago, San Francisco, and New York.

Is it so hard to understand that conservative, rural voters are going to be incensed that the the federal government is subsidizing Portland’s Antifa-soaked autonomous zone at their expense? And thinking pragmatically, do Democrats realize that the passage of this bill will be remembered in campaign ads in Ohio, Florida, and Georgia in 2022 when voters will be reminded that Schumer and Pelosi shafted them out of billions of dollars so that New York, California, and Massachusetts got a bigger share? Ouch.

Here is a simple rule the Congress should live by, one enshrined in the 10th amendment which remains theoretically in force: never subsidize states, cities, or localities. The Senate’s relief bill fails that test and then some.

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Tim Kane

Economist, entrepreneur, US Air Force veteran, and co-author of BALANCE: The Economics of Great Powers