Financing American government

1 Introduction

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act is a $2.2 trillion economic stimulus bill passed by the US government in response to the health and economic fallout of the COVID-19 pandemic in the United States.

In late March, 2020, as the terrible human and economic costs of the COVID-19 pandemic were starting to become apparent in the United States, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to stem the fallout. This single piece of legislation called for $2 trillion in new expenditures, including direct payments to households, forgivable loans to businesses, and expanded unemployment insurance benefits. The expenditure authorized by the Act amounted to about one-tenth of the country’s annual gross domestic product.

How was this new expenditure financed? Not by raising taxes, which would have been quite undesirable under the circumstances. The CARES Act was designed to allow households and businesses to survive in the face of a collapse in earnings. A tax increase would have reduced disposable income, prevented households from smoothing their consumption over time, and thus defeated the purpose of the legislation.

In addition, raising taxes to cover the increased expenditure would have been essentially impossible. Total federal tax revenues for 2019 were less than $3.5 trillion, and changes to the tax code do not take effect immediately in any case.

Accordingly, the increase in spending was financed by new borrowing.

But who lent this money to the US government and on what terms? And how did Congress know that the funding would be forthcoming as needed? Is there a limit on how much the government can borrow? Can we be certain that the debt will be repaid as it comes due?

This CORE insight addresses questions such as these, with particular emphasis on the distinction between the Treasury and the Fed, and their respective roles in promoting economic stability and responding to crises.