The U.S. economy is currently still grappling with the COVID-19 pandemic, but this is not the first crisis to have faced individual economies. The government via Congress–with Presidential approval–can try to help stimulate the economy from periods of protracted or even short-run decline. These programs are all generally “Keynesian” in nature, via their efforts to manipulate economic activity. Keynes himself justified this by explaining that during times of great uncertainty, the government is able to provide that stability that firms or consumers might not be able to. This might then prevent a deeper decline or help aid in a recovery.
Fiscal stimulus was really first widely employed in the U.S. on an active basis during the New Deal era of the Great Depression. An alphabet soup of new programs were created during the New Deal to help get Americans back to work and improve the economy. Some of these programs were more successful–and controversial–than others. Notably, many of these programs did not survive in their original form if at all, but a few have persisted. Most notably, the Social Security Act helped institute unemployment insurance, and other direct assistance to mothers with children.
Before going further, when we speak of stimulus to the economy, there is often not an obvious distinction between discretionary and mandatory spending programs. Discretionary programs are those that Congress passes into law that allocate new spending, while mandatory programs already exist and need no Congressional action to spend money as the rules for that increased–or decreased–spending were passed into law at an earlier time. So you might think of existing unemployment insurance programs or food assistance programs like SNAP as being automatically employed to augment income and spending when people have lost their jobs. There are often discretionary expansions to these programs during recessions, with unemployment benefits supported for longer periods or at higher amounts, or more people being given access to food assistance.
The programs that do not need new legislation to spend additional money are known better as automatic stabilizers and include unemployment insurance, SNAP (food stamps), Medicaid, and income and corporate taxes. (For another source on this see https://www.brookings.edu/multi-chapter-report/recession-ready-fiscal-policies-to-stabilize-the-american-economy/). Income taxes turn out to be one of the largest automatic programs in place, as the tax bill actually paid declines a great deal during a recession like this one. That however does not mean people are able to access their approximate tax savings at the moment they lose their jobs!
Therefore, the fiscal response to the economic downturn has included a great deal of discretionary spending increases. The government can spend money directly, transfer money to people or business owners, send money to state and local governments for some purpose, accelerate tax savings, or even lend money to businesses like with the PPP in 2020.
Each of the programs described here may have a “multiplier” effect, such that each dollar spent (or not taken in) by the government would potentially increase overall activity by more than a dollar. You might think of this as the “bang for the buck” that we seek to expand our economy. Infrastructure spending can result in new jobs, which can result in new spending, and more jobs, and so on. Food assistance (SNAP) benefits are estimated to have higher multipliers than some other spending. The Congressional Budget Office (CBO) estimates multipliers for different spending projects following the 2008 crisis (See Table 3 here) potentially giving Congress a “menu” of options. Recent analysis by the Congressional Research Service (CRS) explains that spending directed at lower-income earners and households is often estimated to get higher multiplier effects due to the fact that higher income households have lower marginal propensities to consume.
Questions you might try to answer
- Looking at the CARES Act passed into law earlier this year or the proposed HEROES Act which was passed by the House and held up by the Senate, which balance do you think was the most important aspect of these programs and why? What evidence did you see that helped you understand the role played by this spending. Was the spending discretionary or a mandatory program that was augmented with new federal spending? You should try to provide numerical evidence to support your claims.
- What types of government programs are thought to be the most effective during “normal” recessions? Would those same types of stimulus be as effective right now? What evidence do you have to support what you claim?
- State and local governments often are not able to spend money as freely as the federal government and are nearly all faced with balanced budget requirements that prevent them from running large deficits. What types of help was provided to state and local governments this year? Is it enough to fill the gap in their revenue loss? Where did they lose revenue at the state and local level, and if the federal government will not pick up the tab, where will they get the money?
- An extension on the previous question, is what direct impact might the state/local funding issues have on you as a student at James Madison University? While some students have claimed the university is just trying to provide online school as a money grab, what are their options? If they should be providing more testing, where would they get the resources to pay for this? What have some other schools been able to do in order to remain open? Don’t just choose this and assume you do not need to provide numeric insight. Look here for evidence on the costs to the university for increased testing or waiving student tuition or rent. Is this something that is sustainable for even a short period? While you might not have a direct estimate of multipliers here, imagine and explore the ripple effect this would have on the local community for even a short period.
- Perhaps you think this is all silly, and the government should have minimal impact on our lives. Compare our economic performance to others who have more robust stabilizers in place and some that have even less. What does this make you think about the potential role for the government during times of great uncertainty? If you think that maybe the government should only act during times of crisis, imagine trying to rebuild this apparatus from scratch with no political willingness. Does this seem reasonable. Use evidence from other economies around the world also facing this crisis.
36 thoughts on “ECON332: Blog 4 – Automatic Stabilizers, Multipliers, and you?!”
During a normal recession, we need a governmental program that can stimulate the slow-down in economic activity, more specifically a program that can stimulate consumption. During the Great Recession, Congress passed the American Recovery and Reinvestment Act which was comprised of tax cuts/credits unemployment benefit’s and expenditures for health care, infrastructure, and education.
During a normal recession, this program would have been successful in stimulating the economy. Paul Krugman stated that the program was an early success and that ARRA was “working just about the way textbook macroeconomics said it would.” The only problem was ARRA did not go far enough and was not big enough.
We recently saw the CARES act pass which resembled ARRA, The Cares act was over double the size of ARRA and was comprised of economic impact checks, government assistance, small business assistance, and industry preservation efforts.
Personal consumption expenditure dropped from $13.5 billion to $11 billion between January and March. With congress strapped on options the quickest way to stimulate revive the economic downfall was through consumption. The most direct program in the CARES Act was the economic impact checks that would have a direct impact on consumption.
When breaking down how recipients spent their economic impact checks we see that the stimulus didn’t impact consumption as much as the program would have liked to. According to the New York Fed, only 29% of recipients spent their stimulus checks on consumption, 36% saved the benefits, and 35% allocated it to debt repayment.
The economic impact check found in the CARES act would have effectively stimulated consumption better if it had added time and allocation constraints. With the goal of stimulating consumption, the economic stimulus checks should have been constrained to spending the money on a specified set of goods within a certain time frame.
Government programs certainly play a role in helping the economy recover following a recession. During the Great Recession of the early 2000’s, more working-class Americans lost their jobs than in any previous economic downfall since the Second World War. In response the U.S. Department of Labor provided unemployment insurance and job training in part through the Wagner-Peyser Act and the Workforce Investment Act (WIA) (1). Advanced and more developed economies like that of the United States can implement tools such as this as well as payroll tax deferral and wage subsidies to small and medium sized firms. (2) Food security is another vital aspect of a recessionary crisis. SNAP, or the Supplemental Nutrition Assistance Program, provides food purchasing assistance to those who fall into the categories of low or no income respectively. The pandemic has shown that certain government programs are inadequate in combating the level of hardship Americans are facing. Even with programs like SNAP, nearly 24 million adults, or 10.9 percent of all adults in the nation reported that their household sometimes or often did not have enough food to eat in the previous seven days. Unemployment was reported at 6.9% as of October 2020, a level not seen since the 1930’s. (3) In theory, these programs should help to bolster the economy and ideally help it return to pre-recessionary levels. But as the nation reaches nearly a year of economic stagnation, it is evident that these essential programs need to be strengthened to a level that will aid Americans for the duration of the crisis.
