President Joe Biden signed into law a massive, $1.9 trillion COVID-19 stimulus package last Thursday, the fourth major response to the pandemic. Did these measures save our economy from a protracted recession?
Our initial response might be yes, because of last spring’s economic free-fall. The stock market declined 20 percent. Unemployment jumped from 3.5 percent in February to 14.8 percent in April, the highest level since the Great Depression. GDP fell 10 percent in the second quarter.
The economy stopped collapsing in the summer and rapidly began regaining the lost ground. The stock market hit new record highs. Unemployment fell to 6.3 percent in January, and inflation-adjusted GDP in the fourth quarter of 2020 was within 2 percent of the 2019 level. Post hoc ergo prompter hoc, however, is a logical fallacy.
Macroeconomists disagree over whether government spending can lift an economy out of recession. Keynesians, following John Maynard Keynes’ analysis of the Great Depression, see a role for government stabilization. Austrians in the tradition of Ludwig von Mises and Friedrich Hayek argue government often causes recessions. New classical analysis has blown many holes in Keynesian theories.
Even without a fiscal stimulus, our economy might not have faced a true recession in 2020. The COVID-19 slump arguably resembled an offseason shutdown in a resort community, more than a recession. The major difference was that the pandemic shutdown was unexpected, whereas seasonal closures are planned.
The economy could have been expected to bounce back on its own if the business closure and stay-at-home orders did not last too long. This indeed seems to be happened during the summer and fall.
How can we ascertain the result of the stimulus spending? The Payroll Protection Plan and augmented unemployment payments probably kept some persons employed and softened the financial blow for idled workers. These programs could also be viewed as compensation owed by the government for business closure orders, not a stimulus. Personal saving has risen sharply, meaning many households’ stimulus checks produced little spending.
Unemployment programs have been beset by fraud. The Foundation for Government Accountability estimates fraudulent schemes siphoned off $36 billion, more than the $26 billion in unemployment compensation paid out in all of 2019. Do Keynesians think fraud is a fiscal stimulus?
One trillion stimulus dollars were unspent as of January 2021. Although some Republicans argued that we should spend this money before approving Biden’s proposal, the unspent money was in the process of being spent. Still, money not yet spent did not stimulate the economy in 2020.
Proponents of fiscal stimulus warned that the economy would sputter without a fall stimulus. One forecast warned of a five percentage point increase in unemployment and 5 percent decline in GDP. =The House and Senate did not agree on an encore to the CARES Act until December. Nonetheless, unemployment fell and GDP grew in the fourth quarter.
Even if some spending helped in 2020, the current stimulus package is almost certainly unnecessary. The Congressional Budget Office was already forecasting growth would recover “rapidly,” with GDP surpassing the pre-pandemic level by midyear and unemployment returning to its prior level by early 2022. After the Great Recession, by contrast, unemployment did not reach its 2007 level until 2016.
Biden’s stimulus package includes $500 billion to stabilize state budgets. States operate under balanced budget rules, so revenue declines caused by the pandemic would trigger spending cuts, potentially slowing the recovery. The $500 billion allocated for the states was based on an 8 percent decline in state revenues, but the Wall Street Journal reports that those revenues will be down only 1.6 percent.
Whatever the verdict on the stimulus spending, it worsened the national debt by about $3 trillion. The long-term debt impact may easily offset any short-term boost to the recovery.
The economic case that government spending can prevent or end a recession is weak. Fortunately, the COVID-19 shutdowns did not trigger a prolonged recession. Although we might be tempted to say, “Better safe than sorry,” the cost of the stimulus will be with us for years to come.
[Originally posted at Yellow Hammer News. Republished with permission.]