The COVID-19 pandemic precipitated the sharpest and deepest economic contraction since the Great Depression. Although the economy has recovered somewhat since the spring of 2020, millions of Americans who lost their jobs remain unemployed, and the economy is operating far below its capacity. A new round of economic relief and stimulus would help raise the level of economic activity and restore full employment.
Moreover, the pandemic has had particularly severe effects on certain economic sectors, low-income workers, women, and racial and ethnic minorities. Thus, even if the “headline” statistics improve, the prospect of a K-shaped recovery is real; while the overall economy recovers, many Americans may be left behind. Further action is therefore needed to offset the devastation that has affected significant parts of the economy and the population.
In the face of these concerns, some Republicans have argued that high current and projected federal deficits should curtail any new economic stimulus. To be clear, the U.S. does in fact face a long-term fiscal problem. But the severity and breadth of the economic decline and the remarkably low interest rates that exist today mean that concerns about the long-term federal budget should not stand in the way of policies that could help people and the economy now. The most effective, fair, responsible, and rational approach would be to provide economic stimulus and relief now and address the long-term fiscal problem later.
Of course—and this cannot be emphasized enough—COVID response policy is economic policy right now. The more traditional economic stimulus and relief measures that the country needs now are the focus of this policy brief, but they must be supplemented by effective responses to the virus itself (mask-wearing, testing, tracing, developing treatments and vaccines, etc.). Full economic recovery requires that the virus be contained, but the policy measures discussed here will help provide relief and improve the economy until containment is achieved.
The need for new fiscal initiatives stems from evaluation of two challenges: the weakened economy and the unsustainable long-term fiscal outlook.
The COVID-19 pandemic has had a devastating effect on the U.S. economy. From February to April, the unemployment rate rose from 3.5 percent to 14.7 and the employment-to-population ratio fell from 61.1 percent to 51.3 percent. Both measures have rebounded somewhat since then—in September, the unemployment rate was 7.9 percent, and the employment-to-population ratio was 56.6 percent – but remain substantially worse than their pre-COVID rates, raising serious concern about the welfare of millions of households. By comparison, over the last 30 years, the two figures have averaged 5.9 percent and 61.4 percent, respectively.
The Congressional Budget Office projects that, under current policies, the economy—which was close to full employment before the pandemic—will not recover to full employment before the end of the decade and that output will, on average, be 3.5 percent lower than projected prior to the pandemic.1
Besides affecting short- and long-term economic prospects, the pandemic has hit different industries and population groups differently. Sectors that require in-person interactions or travel have been hit particularly hard, including service industries in general and education, childcare, health care, social services, restaurants, and airlines in particular. As a result, various groups of workers have been affected differently, with larger increases in unemployment rates for workers who are less educated (who could less easily shift to working at home), young (reflecting lower levels of education and high representation in service industries), female (because women comprise the majority of the labor force in many industries most affected by the pandemic, and because they have borne the majority of child care responsibilities when schools have been closed), and Black, Hispanic, Native American, and Asian American.
Certain regions, both Republican- and Democrat-leaning, remain vulnerable, too. Tourism hot spots like Myrtle Beach, South Carolina and Orlando, Florida and manufacturing and energy hubs like Akron, Ohio and Corpus Christi, Texas continue to have relatively high job losses and unemployment rates. Analysis shows that certain metro areas have faced various degrees of impact from the COVID recession and are on unequal recovery trajectories.
Concerns about the weak economy are compounded by concerns about the long-term federal fiscal outlook. Even before the pandemic, debt as a share of GDP was projected to rise continually and far exceed previous highs. The projected rise in debt can be attributed to two sources. First, an aging population and rising health care costs will raise federal spending on Social Security, Medicare, and Medicaid. This does not make the rising debt a “spending” problem, though, any more than one side of the scissors does the cutting. The mismatch between projected rising spending and projected flat revenues creates a systematic bias toward deficits in future budgets.
