The loss of the 2021 expanded Child Tax Credit deepened economic pessimism

By most standard measures, the U.S. economy was strong heading into 2024: Unemployment was low and wages were rising. Yet Americans kept telling pollsters they felt terrible about it. The gap between the data and the mood became large enough to earn a nickname—the “vibecession.” And the disconnect has persisted. Unemployment still hovers around 4%, layoffs are historically low, and wages are generally outpacing inflation, yet Americans continue to feel down on the economy. Why?

One important explanation is affordability: Rising prices due to inflation and the cost of borrowing. But a second important explanation has been overlooked: In early 2022, a temporary benefit that gave families with children hundreds of dollars per month expired. In new research, co-authored with Melody Harvey, we show that after this benefit expired, sentiment fell much further for families with children than for childless households, and further still for families with multiple children. For millions of families, the pessimism wasn’t a vibe. A check had stopped coming.

A large benefit, abruptly withdrawn

The 2021 Child Tax Credit (CTC) expansion was one of the largest one-year increases in aid to low- and middle-income families in U.S. history. The credit climbed from $2,000 to $3,600 per child under age six and $3,000 per child aged six to 17. Importantly, the expanded credit was fully refundable, so the lowest-income families who owed little or no federal income tax could receive it in full. The CTC expansion helped reduce child poverty to a record-low 5.2%.

In 2022, the CTC reverted to its smaller, pre-2021 form, and child poverty soared from 5.2% to 12.4%. Other pandemic-era supports (including stimulus payments and expanded unemployment insurance) had also helped reduce poverty in 2020 and 2021, and their subsequent absence contributed to the 2022 rebound (Figure 1).

The size of the loss varied sharply across families: The poorest families lost $3,000 per child in annual income—$3,600 per child for children under six—while many higher-income households were unaffected. That variation allows comparison of families who lost substantial income with those who lost little or nothing.

The University of Michigan Index of Consumer Sentiment shows that mood fell across the board after early 2022, but not evenly (Figure 2). Sentiment among childless households dropped by about 9 points. Among families with children the decline was steeper and deepened as the number of children increased, falling by almost 20 points among families with three or more children, a decline equal to about a fifth of the index’s pre-pandemic level.

The pattern suggests that the loss of the expanded CTC drove the decline in sentiment. The drop was concentrated among lower-income families, who lost the most benefits. For every $1,000 reduction in CTC benefits, sentiment fell by about 1.7 points. But sentiment among higher-income families with children—who lost little or no CTC benefits—declined about as much as it did among households without children.

Families were not simply feeling worse about their own finances. Our research shows that losing CTC income also made families more pessimistic about the broader economy, their risk of job loss, and the government’s economic policies.

Other factors don’t explain the pessimism

We also consider other factors that could potentially explain the decline in sentiment. Other pandemic-era income supports had ended well before early 2022, making them unlikely to explain the sharp change at that point. Inflation and rising borrowing costs are another possibility if they hit families with children especially hard.

But our results are essentially unchanged after accounting for inflation, mortgage and auto-loan rates, and the federal funds rate, and allowing for the possibility that these factors affected larger families differently. Higher borrowing costs weakened sentiment among all household types, but do not explain why sentiment fell more sharply among families with children.

The expanded CTC may have improved sentiment, too

The start of monthly payments in July 2021 was associated with higher sentiment, especially among lower-income families, but these estimates are smaller and much less precise. It’s harder to isolate the introduction of the expanded CTC since the March 2021 stimulus checks arrived just a few months before expanded CTC payments began.

The absence of the expanded CTC has left a lasting mark

The expiration of the expanded CTC is an important piece of the puzzle of why consumer sentiment remained so weak even as many economic indicators improved. It accounts for most of the extra decline in sentiment among households with children, and for about 15% of the early-2024 “vibecession,” the gap between actual sentiment and what fundamentals alone would predict.

The broader lesson extends beyond the CTC. The effects of temporary benefits may not end when payments do. When the expanded CTC expired, affected families were not just poorer. They reported more pessimism about the broader economy and about government itself. For policymakers, that means evaluating temporary programs should include not only what they provide while in place, but also what happens when they disappear.