This COVID-19 crisis has caused adverse effects across the entire United States economy; however, the state and local governments of the United States do not have such leniency with their budget as the federal government does, and, thus, have faced some challenging issues.
State and local governments cannot finance deficit spending like the federal government can. (1) Their budgets are typically balanced every year or two (2), meaning they were not prepared for such a rapid decrease in consumption that, in effect, plummeted the revenues from taxes and fees on hotels, tolls, airports, and motor fuel the states and local governments receive (3).
There has been a helping hand, in the form of federal aid, in 2020 to states and localities, as they are to receive over $200 billion in 2020 (3). The largest of this aid was the $150 billion given through the Coronavirus Relief Fund, known as the CARES Act, which was signed into law on March 27th, 2020 (2). This large sum of aid was directed into essentials such as, health care providers, public hospitals and community centers, public transit agencies, K-12 education, and public colleges and universities. This aid provided by the federal government should be enough for the state and local governments to offset their current and projected revenue lost from consumption decreases and other areas of loss for the remainder of 2020. (3)
The Treasury and Federal Reserve have also tried to take weight off of local and state governments by creating the Municipal Liquidity Facility (MLF) through the CARES Act. The MLF purchases short term municipal debt, with extremely low interest rates, from local and state governments, in hopes of easing the cash flow pressures. (2)
However, if heading into 2021 the economy remains in a recessionary period, these measures taken may not be enough, and additional aid may need to be acquired by the state and local governments in order for them to function properly. Furthermore, as one looks forward, pre-COVID levels of spending for states and localities may not be enough to provide some services that have seen increased demand in the wake of the COVID-19 epidemic, such as health care services and the supplies required for virtual education. (3)
After researching the effects government stabilizers, or lack thereof, have had on different European economies and our own, it is clear that the presence of such stabilizers have played a crucial role in helping people bounce back from this pandemic.
Denmark historically has had a particularly high level of government involvement. Beginning with changes to sick leave compensation on March 12, 2020, the Ministry of Finance took over providing all sick leave benefits during the first month of illness for those who contract the virus. Normally, the provision of these benefits falls to employers. The Ministry of Finance enacted another stabilization effort days later, announcing that “the government will subsidize 75% of the salary costs for employees that otherwise would have been fired as a result of the company’s financial losses caused by COVID-19” (KPMG, Denmark). In addition to this, it was insisted that employees stay home while receiving these benefits in an effort to cut down on the spread of the virus. This drastically decreased the number of Danes who fell into poverty, reducing a great among of stress and anxiety for the Danish people. The government then went on to compensate self-employed Danes for 90% of lost revenues due to the impact of the virus. The relief measures only continue. The country was one of the first to shut down in Europe and is now among the first to reopen. While the governmental relief efforts have been extensive in Denmark, “the government is forecasting a contraction in gross domestic product of 5.3% this year” (Bloomberg). Yet, this ultimately fairs well in comparison to both the United States and Sweden.
Sweden’s notoriously limited COVID-19 response entails nothing more than encouraging its citizens to social distance, stay home when sick and take “personal responsibility” (Business Insider). A hopeful Swedish government believed than in putting the responsibility to stay safe and remain financially cautious on its’ citizens, it would see a rise in GDP of at least 1.3%. However, they are sorely mistaken and are now facing a projected 4.5% contraction of their economy if not greater, with an 8.6% decline in GDP in quarter two. Their death toll is currently over 6,000. This is astronomical compared to Denmark’s meager 773 COVID-related deaths and decline in GDP of 6.8% in the second quarter. It is evident that assuming society will pull itself up by the bootstraps during such a tumultuous time is unfounded, as Sweden still faces issues with containing the virus with an ever-rising death toll.
Finally, looking at the United States’ performance during this pandemic, it is widely known that our response to this virus has been mixed with a large amount of discretion and responsibility falling to the governors of each state. From the PPP loan to help small businesses to the COVID-19 task force, the government has offered relief and guidance although it has been varied. We are currently facing a 7.9% unemployment rate; a bit of an embarrassment compared to Denmark’s 4.8%. Similarly, we have seen a 32.9% contraction in GDP in the second quarter alone, compared to Denmark’s 6.8%. Yet, despite our large unemployment rate and drop in GDP, the country’s personal consumption expenditure has only gone from $13.5 billion to $11 billion. There is no doubt that this drop would be much more prominent if it had not been for government involvement via the CARES Act and the like. Clearly, government involvement has made a positive impact on both Denmark and the U.S. although I believe the comparison between these two countries highlights the need for a strengthening of our current government programs as we continue to battle the pandemic.
It is hard to definitively say which one is truly more impactful between the two, but I would have to say the HERO act 2.0 that was passed in the house on October 1st. (1) This carries many of the same attributes of the original hero act and the care act, with a couple previsions that further impact economic recovery. Under the PPP parts of these acts we can see a good amount of variation in their approach. In the HERO act 2.0 these protections where more curtailed to smaller businesses by not allowing any of the PPP benefits to be extended to a publicly traded company. This will hopefully slow down the K recovery and allow for a more equal recovery. This combined with the HERO act’s greater focus on SNAP benefits Is why I believe it is more favorable.
The SNAP is for one an easy system that is already part of mandatory spending, and thus any discretionary action is only need to increases its effect, and not create a new program all together. Another reason that focusing more in on the SNAP is a good policy choice for it gets the money directly to those that are most in need, and those in need are the ones likely to turn around an immediately spend it rather than put it into savings. This is the whole goal of any stimulus, get more people to go out and start spending again to get things back to a ‘norm’. The money delivered in SNAP has a great multiplying effect behind it, growing the economy by more than a $1.50 for every $1 delivered Through SNAP.
Times like today and the crisis of ’08 make me truly understand why we need government involvement. No better way to observe this than the United States’ behavior towards the banking in the late nineties and early ’00s. The U.S. institutions relaxed their regulations on the financial institutions, allowing for financial behemoths like city group. With the government’s involvement’s dwindled It permitted these institutions to run freely to start all these practices that ended up with the crisis of 2008. The government involvement and regulations in times of no crisis is needed to keep the whole system from getting in-tangled to the point that if one part fails, the whole system could easily follow.
During normal recessions the most effective government action are public workforce programs. This is because the higher unemployment is, the less income households are earning, leaving less money to consume and contribute back into the economy. When citizens have jobs there may be less of a need for the government to spend on discretionary or mandatory policies to re-stimulate the economy. However, due to the extraordinary circumstances that we face regarding COVID 19 and the shutdown of many nonessential businesses, creating programs to ensure citizen employment is not exactly feasible because not everything is open and running at full capacity.
As a result of unemployment during the pandemic, the government effectively stabilized the economy using both fiscal and monetary policies. This can be seen through the CARES and HEROES Act. Speaking fiscally, the CARES Act was a stimulus package of over $2.2 trillion which was composed of unemployment benefits and payments to both individuals and small businesses just to help stay afloat. Simultaneously, monetary policy has adjusted to support the economy by loosening regulations and requirements by having near zero interest rates and cutting/lowering the federal funds rate.
Aside from the Fed and federal governments contribution to stimulating the economy, state and local governments have assisted as well although not in the same way. With not nearly as much money, states have had the ability to determine when and what re-opens and to what capacity. Creating quarantine periods, curfews, and social gathering regulations to limit the spread and have the economy recover as quick as possible.
