An unprecedented fiscal support
As of April 2021, the United States leads by a wide margin the Discretionary Fiscal Response to the COVID-19 Crisis enacted by the world’s Advanced Economies, especially when it comes to straightforward fiscal measures comprising additional spending and forgone fiscal revenue.
As in other countries, the US fiscal policy response to the COVID-19 pandemic took two forms:
- Disaster-related Relief measures: These measures were designed to help prevent business failures and sustain the unemployed directly affected by the COVID-19 pandemic and the sanitary restrictions that were put in place to contain its spread. The sheer magnitude and the synchronised nature of the pandemic put it appart from natural disasters which are usually localised in time and space. This warranted early on, an unprecedented fiscal support, illustrated by the CARES Act and the Paycheck Protection Program (PPP).
- Traditional Stimulus measures: these policies and support measures aim at stimulating aggregate demand and speeding up employment recovery. They are broader in scope and less directed to support specifically certain businesses, sectors, or individuals. These measures include spending on education, healthcare and infrastructures.
A quick review of prior Covid-19 related US legislation
The IMF Fiscal Monitor provides a convenient cost-based assessment of fiscal policies that have been implemented around the world starting from February-March 2021 to deal with the economic and sanitary impact of Covid-19 pandemic. Here is what the Fund reports regarding the legislations implemented in the United States prior to the ARP of March 11, 2021:
- An estimated US $ 2.3 trillion (around 11% of GDP) Coronavirus Aid, Relief and Economy Security Act (“CARES Act”). The Act includes (i) US $ 293 billion to provide one-time tax rebates to individuals; (ii) US $ 268 billion to expand unemployment benefits; (iii) US $ 25 billion to provide a food safety net for the most vulnerable; (iv) US $ 510 billion to prevent corporate bankruptcy by providing loans, guarantees, and backstopping Federal Reserve 13(3) program; (v) US $ 349 billion in forgivable Small Business Administration loans and guarantees to help small businesses that retain workers; (vi) US $ 100 billion for hospitals, (vii) US $ 150 billion in transfers to state and local governments and (viii) US $ 49.9 billion for international assistance (including SDR28 billion for the IMF’s New Arrangement to Borrow).
- US $ 483 billion Paycheck Protection Program and Health Care Enhancement Act. The legislation includes (i) US $ 321 billion for additional forgivable Small Business Administration loans and guarantees to help small businesses that retain workers; (ii) US $ 62 billion for the Small Business Administration to provide grants and loans to assist small businesses; (iii) US $ 75 billion for hospitals; and (iv) US $ 25 billion for expanding virus testing.
- On August 8, 2020 President Trump issued executive orders mostly to address the expiration of certain Coronavirus reliefs provided by previous legislations. These included i) using $44 billion from the Disaster Relief Fund to provide extra unemployment benefits ; ii) continuing student loan payment relief ; iii) deferring collections of employee social security payroll taxes ; and iv) identifying options to help renters and homeowners avoid evictions and foreclosures.
- On December 28 President Trump signed a US $ 868bn (about 4.1 percent of GDP) coronavirus relief and government funding bill as part of the Consolidated Appropriations Act of 2021. The Act includes enhanced unemployment benefits of US $ 300 weekly federal enhancement in benefits through March 14, 2021, direct stimulus payments of $600 to individuals, another round of PPP loans, resources for vaccines, testing and tracing, and funding for K-12 education.
What’s in the American Rescue Plan (ARP)?
The $1.9 trillion American Rescue Plan was passed into law on March 11, 2021.The Plan is estimated to have a $1,855.6 billion impact on the Federal Budget Deficit by the CBO. Out of this impact, $1,802.6 billion consists of the estimated Outlays over the 2021-2030 period, with the bulk of these outlays occurring in 2021 and 2022 (cf. table below). In 2021 alone, total spending is estimated to reach around $1,1trillion.
Extended Unemployment Benefits (~$175 to $225 billion in 2021)
Over the past year, more than 46 million people across the United States have received more than $600 billion in unemployment benefits. The new programs that have been created in the last year to support American workers such as Pandemic Unemployment Assistance, were scheduled to end March 14. The American Rescue Plan extends these unemployment benefits programs (including supplemental federal unemployment benefits).
More precisely, the Plan extends pandemic unemployment assistance from 50 weeks to up to 73 weeks through September 6 and extends emergency unemployment compensation from 24 to 53 weeks. It provides an additional $300 in weekly benefits through September 6, 2021.