Second, as debt rises as a share of GDP, net interest payments will generally tend to rise relative to the economy as well. This tendency has not held in recent years because of the substantial decline in interest rates over the past 20 years. The pandemic has driven interest rates even lower, and these lower rates are projected to last through 2034, making the new debt accumulated during this period of crisis relatively cheap. However, rates are slated to rise steadily between 2025 and 2050, in which case government interest payments would grow dramatically.
In response to the downturn in the economy and the substantial relief packages implemented in response to COVID, the 2020 deficit shot up to $3.1 trillion, much higher than CBO’s pre-COVID projected deficit of about $1 trillion. The debt-to-GDP ratio rose to 98 percent at the end of fiscal 2020, compared to a pre-COVID projection of 81 percent.
While the COVID pandemic has changed the short-term fiscal situation significantly, it has not had much impact on the long-term projections, because the policy interventions have been temporary in nature and because the pandemic has reduced interest rates, at least on a temporary basis. In January, CBO projected a 2050 debt-to-GDP ratio of 180 percent. In CBO’s most recent projections, released in September, that figure had risen, but only by 15 percentage points—basically, the same size of the 2020 fiscal intervention as a share of the economy—to 195 percent. Under somewhat different assumptions about spending, but maintaining current law, Auerbach, Gale, Lutz, and Sheiner (2020) project a debt-to-GDP ratio of 190 percent in 2050. Despite the limited impact of previous COVID interventions on the long-term budget outlook, the growing federal debt (a pre-COVID trend) has been used as an argument against another relief package.
Limits of historic and existing policies
As noted above, earlier this year, policymakers responded to the pandemic with a series of policies to support businesses, individuals, and public health efforts. These include the Coronavirus Preparedness and Response Supplemental Appropriations Act, the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Paycheck Protection Program and Health Care Enhancement Act. Combined, the various pieces of legislation cost $2.4 trillion.
The COVID response measures established the paycheck protection program (PPP); provided a direct payment to most households; expanded eligibility for—and the level and duration of—unemployment insurance; increased SNAP benefits; provided funds for health care providers, vaccine development, and health institutions; funded loans and direct support for state, local, and tribal governments; and established pandemic-related health care rights for workers.
Although the policies were implemented imperfectly—social services agencies and the Internal Revenue Service struggled to meet heightened demands placed on them and agencies had to quickly issue rules related to the new policies—the policies did support household income and preserved jobs as people observed social distancing guidelines. That is, the set of policies implemented at the beginning of the pandemic provided relief.
Nevertheless, for a variety of reasons, the policies are inadequate now. First, automatic stabilizers in the federal budget—changes in taxes and spending programs that are triggered by changes in economic conditions—are weak, relative to those in other countries. Second, several of the policies, including the Paycheck Protection Program and Pandemic Unemployment Compensation, have expired. The Economic Impact Payment (or “stimulus check”) reached most households over the summer but was a one-time benefit. The emergency policies enacted in the spring of 2020 were not designed to protect the economy through a protracted crisis and it is time to renew and expand government relief and stimulus. For months now, the House and Senate have been unable to pass an updated COVID-19 relief package. Treasury Secretary Steven Mnuchin and Speaker Nancy Pelosi have negotiated, though recent progress ended in a Twitter feud. Senate Majority Mitch McConnell refused to authorize additional aid before the general election and President Trump has both supported a larger package than the one passed by the House and refused to take any action. At the time of this writing, House and Senate Democrats are pushing for a narrower relief measure that is more similar to earlier Republican proposals.
Congress needs to allocate more resources—trillions of dollars—for relief and stimulus to support people and businesses. The distinction between relief and stimulus is important. Relief provides support for people while they are observing public health guidelines that require them to stay home and lose employment. The goal of relief is to reduce economic activity and encourage people to act in ways that reduce the spread of the virus. Stimulus provides incentives for people to spend or work more. The goal of stimulus is to raise economic activity. Both relief and stimulus are valuable currently—relief for those who need to remain out of their jobs because person-to-person contact presents threats and stimulus to help those who can return to work.