In comparison to other countries, the fiscal policy enacted by the US was quite small. The US fiscal response this year amounts to about 13% (Cite 2) while countries such as France, Germany, and Japan reflect much higher due to automatic stabilizers such as generous unemployment and furlough policies as well as accessible healthcare. If the US hopes to recover from economic decline, steady and continuous stabilizers must be in place to limit a snowball effect and diverting to crisis management.
The COVID recession by nature is different from other economic recessions we have experienced in America. This recession was caused by the external factor of coronavirus, and our economic recovery is somewhat tied to the direction the pandemic is going (1). We have never seen such drastic and rapid economic decline as experienced because of COVID. In 2019, the economy was hitting record highs on many benchmarks which came crashing down to levels even lower than seen in 2008. During the Great Recession around 8.6 million jobs were lost in total and unemployment peaked at 10%. In the recent COVID recession we lost 33 million jobs so far and unemployment rate peaked at 14.7% (2). The COVID recession has been different than any other recession we have experienced.
During a recession the government wants to support overall consumption and employment to guide in recovery. In a “normal” recession this looks like lowering target interest rate to incentivize borrowing, providing security by backing up or bailing out struggling businesses and industries, and government stimulus. Government stimulus can take different forms such as tax relief and increased unemployment benefits, both of which were seen in 2009 as a response to the Great Recession (1).
When evaluating effective stimulus, it is beneficial to look at the “multiplier” or “pass-through” rate. Essentially this is the amount of economic activity generated for every $1 increase created by stimulus. After the 2008 recession, data was collected to evaluate the pass-through rate of different types of fiscal stimulus conducted. Transfers to individuals such as tax cuts do have an impact on economic recovery, but it is not as strong as other methods. Government consumption, like the ARRA passed in 2009 seems to have a strong impact on economic recovery, with around a 1.5 pass-through rate (3). Lastly, transfers to state and local governments may have the strongest impact on economic recovery, as they tend to spend more of their stimulus money compared to that of households.
We have seen all of these kinds of stimulus with the COVID recession and more, adding stimulus to PPE to the list. It is important for stimulus to arrive quickly, directly to the areas needed most, and is large enough (4), which we did see. We had stimulus go directly to the people suffering through direct checks and increased unemployment benefits. The COVID stimulus has also been the largest economic stimulus in American history. The boost to output created by all this stimulus should be large due to our multipliers, and we have started to see good rebound in areas such as personal expenditure (5). However, the recession will likely have long-term negative impacts on our economy. Areas that were hit hardest such as “non-essential” services are still struggling to restart. Long periods of unemployment can lead to a decline in the development of human capital, which hinders economic potential. In conclusion, I believe that the stimulus done so far has been affective in target areas as we have started to see them rebound however the COVID recession will still leave some long-lasting scars on our economy that are difficult to heal with increased spending.
From a student, the direct impact is in the cost to attend James Madison University. In fact, the overall cost is slightly cheaper compared to previous semesters. During my Industrial organization class, my classmates were talking about how James Madison University did not change an “athletic fee” due to no fall sports. In addition, I recalled that in the summer months, JMU was offering online classes at discounted rates. In fact, the pandemic made the cost of attending college cheaper in the short run. But as things slowly go back to normal, I expect the tuition rate to rise in order to “make up” for lost revenues.
For a student, you options are either to attend a “hybrid class “, online learning, or taking a “gap year (a break from college to pursue work and/or leisure opportunities)”. I think the negative sigma with online learning is from the fact that “for profit” colleges like the University of Phoenix use this as their business model and some of these colleges have sleazy reputations But in these times, online learning has become a necessity.
For many college towns, universities and student spending generate a large portion of the area’s income. In fact, Princeton mentioned in a 2017 state-centric study that colleges contribute about $1.85 billion a year to the New Jersey economy while students spend an average of $60 million a year. The coronavirus mean that only a fraction of that money will be seen due to reduced spending.
What I found most interesting about the proposed HERO’s Act was its additional focus on student loans. The package included plans to pause interest accrual, pause collection on defaulted debt, and allow student loan payments to be deferred through Sep. 30 2021. In addition, the proposed package would grant “economically distressed” citizens with $10,000 in student loan forgiveness, although the exact boundaries of what constitutes “economically distressed” was not defined (1). Today, there are roughly 45 million Americans currently holding student debt. The idea behind these additional programs is that if individuals did not have to worry about paying their student loans for the next ten months, they could spend that money elsewhere either towards rent, mortgages, or simply through day to day consumption (2).
Given the short-term nature of the HEROE’s Act these student loan proposals are inherently temporary, but what would be the economic impact if they were not? Even further, what would be the economic impact if all student loan debt were forgiven today? Financing of the American higher-education system has been the subject of much debate and has thus garnered extensive research. In 2018, The Levy Economics Institute issues a 68-page study analyzing the macroeconomic impacts of student debt cancellation. Although the entirely of their work cannot be discussed here, the researchers found student debt cancellation resulted in an increase in average households’ net worth and disposable income, increases in annual GDP and decreases in average unemployment rates. These positive macro-effects were accompanied by little inflationary pressure over the 10-year horizon of their model simulations and only modest increases in nominal interest rates. Though the federal budget deficit would increase, the study found that state-level budget positions would improve due to the stronger economy (3).
While American policy makers continue to debate the impact short-term student loan programs can have on stabilizing our fragile economy, it may be time to consider more expansive programs as the optimal solution.
As decades move on, it is in-evitable for a powerful economy to have a recession, yet its much rarer for it to be induced by a large spreading virus than an economic cause. It is thankful though through times of distress the government has the capabilities to put policies in place to dampen the harm of decline. We see this vividly in the Great Recession when fiscal stimulus was put upon the country. For Fiscal policy, Obama and the Congress pushed the American Recovery and Reinvestment Act in February of 2009 by roughly cutting eight hundred and thirty billion dollars of tax cuts and spending measures (2). The policies had positive effects on the financial market and was a leading cause to the positive response of the economy. Output and employment were striving well above what was believed to come (1).
To speak on the time we are living in, there are needs for the poor as well as the jobless. There is a need to increase consumption and spending to boost the economy. We were in a time of boom roughly one year ago and a return to this state is much needed. One way the government stepped in is with the CARES act which implemented a two trillion-dollar aid to our economy. The economy has also had some support in other realms by seeing interest rates drop, fed fund rates drop, and the chance for spending to rise (3). In April we saw over twenty million Americans file for unemployment, yet we see a large increase to the work force in the month of October alone at a staggering six hundred and thirty thousand jobs created (4). Its obvious by the job spikes that policy is a factor to job creation and doing its job to some extent. It is hard to see how the relief packages of the time have assisted, yet the numbers do some of the talking. Fiscal stimulus is trying to work and is partially, but the drought we are in is drastic and will take time even after a vaccine is ready to go. Once a vaccine is implemented, I believe the policies enabled by the government will help boost the economy positively in unrealistic numbers. The future is bright at some point, we just need to give the economy some time to get there.
During the Great Depression, most of the government programs were enacted under the New Deal. Some major programs were the Civilian Conservation Corps (CCC), the Civil Works Administration (CWA), the Farm Security Administration (FSA), and the Social Security Administration (SSA). These programs provided support to the unemployed, the elderly, the disabled, the banking system, and the agriculture sector.