The American Rescue Plan also waives federal income taxes on the first $10,200 of unemployment benefits received in 2020 by middle- and lower-income taxpayers. The tax relief extends to both workers who received benefits through federal unemployment programs as well as those who received traditional benefits through their state unemployment insurance fund. This tax relief alone is estimated to cost around $25 billion in 2021.
Wes estimate the cost of extended augmented unemployment benefits to be comprised in a range of $150 – $200 billion in 2021, depending on the speed of the job market recovery.
Third round of stimulus checks (~$400 billion in 2021)
The ARP includes a provision for distributing stimulus checks to all eligible Americans. Those eligible will automatically receive a stimulus check – the third Economic Impact Payment related to the provide pandemic Income relief after those delivered by the CARES Act – of up to $1,400 for individuals or $2,800 for married couples, plus $1,400 for each dependent.
The US Congress Joint Taxation Committee estimated the stimulus checks to cost $393 billion in 2021 and a further $80 billion in 2022.
Eligibility for the full amount of the third Economic Impact Payment or “stimulus check”
|As reported by the IRS dedicated website section, individual are eligible for the full amount of the third Economic Impact Payment if they are:|
– a U.S. citizen or U.S. resident alien (and their spouse if filing a joint return), and are not a dependent of another taxpayer
– their adjusted gross income (AGI) is not more than:$150,000 if married and filing a joint return or if filing as a qualifying widow or widower $112,500 if filing as head of household or $75,000 for eligible individuals using any other filing status.
Payments will be phased out – or reduced — above those AGI amounts. This means people will not receive a payment if their AGI is at least:
– $160,000 if married and filing a joint return or if filing as a qualifying widow or widower
– $120,000 if filing as head of household
– $80,000 for eligible individuals using any other filing status
Other direct fiscal transfers (~$50 billion in 2021)
The Arp Act includes a subtitle meant for preserving health benefits for workers with an estimated price tag of $27 billion in 2021.
The ARP Act makes the Child Tax Credit (CTC) fully refundable for the vast majority of children in 2021, with an estimated cost of $25 billion.
State and Local Fiscal Recovery Fund (~$350 billion in 2021)
The American Rescue Plan also provides $350 billion dollars in emergency funding for state, local, territorial, and Tribal governments to remedy the mismatch between rising costs and falling revenues. This includes:
- $195 billion for states, (a minimum of $500 million for each State)
- $130 billion for local governments (a minimum of $1.25 billion per state is provided by the statute inclusive of the amounts allocated to local governments within the state)
- $20 billion for tribal governments
- $4.5 billion for territories
The Rescue Plan will provide relief to state, local, and Tribal governments to enable them to continue to support the public health response and lay the foundation for a strong and equitable economic recovery. In addition to helping these governments address the revenue losses they have experienced as a result of the crisis, it will help them cover the costs incurred due responding to the public health emergency and provide support for a recovery – including through assistance to households, small businesses and nonprofits, aid to impacted industries, and support for essential workers. It will also provide resources for state, local, and Tribal governments to invest in infrastructure, including water, sewer, and broadband services.
For much of it, this emergency funding makes up for the loss of fiscal revenue by the States and Cities, caused by the pandemic. It is therefore more a return to the sub-sovereign fiscal baseline of 2019 than an extra funding coming on top of existing resources.
Estimating the macroeconomic impact of the Plan
Lessons from the previous COVID-19 support bills
Studies that examined the recently enacted fiscal measures suggest that the expanded and augmented unemployment benefits were effective at increasing spending, while the stimulus checks were effective to the extent they were received by lower-income individuals. Stimulus checks received by higher-income individuals appeared to be largely saved.
Ezra Karger and Aastha Rajan (2020) (Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19 Stimulus Payments) found that stimulus recipients who live paycheck-to-paycheck spend 62% of the stimulus payment within two weeks, while recipients who save much of their monthly income spend only 35% of the stimulus payment within two weeks. As a result, overall, the CARES Act’s $296 billion of stimulus payments increased consumer spending by $144 billion (49% of total outlays).
Another study by Chetty et al. (2020) using anonymized high frequency data found that Stimulus payments made to households in mid-April 2020 increased spending among low-income households sharply, nearly restoring their spending to pre-COVID levels by late April. Indeed, according to their findings, the initial impacts of COVID-19 on economic activity were largely driven by a reduction in spending by higher-income individuals due to health concerns, which in turn affected businesses that cater to the rich and ultimately reduced the incomes and expenditure levels of low-wage employees of those businesses.
In addition, “most of this increase in spending was in sectors that require limited physical interaction: purchases of durable goods surged, while consumption of in-person services increased much less. As a result, little of the increased spending flowed to businesses most affected by the COVID-19 shock, potentially limiting the capacity of the stimulus to increase economic activity and employment because of diminished multiplier effect”.
