Congress is expected to soon pass President Biden’s $1.9 trillion COVID-19 stimulus package, 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%. Unemployment jumped from 3.5% in February to 14.8% in April, the highest level since the Great Depression. GDP fell 10% in the second quarter.
The economy stopped collapsing and began regaining ground. The stock market hit new record highs. Unemployment fell to 6.3% in January and inflation-adjusted GDP in the fourth quarter of 2020 was within 2% 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 that government often causes recessions. New classical analysis has blown many holes in Keynesian theories.
Regardless of the efficacy of a fiscal stimulus, our economy may not have faced a recession in 2020. The COVID-19 slump arguably resembled an off-season shutdown in a resort community more than a recession. Except that the pandemic shutdown was unexpected while 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. And this seemingly happened during the summer and fall.
How can we assess the stimulus spending? The Payroll Protection Plan and augmented unemployment likely 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, so many households’ stimulus checks produced little spending.
Unemployment programs have been beset by fraud. The Foundation for Government Accountability estimates that 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. While some Republicans argued that we should spend this money before approving President 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% decline in GDP. The House and Senate did not agree on an encore to the CARES Act until December. And yet 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 expecting growth to recover “rapidly,” with GDP surpassing the pre-pandemic level by mid-year and unemployment returning to its prior level by early 2022. For comparison, after the Great Recession unemployment did not reach its 2007 level until 2016.
President Biden’s package includes $500 billion to stabilize state budgets. States operate under balanced budget rules, so revenue declines due to the pandemic would trigger spending cuts potentially slowing the recovery. The $500 billion was based on an 8% decline in state revenues; the Wall Street Journal reports that revenues will be down only 1.6%.
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. While we might say, “Better safe than sorry,” the cost of the stimulus will be with us for years to come.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