During the Great Recession, the two most effective government programs were the Troubled Asset Relief Program of 2008 (TARP) and the American Recovery and Reinvestment Act of 2009 (ARRA). TARP was initially used to bail out banks but was expanded to bail out automotive, credit, housing, and insurance industries. This program aimed to stabilize large sectors with fiscal stimulus, so that the economy does not decline further. The goal of ARRA was to put $787 billion into the pockets of American families and small businesses, through tax cuts, tax credits, and unemployment benefits.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) was created in response to the COVID-19 pandemic and recession. The CARES Act sent a $1,200 check to eligible adults earning up to $75,000 and also increased unemployment benefits nationwide through the Pandemic Unemployment Assistance (PUA). The federal government also gave a fiscal stimulus to the airline and automobile industries and small businesses.
Unlike the CARES Act, under the New Deal fiscal stimulus was not given to a majority of individuals; SSA only gave a stimulus to the elderly, disabled, and The New Deal and fiscal stimulus during the COVID Recession both bailed out several large industries, like banking, automobiles, agriculture, and airlines. During the Great Recession, TERPS bailed out many large industries as well. Large sectors that employ a lot of people are important to maintain because if they fail then unemployment will rise drastically and make economic recovery even harder.
The CARES Act and ARRA gave families and individuals stimulus. The CARES Act gave the money through a mailed-in check and unemployment benefits. The ARRA gave the money through tax returns and unemployment benefits. The CARES Act used checks because it is a more direct way of giving money and ensuring that the individuals will spend it. Under the ARRA, many people were confused about where the stimulus is coming from because it was given through tax-returns, so it was not distributed as well and not spent as well.
All of these programs are aimed at boosting the economy by increasing consumption, productivity, and investment levels. The COVID Pandemic stands alone in the history of recessions because there is little the government can do besides directly giving people money because of social-distancing rules and the failure of many businesses. Without a vaccine or mass immunity increasing productivity and employment enough to recover and stabilize the economy is impossible.
During a recession, the government tries to intervene as much as possible to make sure that the economy can stay afloat despite the given circumstances of declination in growth or activity. Some of the types of government programs that are thought to be the most effective during times of recessions include Medicaid, flexible grant funds, automatic stabilizers, and allocations to a variety of programs.
Some of the bigger known recessions that happened in 2003 and 2009 were handled similarly in which the government “offered tax relief, billions in Medicaid, and billions more” in state assistance to help balance their budgets (1). Since then, recessions have started to dip, even more, in the 2009 instance, and thus the government created the American Recovery and Reinvestment Act (ARRA). The ARRA allocates hundreds of billions of dollars to the programs listed above being Medicaid, grant funds, and various programs.
During a time where COVID has granted a lot of uncertainty and closures, some of these government programs can definitely help stimulate the economy and get us out of this dip that we are experiencing. However, by providing so much government assistance, it might cause the states to be heavily reliant on help and thus could make things worst off in the long run. They might not be prepared for future recessions, which is probably why COVID hit so hard since we were still unprepared for the most recent recession (2).
With the help of automatic stabilizers, there may be a possibility where the government already has set motions to cause growth and stimulate the economy’s upturn out of the current recession (3). We are still unaware of how COVID will affect not only our society but the economy as well, but all we can do is taking it day by day.
As the winter is approaching, countries worldwide are experiencing a second wave of COVID-19, the new rise accounting for one fourth of all total cases since 2019. With now over 11 million Americans having been infected with the coronavirus, the United States has become the frontrunner for covid-19 infections worldwide and its economy is suffering highlighted by the 10% fall in GDP from Q1 of 2020. Part of the cause is the lack of trust citizens have for the government, even with mask mandates and other restrictions, Americans continue to ignore them, but government intervention (or the lack of it) has also had an impact on how covid has affected the U.S.. Norway, a country with a relatively more socialist government, has fared better than most countries during the pandemic, with only 56 deaths per 1 million people (compared to the US’s 762) and a only 4% fall in GDP from Q1. Unlike the US, Norway’s government was very proactive at the early stages of the pandemic, they implemented very strict lockdown measures and tight border controls back in March, and their universal health care has also helped keep COVID related deaths low. On the other hand Chile, a country where there is much less government intervention, has not been as successful in combating the coronavirus currently being 778 deaths per 1 million people. Like the US, Chile’s government was slow to react, only implementing a nationwide quarantine in May, and consequently their GDP fell 13% from Q1. Norway’s relative success in combating the coronavirus compared to countries like the US and Chile show that a more proactive government–one that citizens trust and believe in–have had positive impacts on the health of citizens and the state of the economy.
The transition to online learning by a majority of our universities, to include James Madison University, has created enormous economic impact across the country. In fact, the University of Michigan was forecasting a loss of between $300 Million and $1 Billion across its system. The fixed and variable costs of operating a major institution of higher learning has been fairly predictable over the last several decades, often balanced by factors to include a percentage of state funding, tuition, and filling the incoming class (with both in-state and out-of-state students). Those variables have not only changed, but the magnitude of change has become almost unpredictable going forward. Some students have chosen to take a “gap year”, essentially taking the year off, which impacts enrollment, often influenced by the fact that they are not getting the “college experience” that their tuition had promised. As mentioned within the citations, the cost of testing can be overwhelming to a University, and in some cases, can cause smaller institutions to cancel athletic programs or close all together. In fact, it was stated that 10% of smaller institutions may close. Within the second citation, it was mentioned that the University of North Carolina has spent approximately $87,000 testing student athletes over a four-month period during the summer. Is this the new normal? Will this continue after introduction of a vaccine? It just could be a part of JMU’s budget going forward. The solution is for each state to provide a holistic approach to testing and other COVID-19 related expenses, taking the burden from each university, primarily the universities within the state system. The cost of testing is not sustainable within a university’s budget, not to mention adding the costs of prevention such as masks and hand sanitizer. Lastly, the impact to the small businesses that need the support of our universities cannot be calculated in the short term. Job loss or furloughs within the university system is another economic impact that may be short term, but is difficult to quantify. In summary, the state governments (with help by the Federal Government) must provide standardization and economic assistance in order to keep our universities viable and affordable.
Due to budgetary restrictions, State and Local governments have had a more difficult time mobilizing and responding to the COVID-19 Crisis. Most states are required to run balanced budgets, making quick and effective action difficult due to the high price tag. With a hefty price tag of $352 per test, state-sponsored widespread testing could cost a local or state government millions or even billions of dollars (1). This necessitated the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which gave almost $150 billion to state, local, and tribal governments (2). Despite the aid from the federal government, it is still not enough for some states, and those states are being forced to reappropriate funds from other spending items. States are shelling out millions of dollars from general funds or other departments to keep businesses afloat or pay for other COVID-19 relief efforts. Minnesota took $200 million from their general fund for a public health response. Missouri’s response appropriated $387 million from various other state funds and $250 million from their general fund (3).
Not all states were forces to take this action, many had already built-up Rainy-Day Funds or other reserves and were able to instead draw from those instead of a dwindling tax revenue. Maryland moved $100 million from reserves and Nebraska withdrew over $83 million from the Governor’s Emergency Cash fund to aid in paying for the state’s emergency response (3).
Although the federal government was able to provide relief funding for state governments, it was not enough. Many states either had to dip further into tax revenue or start pulling out of reserve accounts to adequately react to the pandemic.
When the economy enters a recession, we see an increase in unemployment, a decrease in investment, and a decrease in output. The government’s job during a recession isn’t necessarily to fix or cure the downturn of the economy but instead to lessen the effects of it. They do this by passing bills like the CARES Act or the proposed HEROS Act. These bills are supposed to stimulate the economy again and help aid us out of the recession. Some of the aid given in these bills are stimulus checks that go directly to the people, or bailouts to large and small companies to help pay for debt and lost revenue to keep them in business.