Cox et al. (2020) (Initial Impacts of the Pandemic on Consumer Behavior: Evidence from Linked Income, Spending, and Savings Data) use anonymized bank account information on millions of Chase customers to explore how spending and savings over the initial months of the pandemic vary with household-specific demographic characteristics, such as pre-pandemic income and industry of employment.
Their results suggest that spending declines in the initial months of the recession were primarily caused by direct effects of the pandemic, rather than resulting from labor market disruptions.
The studies on the PPP are more mixed. Two studies indicated that the loans went to firms that already intended to retain employees or did not go to areas most affected by the virus, while others found that states with more PPP loans had milder declines and faster recoveries or that the PPP increased employment. (Cf. CRS Report, Fiscal Policy and Recovery from the COVID-19 Recession, February 2021).
From the direct effect to the fiscal multiplier
The impact of fiscal measures on the demand for goods and services can be decomposed into a direct effect and an indirect effect. The Direct effect consist of changes in purchases of goods and services by federal agencies and by the recipients of federal payments or payers of federal taxes. The indirect effect, as measured through a demand multiplier, is defined as the change in GDP per dollar of direct effect on demand. Indirect effects enhance or offset the direct effects.
The product of a direct effect and a demand multiplier is referred to as an output multiplier or fiscal multiplier.
Output multipliers differ across different fiscal policies because the direct effects differ. Most changes in fiscal policies have direct effects that are less than 1 (because recipients of benefits and payers of taxes tend to adjust their spending less than one-for-one with changes in their income), in which case their output multipliers are smaller than the demand multiplier.
Taking into account the nature of the fiscal measures included in the ARP Act, there are two broad categories of fiscal expenditure with different direct effects and demand multipliers:
- Personal income replacement and support schemes (~ $650-$700 billion in 2021)
- Federal subsidies to States and Municipalities (~$350 billion in 2021)
For the first category, the direct effect of the measures depends on the share of receipts that is actually spent and the share that is saved or used to reimburse debt. The key variable is the recipient’s personal income bracket, as it came out from the studies analysing the impact of the pandemic’s first personal payments rounds (cf. above) . Another key variable is the relaxation of the pandemic related restrictions. Indeed, in contrast with 2020, the sanitary outlook has dramatically evolved for 2021, with the vaccination campaign being quickly ramped up.
Insights from recent economic history and academic studies
Reflecting on the experience of the Great Recession, CBO estimated that, by the first quarter of 2012, the fiscal multipliers for provisions enacted in 2009 were 1.5 for federal purchases, 1.3 for spending on state and local infrastructure, 1.25 for transfers to individuals, 1.15 for unemployment benefits, and 1.1 for other state and local transfers.
When actual output is well below potential output and the Federal Reserve does not act to offset the effects of changes in fiscal policies, CBO’s demand multiplier ranges from 0.5 to 2.5 over four quarters, starting the quarter in which a direct effect occurs in response to changes in policies, with no further (indirect offsetting) effects on output.
Peter Ganong and Pascal Noel (2019) (“Consumer Spending during Unemployment: Positive and Normative Implications.” American Economic Review, 109 (7): 2383-2424.) show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. Depressed spending after UI exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels.
This suggests that to in order avoid an exhaustion of the economic recovery that would be caused by sudden declines in income and aggregate demand, targeted support might still be needed after September 2021 to maintain spending for low-income, vulnerable households.
Summing it up all: a back of the envelope calculation of the impact of ARP on US GDP
Direct effect of income support schemes in 2021 60% translates into additional spending (40% is saved) versus (50% – 50% in 2020 due to constrained saving).
Indirect demand multiplier of income schemes: 2
Total fiscal multiplier for category 1 measures: 60% * 2 = 1.2
Fiscal multiplier for category 2 measures (transfers to States and municipalities): 1 is assumed as the federal support merely ensures a return of States fiscal balance to pre-pandemic baseline
Total Impact on Domestic Demand in 2021 = 650 * 1.2 + 350 * 1 = $1130 billion. (5.4 percent of GDP).
However, a downward correction must be included to account for the increase in imports.
Short term (4 quarters) cumulative Imports impulse response to a shock to GDP: 3 (Cholesky decomposition on the residuals covariance matrix of a VAR model)
Imports to GDP ratio: 15%
Contribution of Imports to GDP growth = – 5.4 % * 3 * 15% = – 2.4 percent of GDP
Total Impact of ARP on US GDP growth = 5.4 % – 2.4% = 3 percent in 2021