Unprecedented federal fiscal response to COVID-19 propped up economy, but created significant challenges

By

Patrick Jones

|

In the midst of the tremendous challenges created by the COVID-19 pandemic, which included significant health impacts and widespread layoffs, the federal government began its fiscal response to help prop up the U.S. economy. A report released [recently] by the Kem C. Gardner Policy Institute details the federal government’s 2020 and 2021 fiscal policy (i.e., spending and taxing) responses to the pandemic and the initial impacts of these fiscal responses, particularly on western states.

“While the Federal Reserve’s expansionary monetary policy (i.e., money supply increase and corresponding interest rate reduction) played a significant role in stabilizing the U.S. economy through the early pandemic, the massive scale of the federal government’s fiscal response to the COVID-19 pandemic (about 25% of 2020 GDP) far exceeded its fiscal response to other economic downturns,” said Gardner Institute Chief Economist and Public Finance Senior Research Fellow Phil Dean. “The enormous and rapid response stabilized household and company budgets, which in turn helped stabilize state budgets; however, the unprecedented level of stimulus also contributed to current economic and budget challenges being faced today across the country.”

 

Image: Kem C. Gardner Policy Institute

 

Key findings from the report include the following:

Massive pandemic fiscal stimulus – Within a year of the COVID-19 pandemic beginning in the U.S., the federal government enacted three waves of unprecedented fiscal stimulus amounting to nearly 25% of 2020 GDP (over $5 trillion).

Pandemic aid significantly exceeded that of recent recessions – Pandemic federal fiscal support exceeded a full year’s worth of regular federal spending and more than tripled the amount of aid as a percent of GDP provided for the Great Recession. Federal fiscal support provided during the Dot-com recession was even smaller tallying 0.4% of GDP, compared with 7.0% for the Great Recession, and 24.6% for the pandemic.

Direct and indirect state budget impacts – This federal funding supported state and local government budgets both (a) directly through state and local government grants and (b) indirectly through economic support to firms and households.

Fiscal stimulus benefits and costs – While helping the U.S. economy overcome early pandemic challenges, the fiscal stimulus also contributed to goods shortages, inflation, and long-term debt.

Impact on western states – As with states throughout the nation, western states received significant benefits from the federal fiscal response, unexpectedly maintaining and increasing budgets as revenues increased. At the same time, the federal fiscal response is contributing to current economic challenges faced by both state governments and the average consumer.

The full analysis and report are now available online.

This press release was provide by the Kem C. Gardner Institute at the University of Utah.