One of the most important aspects of these recovery bills that should be focused on more is the stimulus checks. In the CARES Act, we received check worth up to $1200 for anyone who is a US citizen over 18 years of age that is not a dependent. These are meant to help people who had lost their jobs pay for rent, food, gas, or anything that they might need in order to help them get through whatever hardship the recession caused them. It also helps boost the economy for the people who did not need the money as they will either go out and spend that money or maybe even invest it in the stock market. This is one of the best resources for stimulating the economy and help lessen the effects of a recession.
The other aspect of the recovery bills is bailing out firms from the effects of the economic downturn. This is giving money to large and small companies to help make up the loss from the decreased revenue and help them make it through the recession. This is a major focus of the government as a large portion of the CARES Act went towards these companies. They focus a lot of this because the government doesn’t want to run into the problem they did during The Great Depression where large firms went out of business and caused the recession to last a very long time because these firms were too big to fail.
Sending money directly to the people should have been more of the goal for this recovery bill as a lot of people lost their job and feared COVID-19 and didn’t want to find a new job. Also since the government doesn’t know what each person needs the money for the best thing for the government to do is give people the money and they can do what they see fits best with the money, whether that’s paying rent or investing, in either case, it helps the people and boosts the economy.
During what could be considered “normal” recessions the government is inclined to enact programs and policies that are thought to help counter the effects that recessions have on the economy. For example, the most studied by economics students is the Feds ability to lower interest rates. Although the Fed is not directly tied to the government, lowering interest rates stimulates consumers to borrow and spend more, increasing GDP in the short run to then return to normal rates once they are out of the recession (1). Another example of a program would be the government’s decision to increase spending to again increase GDP in the short run. The increase in government spending makes up for some of the other components that make up GDP that may be lacking during a recession (3). This includes categories such as investment, consumption, and a lack of exports. One final example would be a reduction in tax rates. Reducing the tax rate puts more money in the pockets of consumers which would inevitably make them more inclined to spend more. Combining this with increasing government spending can result in a very effective method to get us out of recessions and has proven so in the past.
During the COVID-19 pandemic, the most notable policy that has been put in place from the ones mentioned above is the Fed’s decision to set interest rates low. This as of recently has appeared to be not as effective as it normally would be in a recession due to longer than normal lags. This is evident because the Fed recently decided it would keep interest rates low possibly for years to come (3). This long-lasting pandemic and its effects brought a lot of uncertainty including what the future holds. The Fed’s goal as of right now is to increase inflation so that interest rates can grow to a number well above zero to give them room to adjust them accordingly in the case of another shock (3). In the meantime, however rates are close to as low as they can go, and without a significant positive change in our outlook as in an increase in the inflation rate, they will remain low to get point get us there.
Automatic stabilizers acquire that title by doing just that. A lack thereof does not mean the economy is unstable but may create greater recessionary problems in the future as discretionary stabilizers are less effective. The Netherlands implementation of automatic stabilizers offset over 80% of the economic shock created by this pandemic faring better than most other large economies. The Netherland’s GDP contracted by 8.5% in the second quarter and worked back up 7.7% in the third quarter. The United States offset roughly 45% of the shock with an annualized GDP change of -31.4% in Q2 and a +33.1% change in Q3. Japan offset around 40% of the shock with annualized GDP down 28.8% in Q2 and up 21.4% in Q3. As you can see from these indicative examples, there is a correlation between robust stabilizers and GDP recovery. The Netherlands nearly recovered their GDP loss quarter to quarter with an 80% stabilizer offset while Japan had a lesser recovery at a 45% offset. The inclination of some people is to believe the government should not offer programs such as progressive income taxes, Medicaid, and unemployment, however if policies are not in place from the start of a recession, there will be a lag time and inefficient distribution of funds contributing to a slower recovery. Economically restarting from scratch creates a larger burden than retaining these policies and programs on the Federal budget. The stimulus checks sent to many Americans were poorly allocated due to the fact that no Government program is setup to effectively distribute them. Perhaps if a Universal Basic Income existed, the stimulus would have been distributed more effectively.
* Countries with a higher rate of cases average a slower recovering GDP than those less affected.
As we enter month nine of the pandemic, I believe the challenges we face, economically and socially, are changing and becoming more difficult to manage, proving that government programs that were effective in a normal recession need to reinvent themselves. In some ways, a financial crisis is almost preferred compared to a health crisis. Although each financial crisis is brought on by different measures, the actions can be replicated in almost any situation. For example, in normal recessions, money is put first. Pushing money back into the economy through credit easing programs such as lending to financial institutions and purchasing long-term securities have helped lead the effort in economic recovery in the past (1).
The normal focus on increasing aggregate demand may not be as relevant in this pandemic as we have seen in past recessions. With a large decrease in potential output due to the fact that non-essential businesses are closed, we can’t expect the same policies to work. The government needs to be able to adapt to consumer preferences, rather than pushing policies on the consumer. Monitoring consumer behavior and seeing how people spend their money when the economy reopens is crucial to the recovery.
Furthermore, I believe that there’s not much the government can do to bring the economy back to old levels during the pandemic. The key to recovery, in my opinion, is how the government reacts to post-pandemic life (2).
However, we can’t allow a completely hands-off approach. Because consumer preferences will set new levels of demand and potential output, the government should intervene on a small scale to prevent low levels from becoming the new normal, inhibiting economic growth once the coronavirus vaccine is our new flu shot. A Bloomberg article written by a French journalist outlines potential ways to keep the French economy open without killing the very people that help fuel it. He offered solutions including sending the younger generation back to work or redesigning current working conditions in places such as factories and offices. As the article points out, a supply chain can’t work correctly when sectors are being classified as essential or non-essential (3).
The government needs to set realistic expectations for the current climate and adjust its lens to fit our new normal.
The COVID crisis this year is something The United States has never seen before. The rate at which GDP dropped and unemployment skyrocketed is bizarre when comparing it to the recession in 2008. Because of this truth, the government and the Fed took a different approach in stimulating the economy back to where they want it to be. The government is being aggressive with expansionary fiscal policy which has caused a major increase in government spending. (1) As of September 1st, the government has spent almost $2.6 trillion dollars on COVID-19 relief alone. This includes the CARES act which equated to almost $2.1 trillion dollars of government expenditure. (3)
So where is the government getting all the money to fund this expansionary fiscal policy? It isn’t from tax revenue, which has increased from $3.46 trillion in 2019 to an estimated $3.71 trillion in 2020. (4) It is expansionary monetary policy from the Fed that is funding this increase in spending. The Fed has increased the monetary base in the U.S. by $1.3 Billion to stimulate the economy. (5) The monetary base is the simplest way to look at money supply because it accounts for only the most liquid forms of money like cash and deposits. It still gets the point across that the Fed is printing up money to fund the government’s fiscal policy.
This is not the first time we have seen this. By looking at the data, it is evident that the Fed also increased the money supply during the 2008 recession. (5) This was the first time the monetary base had ever experienced such a steep increase, but it is similar to the increase the monetary base is experiencing in 2020. However, this is not the case for the recession in 2000. This tells us that while the government has been combatting recessions through expansionary fiscal policy since FDR’s “New Deal”, the government has only recently begun combatting recessions through expansionary monetary policy. Perhaps this has been an effective defense against the recession considering the quick recovery to economic activity that the government’s stimulus has provided. However, we still have a long way to go. Only time will tell.
