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.