Sheiner and Edelberg (2020) estimate that implementing five policies (rebates to households, additional unemployment insurance, aid to state and local governments, support for businesses, and other aid to public health and highly impacted industries) at a total cost of $2 trillion would let GDP regain its pre-pandemic path by mid-2021, much sooner than it would under current law projection, according to CBO.
There are several reasons why relief and stimulus would be best if implemented now. First, the benefits of additional policies would be substantial. Funds targeted to state and local governments would help mitigate the recession and retain vital human services. States face balanced budget rules and thus would otherwise have to cut spending as their revenues decline, deepening the downturn. Funds provided to firms would help preserve jobs and potentially stimulate new employment. Expanded unemployment insurance would help the millions of people currently out of work through no fault of their own. Increasing resources for the rest of the safety net—including the Earned Income Tax Credit, the Child Tax Credit, SNAP, WIC, housing assistance, the Low-Income Home Energy Assistance Program, TANF, Supplemental Security Income, and Medicaid—would provide needed support. Investments in the social safety net not only help people in the short-term, but often provide long-term benefits back to the economy that exceed the initial costs.2 Federal investments in infrastructure and research and development, which can generate high returns, have fallen short for decades now and should be raised. Aid to businesses can protect jobs, helping to speed up the recovery when people can safely return to work. And, of course, increasing resources devoted to fighting the virus—including testing, tracing, research, vaccine distribution, and so on—is necessary and would be productive.
Second, helping the economy now would be relatively inexpensive, thanks to low interest rates, and could help the long-term economy. Adjusted for projected inflation, interest rates on government debt are negative over most horizons. Indeed, there may not be any net costs at all if additional stimulus enables the economy to effectively outgrow deficits. In any case, not all debt is bad. What distinguishes good and bad debt is how it is used. Bad debt is unproductive. Good debt serves genuine national investments. New debt issued today to fight an unprecedented viral pandemic, cushion the effects of the pandemic on those most harmed by it, restart the economy, and invest in physical and human capital would pay proceeds now and in the future. The U.S. public debt is not going to trigger a crisis like the one Greece faced in the wake of the 2008 recession. The U.S. borrows in its own currency and can pay its debts for decades to come. And interest rates as low as ours signal that government bonds remain in demand. Even in 2008, when the U.S. literally exported a financial crisis, the rest of the world responded by sending funds here because we were a safe place to invest.
Third, we can learn from history and avoid policymakers’ knee-jerk tendency to cut off stimulus too quickly after a recession. Short-term austerity will likely only worsen the long-term economic outlook. During the Great Depression, in the 1990s in Japan, and in the past decade—in the U.S. but especially in the U.K. and continental Europe—law makers’ premature moves to austerity held back recoveries and, in some cases, created new recessions. Already Congress has allowed emergency support for individuals and businesses to lapse though the pandemic safety measures continue to require Americans to stay home to reduce viral spread. Prominently, the Pandemic Unemployment Compensation, which gave eligible households an extra $600 weekly benefit and extended the duration of federal aid, ended July 31, 2020. Leaving Americans in financial straits now will only make the pandemic even more devastating. The upward trend in the number of new daily cases indicates that pandemic-related economic restrictions will continue, necessitating more intervention to avoid long-term economic harms. The risks of doing too little now far outweigh the risks of doing too much.
The nation needs to address its long-term fiscal shortfalls, which are certainly worse now than they were before the pandemic. But it is also clear that we now face a different problem that dwarfs the federal debt in urgency. The only way to achieve a strong long-term budget is to first generate a strong economy. And we cannot fix the economy until the virus is under control. Federal stimulus can help deal with the virus and the economy and thus can strengthen our long-term economic and budget prospects even as it increases the current deficit. Being timid in our policy solutions during this crisis would be a mistake.