During a “normal” economic recession, the government and central bank try to stimulate the economy using various policies. The most effective policy the government could use to make the economy stronger and fight a recession is to give money directly to people.
Giving money to people will increase their disposable income. This will increase consumer spending, which will increase consumption and boost the economy. The U.S. has used this expansionary fiscal policy last march (CARES Act). The $2.2 trillion bill soothed the impact of the lockdown on the economy (1). Although consumer spending was down 20% at the trough of the recession, it is recovering faster as the economy is healing. Consumer spending today is only 3% away from its pre-COVID highs (2).
In economic terms, a recession will reduce disposable income which reduces aggregate demand and lowers equilibrium. The government will intervene by giving money directly to people which will increase consumption. Increasing consumption will increase output, which will shift back the aggregate demand curve to where it was.
Giving money directly to people is a better fiscal policy than a tax cut or an increase in government spending because it has a larger multiplier. At the beginning of the recovery from the COVID crisis, many people were getting more money from unemployment benefits than they were from their real jobs (3). This has led them to increase their spending on goods and services. This larger multiplier is helping the economy recover faster.
While they may claim not to, the Fed is out of juice. Interest rates are at historic lows, and Jerome Powell himself said earlier this month that he thinks further fiscal stimulus is needed(1).
The 2.2 trillion HEROES Act failed in the Senate earlier this year, and the $1.8 trillion offered by President Trump seems to have no traction so far. If the omnibus package passed, It would have included an extra $600 in weekly unemployment payments, in my opinion, being the most crucial part of the whole legislation(2). Workers that have been laid off due to the pandemic need anything they can get right now, and $600 a week is still too low in my opinion but is a better alternative than nothing at this point.
The government’s willingness to increase our “automatic stabilizers” as we call them in Econ, is a mirror image of what the government has done in past recessions to lessen the severity of economic downturns like this one. Congress passed the emergency unemployment compensation act(EUC) in 2008 and gave unemployment benefits to individuals, who used up all of their state-level benefits, for 13 weeks and would go on to pass the American Recovery act of 2009 the following year(3).
Unemployment benefits are an effective remedy for those currently unemployed. In 2015, the CBO released a report that found that out of eight different fiscal activities, unemployment benefits, which fall under transfer payments, had the third-highest estimate in terms of its multiplier effect on output, followed by transfer payments to state and local governments(4). Economists at JP Morgan Chase have also found that unemployment recipients from the CARES Act, uplifted their spending more than they did during the great recession(5). The expansion in unemployment benefits in 08’ made up 2.5% of the nation’s total income, while in May 2020, the benefits made up 14.5% of aggregate wages in the US. While that increase is partially associated with the fact that we are in a much more severe recession than 08’, still, it shows us that direct stimulus is having very short-run effects, which are crucial for those most affected.
In 2008, the U.S suffered through the greatest recession since the great depression. GDP fell significantly and during the lowest trough of the recession, virtually all segments of the economy were being hindered. During this devastating period, Congress passed the American Recovery and Reinvestment Act. The Recovery Act was one of the most extreme displays of fiscal stimulus in American history. It was comprised of almost a trillion dollars distributed among tax cuts, government investment, and people who were directly affected by the recession (1).
The same action to help the U.S rebound from the financial crisis may not be as applicable when combatting the COVID recession. In this scenario, the major banks are not the source of the problem. Communities undergoing lockdown has been the main culprit to the 30% GDP contraction seen in the second quarter (2). While the usual remedies to normal recessions, such as tax cuts, stimulus, and reinvestment are able to keep the economy afloat for a short term interval, the only certain solution is for a vaccine to be effective enough to give local governments enough confidence to lift lockdowns. Since there is action to be taken in the meantime while the country waits for a vaccine, the best place the government can provide relief to is localities.
This is where the CARES Act plays a role in recovery. The CARES Act provides a fund to eligible units of local government to cover expenses regarding necessary expenditures incurred due to the public health emergency (3).
While struggling to fund the local government has been a problem this year, another major problem is the funding of colleges. When it comes to higher education, the pandemic has had a huge impact to colleges financially. The Pennsylvania State System of Higher Education, which oversees 14 universities, is projecting a $100 million loss from room and board and other fees (4). Many schools, small and large, are struggling to retain their students on campus. Besides colleges not having enough funding, there is a hypothetical danger to students learning remotely. This period of time can drastically affect how prepared the future work force is.
To conclude, the attempts at stimulus have had positive short term affects on the economy, but the damage that has been done will be carried throughout the economy long into the future. We are in a large amount of debt, many jobs do not exist anymore, and higher education is currently less effective.
During normal recessions, direct government consumption of goods and services is the most effective method of fiscal stimulus. The reason direct consumption works so well is that it can directly buy from industries that are not only at risk, but also that will put the money they receive back into their local economies. The government spending from the American Recovery and Reinvestment act of 2009 (ARRA) is estimated to have yielded a GDP multiplier of around 1.5, stimulating the economy very effectively (1). Individual transfers have also been effective in past recessions, because while the marginal propensity to consume from them is close to zero for wealthier persons, low-income individuals had an MPC of around .4 and a multiplier of .67, reinvesting a large portion of their lump-sum back into the economy (1).
These two stimulus methods have been used by the federal government in many economic downturns, including this COVID-19 recession, but have been much less effective this year than usual. Recent Federal Reserve analyses have led to the prediction that aggregate demand will stay so low that inflation is unlikely to reach two percent for at least the next two years (2). Because of the low MPC from the direct stimulus, the government also passed a Paycheck Protection Program with the CARES Act, which gave money to businesses as long as they spent it primarily on maintaining salaries (1). This type of stimulus had no predecessor from the 2008 financial crisis and represents over 25 percent of the CARES Act’s budget.
During the Great Recession in 2007-2009, public workforce programs proved helpful in aiding the recovery of the economy. Unemployment insurance to those seeking re-employment acted as the emergency fund almost no one in the U.S. has anymore. CNBC reported in January of this year that only about 40% of Americans could handle even a $1,000 emergency. About a month later, the pandemic hit, and people were reminded why it is recommended to keep months of expenses saved. No two recessions are exactly alike, but there has not been a recent recession like the COVID pandemic. Automatic stabilizers are not enough, and attempted fiscal policy has fallen short. The unemployment rate in q2 2020 rose to 13%, higher than the Great Recession’s peak of about 10%. The gap in real to potential output sharply rose, with potential output remaining around 2%, compared to the negative real output. However, just looking at consumer spending and the stock market would make it appear as if the economy were booming. In response to the pandemic, the CARES act attempted to stimulate the economy by sending money to individuals, large corporations, and small businesses as well as invest in public health programs and education. Individuals who rely on the CARES and other government programs to get them through recessions are not able to sustain themselves.
