The eruption of the COVID-19 pandemic in March 2020 is less than five years ago: still, it has become hard (for me, at least) to recapture in my own head the fears and uncertainties of those first few months. The unemployment rate spiked from 3.5% in February 2020 to 14.8% just two months later in April 2020. It was not clear how many employers would function, or how many people would earn a living. In short, it was a time when a fast legislative reaction seemed essential. But although no one of prominence was making this point in March 2020, any high-speed plan to spend a few trillion dollars is also extraordinarily likely to end up with an oversized proportion of waste and abuse.
Cecilia Elena Rouse makes this point in her broader discussion of “Lessons for Economists From the Pandemic,” delivered as the annual Martin Feldstein Lecture at the National Bureau of Economic Research (NBER Reporter, 2024, No. 3). She describes the sheer size of federal spending in response to the pandemic:
In response, in 2020, Congress passed and then-President Trump signed two bills: the Families First Coronavirus Response Act on March 18, 2020 (providing $192 billion for COVID research, enhanced UI, and health funding), and the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) less than 10 days later (providing more than $2.2 trillion in economic stimulus). CARES alone was the largest stimulus package in American history. These were followed by the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, which was signed in December 2020, providing $900 billion in additional funding and stimulus. And then, in 2021, Congress passed and President Biden signed the American Rescue Plan, which added yet another $1.9 trillion in stimulus and recovery funding. In total, this was more than $4.5 trillion in stimulus, compared to just over $2 trillion throughout the 2008 global financial crisis (both in 2022 dollars).
Rouse focuses on some of the main aspects of the CARES legislation passed in March 2020. As she points out, while the law “may have been `good enough,’ it was sloppy.” She points out:
This lesson is based on the fact that federal data, computer, and human resource infrastructures were — and still are — not up to the task of delivering surgical and speedy support for the economy. Components of the CARES Act highlight this reality well. For example, the Paycheck Protection Program (PPP) provided uncollateralized and forgivable loans to small businesses (generally, those with fewer than 500 employees). These loans could officially be used only to retain workers (with several safe harbor provisions), meet payroll and health insurance costs, or make mortgage, lease, and utility payments. If these conditions were met and firms met their employment targets, the loans would be entirely forgiven after the pandemic. The Economic Injury Disaster Loan (EIDL) program provided low-interest-rate loans of up to $2 million, payable over up to 30 years. Loans also included the option to defer all payments during the first two years while businesses and nonprofits got back on their feet after the pandemic. And finally, the coverage and generosity of UI were expanded dramatically. Benefits were increased by $600 per week, and those not typically covered, such as gig workers and contractors, were made temporarily eligible.
While it may have been “good enough,” it was sloppy. On the one hand, nearly 1 million firms received PPP loans (worth $150,000 to $10 million), and 3.9 million received EIDL loans. On the other hand, this assistance was rather inefficiently delivered. Waste and poor targeting were a problem. David Autor and his coauthors estimate that PPP loans cost between $169,000 and $258,000 per job-year saved, which is more than twice the average salary of these workers. They also estimate that more than two-thirds of the total outlays on the program accrued to business owners and shareholders rather than employees.
Outright fraud was also a major issue. The Government Accountability Office (GAO) estimates that PPP fraud totaled about $64 billion out of a total of nearly $800 billion in loans— that is, about 8 percent of all PPP loans may have been fraudulent. Under EIDL, some borrowers claimed loans using falsified names or business details and often simply ran off with the cash. In the end, the GAO and the Small Business Administration estimate that EIDL fraud was even more pervasive than PPP fraud, in dollar terms — more than $136 billion. UI fraud also skyrocketed during the pandemic; the GAO estimates that fraud may have cost anywhere from $55 to $135 billion.
Add it up, and the $2.2 trillion of economic stimulation in the CARES legislation may have involved more than $300 billion of outright fraud–as well as extremely high costs per job saved. Of course, adding the fraud and waste components from the rest of the pandemic-response legislation would add to the total fraud and waste.
Was this tradeoff between speed of response and the nearly inevitable fraud and waste that followed worth it? Rouse points out that compared to other high-income countries, the recovery of US GDP by the end of 2021 was much stronger. She also notes that this boost of federal support also played a role in triggering the resurgence of inflation. She argues that the pandemic response was clearly not perfect, but given the stresses of the time, could at least be categorized as “good.”
I’m willing to give Congress and President Trump something of a pass for the pandemic support passed in the craziness of March 2020. It seems to me that the additional $2 trillion or so in stimulus passed into law under President Trump in December 2020 and under President Biden in March 2021 probably deserved more scrutiny than they got.
The obvious follow-up question is whether it’s possible, when (not if) a similar crisis occurs, to reduce this tradeoff between a speedy response on one hand and waste and fraud on the other hand–a tradeoff that occurred across other high-income countries as well. Rouse points out that minimizing fraud and waste means investing up-front in information systems and technology that make it possible for the administrators of these programs perform their role as front-line fraud and waste detectors. But the US has lagged behind in such investment. Rouse focuses on the example of information technology in unemployment insurance programs, which are run at the state level, although her point can be more broadly applied to many government information systems. She notes:
As of 2020, less than half of the states had modernized their UI [unemployment insurance] systems. Some state systems still run on COBOL; it is almost impossible to submit an application on a mobile device in most states, and workers in some states must still be physically mailed a password to log in to their UI account. In part because of these challenges, by the end of May 2020, only about 57 percent of unemployment claims had been paid nationwide. This created a double crisis, where overworked employees didn’t have the resources they needed to rigorously verify claims, leading to more fraud, while genuinely eligible workers had to wait weeks or months to get their benefits.
Moreover, if the goal in a pandemic-type situation is to get income to those suffering immediate disruption, unemployment insurance as it exists is an imperfect tool. The program doesn’t cover many people in “alternative” work arrangements like contract worker, the self-employed, gig workers, or students who hold jobs while taking classes at the same time.
We are already seeing some high-profile prosecutions for fraud during the pandemic. But while trying to identify the wrongdoers several years later is necessary, it’s also a costly and inefficient way to limit wrong-doing. What we aren’t seeing is serious thought (and investment) to reduce risks of fraud and waste in these programs both now, and in a future crisis.
