At first glance, it was good news. The Congressional Budget Office said last week that the mammoth economic relief package passed in March would cost the government $1.8 trillion, not the $2.2 trillion initially thought.

But look beneath the surface, some economists say, and the CBO’s calculations are not that comforting. Why? Because they suggest the government may not be providing the economy with all the support it might need to survive the coronavirus shock relatively intact.

“From a budget perspective, this might seem like good news, but from the larger issue of avoiding economic catastrophe it is a problem,” said former CBO Director Douglas Holtz-Eakin, who now heads the American Action Forum.

The difference between the CBO’s calculations and the early estimates comes down to a judgment about the Federal Reserve’s financing facilities for companies and state and local governments. Based partly on information from the Fed board, the CBO reckons that the loan programs backed by the relief package won’t add to the budget deficit.

Worse Shape
That may not be as good a result as it sounds. The Fed can avoid making losses on its facilities and increasing the deficit by discouraging participation by riskier borrowers. But that leaves those companies in worse shape, posing a danger to the economy as a whole.

“There’s a concern about losing money that I frankly don’t understand,” former chief White House economist Glenn Hubbard said. “The way not to lose money is to not make any loans or to lend money to people who don’t need it.”

“Those are great strategies but they don’t seem to work in a crisis,” added Hubbard, now at the Columbia Business School.

The gist of the critics’ argument is this: It’s better in an economic emergency such as this to err on the side of taking losses rather than forgo helping borrowers in dire straits through no fault of their own.

Worth the Cost
If that increases the budget deficit because not all of the loans are repaid, so be it. It’s worth the cost to try to make sure the economy comes through the crisis without incurring significant long-term damage.

The central bank is setting up the financing facilities under Section 13-3 of the Federal Reserve Act that allows it to establish emergency lending programs in “unusual and exigent circumstances.” The Fed is prohibited from taking losses on the facilities and so needs money from the Treasury Department to absorb any red ink that might occur from loans going bad.

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