During a normal recession, the government relies on automatic stabilizers to keep the recession from going downhill too quickly. Unemployment insurance is a great automatic stabilizer during a normal recession because it assists people who would typically be in the workforce. It is important for these individuals to have the resources they need to get back on their feet in times of need so that they do not remain permanently out of the workforce. These automatic stabilizers allow the government to have extra time to make harder decisions in the event of a worse than predicted recession. It acts as a decent safety net that prevents the “normal” weight without breaking. However, in worse recessions the weight is far from normal and this net alone cannot bear it. COVIC-19 has made the study of macroeconomics even more interesting. During the pandemic we have seen responses from the government that many individuals in this country have never seen. We have seen stimulus checks for up to 1200 dollars a person and even seen 600 dollar a week checks for some. This type of stimulus has less structure and a different purpose than the automatic stabilizers in place for normal recession. This stimulus is designed to get people to spend their money and keep businesses afloat because the automatic stabilizers are unable to do so. This phenomenon arises for different circumstances and COVID-19 is a beast many people never saw coming. Programs and plans for a worldwide pandemic were not established. The end goal for this stimulus is to get the money out there in general and less about keeping track of who gets what.
The COVID-19 pandemic has caused a recession unlike any other. Normally there are two types of recessions: natural or manufactured. A natural recession is one caused by shocks to the economy. A manufactured recession is one caused by the Fed in response to inflation above the target rate. COVID has led to a new version of the manufactured recession, one caused by government quarantine. During a normal recession, the economy is the driving force of the recovery. This situation is different since the economy is still partially shutdown. This shifts a large part of the burden of recover onto the government.
This will mean more discretionary spending like the PPP loans and extension of unemployment seen earlier this year. During a normal recession automatic stabilizer kick in, allowing more people to access programs like unemployment insurance, food stamps, and Medicaid. The government also engages in discretionary spending and expansionary fiscal policy. The discretionary money is usually spent either increasing economic stabilizers or on job creation programs. An additional problem with this pandemic induced recession is that we were already engaged in heavy expansionary policy leading up to it and the economy was above potential. So expansionary fiscal policy is less helpful because you already have tax cuts and increased spending on job creation. This makes discretionary spending on programs like unemployment insurance one of the obvious solutions. This was done by increasing and extending benefit periods for those who lost their jobs due to the pandemic. The government also created proactive programs like the PPP in an attempt to prevent further unemployment. Since there is a lag in the effects of discretionary spending this led to furloughed employees being rehired. In May, the first month to see decreasing unemployment since the pandemic started, the five industries that received the highest share of PPP money accounted for 75 percent of May job growth. The discretionary spending has been higher during this recession because of the economic shutdown and the need for more direct stimulus. Once the economic shutdown ends so too will the need for discretionary spending as the economy should immediately experience growth.
The United States has been criticized by many for not acting in the early stages of the pandemic, and for not imposing strict enough guidelines once action was taken. Many decisions were left up to state or local governments, with little structured guidance coming from the federal government. This lack of structure, combined with a large variety of beliefs and opinions held by the American people, led to a general distrust in the United States government and many restrictions not being taken seriously. Monetary policy changes have helped the US begin to recover from the initial hit in March, with a currently projected GDP decline of 3.7% compared to a 6.5% decline estimated in June. This estimated decline is interestingly less than the projected decline of 4.5% in Sweden, a nation that was largely maintaining normalcy to help the economy.
On the other hand, Sweden has had very lax policies regarding COVID-19. The nation has never implemented a lockdown or put strict policies in place, leaving most of the pandemic fight to its citizens. This has ultimately led to one of the world’s highest national death tolls (per million people, Sweden’s death rate is 40% greater than that of the US, and 12 times greater than Norway’s, NYT). While this approach was an attempt to prevent hurt to the economy, the central bank has predicted a 4.5% decline in the Swedish economy for 2020. Sweden failed to collect on expected economic gains while ultimately losing the lives of many citizens.
This comparison illustrates the importance of a strong central government in times of crisis. It is important to have authority over citizens and can implement essential restrictions and procedures with a trusting body of citizens. In addition, those in power must consider all aspects of their decisions and determine the importance of many factors. Nations in which strict policies were implemented and political willingness is high have seen drastically fewer cases of COVID in recent months, such as New Zealand and Australia. Government initiatives must be received by a cooperating audience for maximum benefit.
When there is a “normal recession” the government must implement programs to stimulate the economy, by increasing the amount of consumption in the economy. Public welfare programs are put in place to perform this. These policies help decrease unemployment, which helps increase the amount of money contributed back into the economy. Although this policy may be successful during a “normal recession” this may not help re-stimulate the economy during extreme recessions such as the COVID-19 pandemic. Welfare programs alone will not be effective during this pandemic as only essential businesses are open, meaning that these policies to ensure workers can work will not be as effective.
There is a lack of confidence in the economy that these jobs will become available again, and they will not use the money given to them by the government. The CARES ACT, which helped decrease the economic burden placed on the citizens, was not used in the way that the government wanted the citizens to. (1) The citizen’s 29% Consumption, 23% Savings, 48% Debt Repayment. Citizens are not confident in the recovery of the economy and are therefore saving for the future. Along with this, the cares act had a significant amount of issues when being distributed to families. There were long delays and confusion for households trying to access their benefits, leaving households vulnerable. (2)
If the United States is to be more successful in the future, they must increase the efficiency of their automatic stabilizers, become more efficient in the distribution of future relief packages, and instil the belief in American families that the economy will recover.
Europe and the U.S. have taken two very different approaches to fiscal stimulus following the pandemic-induced recession. Much of Europe has followed the German Kurzarbeit policy created during the 2008 financial crisis. Essentially the policy puts employees on leave, while the government pays up to two-thirds of their salary. The important factor here is that they remain officially employed (1). In contrast, the U.S. has focused its fiscal stimulus mostly on unemployment benefits. Europe’s policies are keeping people in their jobs, while America’s are forcing people to find new ones.
In April 2020 the IMF forecasted GDP would shrink by about 6% in the U.S. and about 7.5% in the Euro region. Their October reassessment predicts a smaller reduction of about 4% in the US, but a larger reduction of about 8.5% in Europe (—). The U.S. has surprised many analysts with its economic recovery. Much of this success can be attributed to America’s flexible labor market (3).
The COVID-19 pandemic has created a recession that is fundamentally changing the landscape of the global economy in ways unlike the 2008 recession. This is why the German Kurzarbeit policy that had such great success 10 years ago is not having the same effect now in Europe. While this recession has killed off many jobs, others are thriving. Industries such as healthcare, staple items, and ecommerce are expanding. In the U.S. much of the job loss has been offset by growth in these sectors. For example, Hilton is helping its furloughed workers “apply for jobs at ecommerce firms like Amazon” (4). Europe, however, is not experiencing the same reallocation of labor. The policies put in place there seem to make labor mobility more difficult, and possibly even discourage it. As a result, those economies are not adjusting naturally, and people remain in dying industries. Overall, the U.S.’ approach may prove to be more effective for this specific type of recession.
