Relief Packages During COVID

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Relief packages and the use of knowledge in society during COVID

In response to the economic impacts of COVID-19, the US Congress passed a $2.2 trillion relief bill referred to as the CARES Act.

By Enoch Hill, Ph.D., Assistant Professor of Economics, Wheaton College

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Though unprecedented in size and scope, Congress is currently discussing a follow-up to the CARES Act. In reflecting on what I wanted to focus on in this short article, I came to the conclusion that the details, while extremely important (and relevant to outcomes), can be readily accessed elsewhere. Government debt is also a topic that we could discuss at length. It is also important and relevant, but alas, economics is a study of tradeoffs so that conversation too must be tabled for the time being. Finally, there are a myriad of reasonable arguments in favor or opposed to stimulus and relief actions which I will ignore. My purpose here is to provide two theories of why it might be net beneficial to implement a relief package at this juncture.

HaUnited States flagyek’s incredible insight in his 1945 paper is that the primary function of prices is to transmit knowledge throughout a society where none of us possess all of the information needed to coordinate our actions.1 Rather, each of us hold just a little bit of specific knowledge and those bits of knowledge need to interact in a meaningful way to figure out what we should each do with our day, with our factories and machines, with our cars and our land, to help one another out.

That’s a bit heady, let me make it more concrete. Right now, my dishwasher leaks when I run it. I’m a bit thick when it comes to this type of repair. I have no idea how hard it is to fix. I don’t know if the closest person knowledgeable in dishwasher repairs is sitting around waiting to help someone out, or if they are overwhelmed because they are simultaneously caring for their aging father and helping to unexpectedly homeschool their three school-aged children. I also don’t know how much better (or worse) the labor, metal and other resources required to replace my dishwasher could be used elsewhere, whether that be in building an electric vehicle, a fence, or a slide (are kid’s slides ever built of metal anymore?) A price takes all this information and converts it into a single number which I can use to make a decision. The price incorporates the repair woman’s current willingness to spend her time fixing my broken dishwasher against all of the other things she has on her plate. If the price of the repair is enough less than the price to replace, then I repair. Or possibly, both prices are high enough that I decide to just make do with my somewhat dysfunctional machine.

United States flagHere’s the issue, when COVID struck, this knowledge distribution system (the market) was knocked out of whack. The economy is not always great at handling quick changes. In the early 1980s when Paul Volker (Fed Chair) slowed the rate of money growth, it took society several years to adjust beliefs about how fast prices should rise and the resulting recession was quite severe. This was in large part caused by prices failing to coordinate action effectively. Presently, we face some pretty large uncertainties and humans tend to be risk averse in general. So, in addition to my dishwasher, the economy’s ability to coordinate our actions may have become somewhat dysfunctional. Prices, our primary tool to coordinate action may need assistance.2

One of my favorite topics to teach in Principles of Macroeconomics is the idea that money is not real. For most of us, it is just a couple of ones and zeros stored in some database. It can be created at no real cost (that is without using up any real resources). Money itself provides us no direct consumptive use, but it does incentivize our actions. When we have more, we tend to feel more comfortable spending.

So, what is real? Most of our society produces real value over time. We can contribute labor over time. Our land can produce crops over time. A classroom facilitates learning for a maximum number of students over time. An espresso machine brews coffee as a function of time. When prices stop functioning well, our ability to coordinate the use of all these resources falters. Suppose our dishwasher repair woman actually does have quite a bit of excess time at the moment and that I really would like to have my dishwasher repaired.3 If my risk aversion and concern about my finances going forward prevent me from searching for a repair, or if the difficulty in accepting nominal wage decreases prevents her from lowering her quoted price, then her productive capacity during this time is permanently lost. The same is true for every factory and every espresso machine in society.

A second thing that is real is relationships. Some of those relationships are created through work. Consider Penn and Teller or Han Solo and Chewbacca, a large part of the value of these dynamic duos comes from their ability to coordinate and work well together. Relationships and learning how to work well together requires time and effort. Similarly, much of the value of a firm lies in the teams and relationships that have formed over time. When workers are separated from their jobs, something is permanently lost. Once a vaccine or some other solution to COVID is discovered, a significant cost of the economic recovery will come in setting up new teams, conducting time-intensive interviews, building new working relationships, and coordinating the labor market (that is, figuring out who does what). If the CARES act can assist in preserving a portion of the existing labor allocation that is worth retaining post COVID, this is a real benefit.

Ultimately this bill is a form of redistribution, but it is a form of redistribution that might help coordinate society to realize much of this productive capacity right now. Much of this capacity, if not currently tapped into, would be forever lost. Many forms of redistribution work towards equality at the cost of shrinking the total size of the pie. However, in this short article, I’ve reflected on two reasons why a relief package in response to COVID may be different: by preventing the permanent loss of productive capacity and by preserving the working relationships within and between companies.


1 - Hayek, Friedrich A. (1945.) “The Use of Knowledge in Society” American Economic Review. (35) 4: 519-530

2 - For the record, Hayek would likely stand against active attempts to stabilize economic activity through Government reaction. Since prices act as our primary channel to aggregate distributed knowledge, taking centralized action which affects prices may exacerbate rather than correct the ability of prices to transmit knowledge.

3 - Or, to be more precise, that the benefit to me is greater than the cost to her.