![]() ![]() How do the size and composition of the COVID-19 fiscal response compare to the Great Recession stimulus? During the Great Recession, the federal primary deficit rose from nearly -1% to nearly 8% as a share of GDP. Comparison to the Great Recession fiscal stimulus The percentages are shares of the total deficit cost based on CBO (2020). The COVID-19 fiscal policy response to date consists of five broad components: (1) transfers to individuals, 23% (2) government consumption through direct federal purchases of goods and services, 24% (3) transfers to state and local governments, 12% (4) grants and unrecovered loans to businesses, primarily the PPP, 29% and (5) tax provisions, 11%. ![]() In all, the increase in the federal primary deficit over the next year or so is virtually guaranteed to surpass anything seen in the United States since World War II. This projected increase is separate from nondiscretionary deficit increases supporting preexisting “automatic stabilizer” programs such as Medicaid and the Supplemental Nutritional Assistance Program (SNAP), as more households become eligible, and from anticipated declines in federal tax revenue. To put this in perspective, the 2019 deficit was $984 billion, 4.6% of GDP. Taken together, the discretionary fiscal responses to COVID-19 are likely to add about $2.4 trillion, approximately 11.2% of 2019 GDP, to the federal deficit, occurring mainly over the next year. The fourth phase increased funding for areas covered in prior phases, especially the Paycheck Protection Program (PPP), which funds small business loans that convert to grants if used primarily to maintain payrolls. The third and by far largest phase was the Coronavirus Aid, Relief, and Economic Security (CARES) Act, initially estimated by the Congressional Budget Office (CBO 2020) to cost $1.7 trillion. The first two focused on emergency health care, food assistance, Medicaid, and paid sick and family leave related to COVID-19. Federal fiscal policy responses to COVID-19Īs of mid-May, there have been four phases of federal fiscal response. The precise timing of its effect will depend on how quickly and extensively spending resumes on travel, leisure and hospitality, and other areas of consumption that are currently constrained by voluntary and government-imposed social distancing. Research suggests it will have a large effect on GDP over the next few years. Given the similarities, the past decade of research on the macroeconomic impact of the Great Recession fiscal stimulus has important implications for the potential impact of the COVID-19 fiscal response. ![]() In this Economic Letter, I analyze similarities between the current response and the fiscal stimulus during the Great Recession. Since early March, the United States has enacted a series of fiscal policy actions in response to the outbreak and economic repercussions of coronavirus disease 2019 (COVID-19). ![]() The results point to a large potential impact on GDP. Research over the past 10 years on the macroeconomic impact of that stimulus thus has important implications for the current fiscal response. The current fiscal response shares key similarities to the fiscal stimulus enacted during the Great Recession. The United States enacted a series of fiscal relief and stimulus bills in recent weeks, centered around the Coronavirus Aid, Relief, and Economic Security (CARES) Act. ![]()
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