(2) The Economist print edition November 14-20th 2020, page 65
Due to the impact of Covid-19, many businesses have been affected. I often see some news about farmers. 1). Whether in the United States or China, farmers’ income this year is less than the previous year. Because their crops could not be sold out, and they were destroyed food. I still remember that some news it’s talked about: “Walmart supermarket dumped the milk into the sewer because the milk could not be sold out.” Moreover, according to the news, we can see that a large amount of food has been destroyed because it cannot be sold or traded. According to these circumstances, the US government also grants subsidies to farmers. 2). Secondly, because many people encountered financial difficulties in this Covid-19, there are corresponding subsidies for different state governments. 3). Moreover, since everyone can only stay at home, consumption in many places has decreased, and the utilization rate of many public facilities has also decreased. For example, the cost of highway traffic, entertainment centers, courts, libraries, and other transactions are falling. Therefore, some places will lower taxes at this time to relieve everyone’s pressure. 4) In the article, the author said: We project that state and local government revenues will decline $155 billion in 2020, $167 billion in 2021, and $145 billion in 2022—about 5.5 percent, 5.7 percent, and 4.7 percent, respectively—excluding the declines in fees to hospitals and higher education. Including those fees to hospitals and higher education would bring these totals to $188 billion, $189 billion, and $167 billion.” Even the government gives a lot of help to us, but they will lose a lot to receive from taxes. Then, different states are meet different economic problems. 5). For me, I don’t think online classes are a way to earn money at university. Just imagine that, if you didn’t go to university at that time, you still will spend money in other ways. And for each professor, they want to use the best way to help students a nd themselves to be safe and teach more they can. Also, if you have insurance, this test is free. And increasing the number of tests may increase “waste”. Because this test is free and the number of times has increased, it will cause some people to take the test even if they feel a little symptom. And for this week, I went to the festival to take classes, they are some people who will check your “Livesafe” and let people enter buy food. Some other schools still open now, and I have a friend, he is studying in Boston. In his university, there is no mandatory requirement to go to school, and students can choose online or school classes. In China, all schools are now basically fully open. In the beginning, the school strictly prohibited students from going out of the school. Students need to be quarantined at school for 14 days, and they also need to live in the school. After that, as long as there are students out of school, they need to be tested to ensure safety when they return.
One of the most effective government programs during a recession is unemployment insurance. This is considered an automatic stabilizer because the reliance on it is going to rise as unemployment rises, and it isn’t something that policymakers have to “turn on”. However, if there is severe or extended unemployment, then policymakers may have to approve increased funding for unemployment insurance. I believe that this government program is effective during the covid induced recession that we are in right now, because it is not something that requires people to go out and do something. They can collect unemployment in the safety of their homes while still searching for a job if they deem it is safe to return to the workforce. Another government program that is helpful during normal recessions is subsidized job programs for low income workers. Unfortunately I don’t think this type of program would be as effective in fighting out current recession due to the fact that people may not want to risk their lives in order to return to the work force. In the times of normal recessions, it seems that the most effective government programs are those that help create jobs and inject money back into the pockets of Americans, whether that be through unemployment benefits, tax cuts, or stimulus packages. However, in our current situation these may not be as effective as with past recessions. Many of the people struggling are those that were forced out of the workforce due to health concerns for themselves or family members. Job creation programs would not be effective for these people because of the chance that they would refuse to take the risk that comes with going to work. When it comes to the government injecting money directly into the pockets of consumers. This is creating a potential K shaped recovery in our current recession. The low-income people that need that money are doing what the government intended and spending it right away. This is what is required to get money back circulating through the economy. However, the more financially secure individuals are either saving that money the government has given them, and or investing it. This is helping put more money in their pockets, however it is ineffective in getting money flowing through the economy, which is what the government intended with those policies.
During previous recessions the government has used several programs in hopes to stimulate the economy. Some of these programs and different aspects of these programs have been more effective than others. For example, based on estimated output multipliers provided by the Congressional Budget Office for the major provisions of the american recovery and reinvestment act of 2009, a 1 year tax cut for higher income people has an estimated multiplier between .1 and .6 which is much lower than purchases of goods and services by the federal government which had an estimated multiplier between .5 and 2.5 or transfer payments to individuals which had an estimated multiplier between .4 and 2.1.
An important factor to consider is whether or not the programs and activities that were effective and ineffective during previous recessions like the example from 2009, will give similar results now given the circumstances of the covid-19 pandemic. We need to recognize the differences of current times from previous recessions and how that could impact the effectiveness of programs. For instance many people will not be willing to go out to eat or to the grocery store even if they are incentivized to with federal programs. Many small businesses can’t operate to their potential with restrictions and employees worrying about safety. Larger businesses have more resources and proper infrastructure and technologies to continue their operations more efficiently than those of smaller businesses. That’s why an increase in government purchases of goods and services from smaller businesses should be just as effective and more beneficial than in previous recessions. Also considering that according to the Congressional Research Center, that spending towards lower income households has a greater multiplier effect, tax cuts for the high income earners should be similarly ineffective as it was estimated from previous recessions.
Programs like unemployment insurance, SNAP, Medicaid, emergency cash assistance payments, subsidized jobs programs, and housing assistance are important to maintain or increase (1). Some of the programs, mentioned prior, are not available to everyone. Some businesses would not be able to take advantage of subsidized jobs prograns due to the health threats of the pandemic. To make sure that benefits work, it is important that they are enacted as sson as the recession hits (1 & 2). As the recession continues and deepens, the more aid will need to be released (1). The CARES Act has many resources that addresses budget problems during the pandemic, including unemployment, aid to businesses/services/programs (1 & 2). One part of the Act addresses/helped families that might have missed some of the aid mentioned earlier by adding one time cash payments to households ($1,200 per adult and $500 per child) (2). The main flaw of the act is that it mainly “aimed at industry rescues [and] no guardrails to ensure that public money is directed toward saving the jobs, wages, and benefits of typical workers” (2). Second problem is that it does not ensure workers safety (2). All of the programs mentioned above have been mobilized to some capacity during the pandemic, but its effectiveness depends on its timeliness (1,2,3). During the pandemic, households experienced a lot of delays (3).
Government aid programs are vital resources for a large majority of our society, and they help to maintain the financial well-being of many Americans through harsh times. Recessionary periods emphasize the need for these programs as many individuals are left displaced and out of work from the struggling market with bills to pay and families to support. Income tax, Medicaid, Social Security, and other programs are mandated legislations that help to stabilize the economy during more challenging times. Discretionary spending programs are typically implemented to bolster and support some of the automatic stabilizers already in place. With the impact of COVID-19 on the United States, it is obvious many of the stabilizing programs are outdated or do not effectively solve the issue of downed markets. With many people not receiving their tax savings until next year, stimulus packages and additional stabilizers seem necessary for when the economy reaches the lows it is currently.
It is seen in the blog reading of all of the different programs that were created to try and boost the economy back up during the New Deal era and the Great Depression. Some have failed and some had success but why was The Social Security Act so notable during this time period(1)? The Social Security act was able to improve the livelihood of many veterans, disabled, unemployed, or retired individuals that did not have a steady income(1). The poverty rate before the act was signed was at an unacceptably high level, which is why former President Roosevelt made the decision to sign in the policy. Years and years after President Franklin Roosevelt signed the Social Security Act on August 14 of 1935, it still remains one of the nation’s most effective, successful, and popular programs(1).
Reading into what the government is doing now in terms of fiscal policy response of COVID-19 compared to the response that went on during the New Deal era and the Great Recession is quite remarkable. With today and COVID-19, they seemed to have more of a step process on order to deal with the situation(2). The fiscal policy response used a branched out five component response to which each component has a certain percentage of funding that will be given out from the Congressional Budget Office. Without going into the details of each component and the motive behind each, one of the main difference between the recovery process of the Great Depression and COVID-19 was the inclusion of PPP(Paycheck Protection Program) funding for COVID-19(2). The reason PPP funding is so important for this pandemic is because it allows for the funding of small business loans(2). With this implementation, the government had to shift funding percentages down for the other four components as compared what was funded during the Great Depression(2). As a result of this, the economy continues to struggle, due to a relatively new situation in terms of the correct fiscal policy response.