$2 TRILLION BAILOUT: Here’s What You Need to Know

The US government is currently debating the details of a massive $1.8 trillion dollar bailout that will do directly to businesses and families most affected by the coronavirus crisis.

Here is everything you need to know about the proposed legislation.

WHAT’S IN THE BAILOUT?

The bill, proposed by Senate Republicans, has 4 main components:

  • Direct payments to American families
  • Loans for small businesses
  • Loans for the hardest-hit industries, such as airlines
  • Increase in healthcare sector payments

WHEN WILL IT BE PASSED?

To get the bailout passed, Senate Republicans need 60 votes, which means having to reach a compromise with the Democrats. Talks are ongoing but the Democrats are worried that:

  • The bailout provides insufficient protection for workers
  • The bill does not impose enough conditions on how businesses can spend the money
  • Steve Mnuchin, the Secretary of the Treasury, may use $100 billion he has influence over to favor businesses and individuals close to the administration

Best-case scenario is that that compromise will be reached and a deal signed today.

WHAT HAS BEEN DONE SO FAR?

US President Donald Trump signed an $8.3 billion spending bill at the beginning of March to help the the US health and human services department, state and local health departments and local community health centers. A sizeable portion of this bill was earmarked to finance the international response effort.

Last week, a second bill worth $104 billion was passed to provide paid sick leave and emergency paid leave for workers.

WHAT ABOUT THE $1,000 CHECKS?

The discussions are smoothing out the details of the proposed plan for individuals to receive up to $1,200 and married couples up to $2,400, including $500 for each child. Individuals with incomes above $75,000 would receive considerably less money and those with incomes superior to $99,000 would not receive anything.

Republicans believe that handing out checks provide a short term economic boost. Democrats disagree and propose strengthening the unemployment insurance programs instead: What happens once the money is spent and the situation gets worse?

The biggest criticism of the checks-to-people proposal is that it may result in low-income earners receiving less than higher income earners. Indeed, while those who earn less than $2,500 will receive, at minimum, $600, the amount of the check will increase along with taxable income up to $75K. Then, the amount decreases until it reaches $99K.

So individual earning $65K may potentially receive more than individuals earning $30K.

HOW WILL THE BAILOUT HELP SMALL BUSINESSES?

The bailout for small businesses consists of federally backed loans for businesses of 500 employees or less:

  • A total of $300bn is earmarked, with individual loans capped at $10m per business
  • A “payroll tax holiday” for small businesses may be included in the plan

The objective is to provide incentives for companies to retain their workforce as the bailout provides for the possibility of loan forgiveness if they keep their employees through June 30th.

WHAT ABOUT THE CORPORATE BAILOUT?

For the most part, Republicans and Democrats agree that the bailout should not end up lining the pockets of shareholders and executives.

The current bailout proposal includes:

  • >$200bn in secured loans to arlines and other industries:
    • $50bn in loans for commercial airliners
    • $8bn in loans for cargo air carriers
  • $150bn in secured loans for other industries (hotels, cruise companies)

Many other industries are also asking for bailouts: The restaurant industry, for example, is requesting $145bn to compensate for losses and closures.

Congress is yet to decide which of these other industries will be eligible.

Often criticized for not imposing enough conditions on businesses when they provide bailouts, it appears that both aisles of Congress agree that companies who receive government aid should be banned from implementing stock buy backs. Indeed, this would increase the wealth of shareholders and executives rather than stimulate the economy. Trump has already declared he would not oppose such a proposal.

WILL THE BAILOUT HELP THE HEALTHCARE SECTOR?

The bailout proposes:

  • An increase of Medicare payments by 15% for coronavirus patients
  • A freeze of the planned 2% reduction rate for all Medicare payments

However, the healthcare industry will not be satisfied with these proposals as they are requesting $100bn to strengthen the sector in anticipation of the coming full-blown pandemic.

Sadly, it is unlikely that they will receive this amount.

HOW IS THE MARKET REACTING?

At writing, the S&P 500 is down more than 3% due to the continued spread of the coronavirus and the uncertainty surrounding the bailout.

Investors are anxiously waiting for the final plan to be announced and the market’s true reaction will be seen this week once the final plan is revealed.

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