COVID-19 Is Transforming Economic Policy in the United States

Forum DOI: 10.1007/s10272-021-0979-4 Claudia Sahm COVID-19 Is Transforming Economic Policy in the United States A global pandemic is bringing the sea change in economic policy that the meltdown of financial markets in 2008 did not. While the shift is incomplete and its success is far from guaranteed, now is the time to reflect on its effects and the challenges ahead. The economic policy response during the COVID-19 pandemic offers four key lessons: First, the features of the coronavirus crisis are different from and the same as past recessions. Second, we must use lessons learned from economic policies in this crisis to prepare for future recessions. Third, good policies require good administration, which was repeatedly missing during the COVID-19 crisis. Good policy is worthless if it never reaches the people it was intended to serve. Finally, it is time for macroeconomics to upgrade its tools and frameworks, bringing in new ideas and retiring some old ones. That effort will require introspection and collaboration. To remain relevant, change in economics is imperative. Differences and similarities shape the policy response now and in the future COVID-19 hit the United States hard. In mid-March 2020, a $21 trillion economy locked down to keep people safe and hospitals from being overburdened by a new, mysterious killer. Several prominent macroeconomists, such as Mankiw (2020) and Summers (2020), heralded it as the first true supply-side recession, since people could not, in their opinion, spend. They concluded that demand policies in recessions, like stimulus checks, were unhelpful and would spark shortages, wasteful deficit spending and high inflation. They called for targeted relief only for people hardest hit like the unemployed and spending on public health efforts. Those actions were necessary but insufficient. The breadth of the crisis was too broad for such a narrow policy response. © The Author(s) 2021. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. Claudia Sahm, Stay-at-Home Macro (SAHM) Consulting, Arlington, VA; and Jain Family Institute, New York, USA. ZBW – Leibniz Information Centre for Economics Yes, spending was restricted more than in past recessions, but people still had to have enough money to keep a roof over their heads and feed their children. Moreover, I argued from the start of the pandemic that we were also living “the mother of all demand shocks” (Sahm, 2020). Millions of workers claimed unemployment insurance each week, and the official unemployment rate hurtled toward 15% in April 2020 (Cox, 2020). The speed and breadth of job losses rivaled only the Great Depression. As shown in Figure 1, nearly half of US families lost income from employment during the crisis. While income loss was most common among low-income families, those with higher incomes were also negatively affected. Economic hardship was even greater among particular groups. People of color (Spriggs, 2021), low-wage service workers (Gould and Kandra, 2021) and mothers (Heggeness, et al., 2021) were hit especially hard. While it is true that in all recessions some are hurt more than others, the severity of this recession magnified the pain of the hardest hit groups. Moreover, most families, even in the best of times, do not have a sufficient financial buffer to weather a lost paycheck (Bhutta et al., 2020). Without government aid, a collapse in demand was inevitable. Thankfully, policymakers went big, fast and broad. They recognized the novel and the traditional features of this crisis. In March 2020, Congress enacted the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. It combined targeted relief, such as an extra $600 per week for the unemployed, and broad-based support in $1,200 stimulus checks per adult. By contrast, during the Great Recession, the American Recovery and Reinvestment Act was under $1 trillion, while the extra weekly payments were $25 and the checks $500 per adult. The large response in the CARES Act worked. Larrimore et al. (2021) found using Internal Revenue Service records that these two relief programs more than replaced the lost employment income for a typical worker with a large income loss due to the COVID-19 recession and provided jobless benefits. Moreover, the support was greatest for low-wage workers. The coronavirus crisis had unique features, too. First and foremost, it was caused by a pandemic. COVID-19 drove the crisis from the start and will continue to until its end. In response, Congress allocated billions of dollars in public health efforts to fight the pandemic and develop a vac- 185 Forum Figure 1 Many families lost income from work, fewer received jobless benefits Figure 2 CARES Act relief shielded low-income workers the most from large income losses Percent of families by household income in 2019 Percent of workers who had large income losses after including relief, by deciles of income in 2019 $150,000 and above 60 $75,000 to $149,999 40 $35,000 to $74,999 Great Recession: 2009 20 Under $35,000 COVID-19 recession: 2020 0 20 Received jobless benefits 40 60 80 Lost employment income Source: U.S. Census Bureau Householding Pulse Survey for Dec. 9 to Dec. 21, 2020. cine. Another difference from the Great Recession is that the fundamentals of the US economy and finances of many families were the best they had been in decades. Policymakers viewed their efforts as a bridge to the other side of the pandemic. So, while income from employment fell broadly, massive relief from the government was able to keep many families afloat. Some benefits, like enhanced unemployment insurance and stimulus checks, even reached people who were struggling before the coronavirus-induced crisis. Researchers at Columbia University estimate that the American Rescue Plan cut the poverty rate for children from 15% (without relief) to 6% (with the relief); among Black and Hispanic families, the reductions were sizeable, too, from around 20% to 10% (Parolin et al., 2021). Fiscal relief worked, and it worked most for groups who entered the COVID-19 crisis with the most economic challenges and who were hit hardest by the crisis. Use lessons from economic policies in this crisis to prepare for future recessions Go bigger, go faster, go broader – was the lesson from the Great Recession when the policy response fell short. Congress and the Federal Reserve delivered in the spring of 2020. The $2 trillion CARES Act was twice the package that was offered in 2009. Support from Congress waned last summer as COVID-19 cases decreased but then the surge in infection rates in late autumn and into the winter led to another $1 trillion in fiscal support at the end of 2020. The big test remained. How committed are policymakers to pushing a rapid recovery? (...truncated)