COVID stimulus boosted economy but left number of woes in its wake

The federal stimulus in response to the COVID-19 pandemic boosted the U.S. economy but also led to significant economic woes, according to a study by the Kem C. Gardner Policy Institute.

“In short, fiscal stimulus propped up the flailing U.S. economy in March and April 2020, when layoffs spiked due to shutdowns,” the report says. “However, the fiscal stimulus also contributed to economic challenges such as goods shortages, inflation and long-term debt.”{mprestriction ids="1,3"}

The Gardner analysis details the federal pandemic response and impacts on state government budgets.

The Federal Reserve’s money supply increase and corresponding interest rate reduction helped stabilize the national economy through the early pandemic, but the scale of the federal government’s fiscal response to COVID-19 was 24.6 percent of the national GDP. That fiscal support topped the amount of a full year’s worth of regular federal spending and more than tripled the amount of aid provided for the Great Recession, which was 7 percent of GDP. The dot-com recession saw federal fiscal support of a mere 0.4 percent of GDP.

“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,” said Phil Dean, Gardner Institute chief economist and public finance senior research fellow.

The pandemic created “enormous” challenges throughout the world, including deaths, hospitalizations and various long-term health impacts, according to the report. Significant economic damage also occurred in COVID’s aftermath in the form of widespread layoffs, including 6 million U.S. workers filing for unemployment benefits in a single week and a total of over 23 million U.S. workers receiving unemployment benefits within several months of the pandemic declaration.

Within a year of the pandemic beginning in the U.S., the federal government enacted three waves of unprecedented fiscal stimulus. The funding supported state and local government budgets both directly and indirectly. State and local governments directly received federal funds to respond to the public health emergency and to support economic activity. The stimulus also provided considerable funding to firms and households, which indirectly supported state and local government budgets by supporting income and consumption. As incomes and spending grew, so did tax revenue, the report says.

The report summary indicates the pandemic “initially brought severe economic impacts, as households, businesses and governments responded to an unknown virus.” The federal fiscal support topping $5 trillion “propped up an ailing economy during the most severe economic impacts and helped with the economic recovery after that.”

But, the report says, the federal response, while helping stabilize state and federal budgets by increasing economic activity that increased tax revenues, it is contributing to current economic challenges such as inflation and goods shortages, and to long-term debt challenges.

“The most prominent short-term impact is that the fiscal stimulus has contributed to current inflationary challenges, with U.S. consumer inflation spiking to levels not seen in over 40 years,” the report says. “While many factors likely contribute to the price spike, including pandemic-specific impacts (such as supply chain disruptions and labor shortages), large-scale fiscal stimulus is a major contributing factor.

“Initially projected to be transitory and closely related to pandemic-specific factors, sustained and accelerating consumer price inflation has raised significant concerns about long-term inflationary pressures if a wage-price spiral occurs, in which workers demand higher wages, which firms then pass on to consumers through higher prices.”{/mprestriction}