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FILE PHOTO: U.S. Speaker of the House Nancy Pelosi (D-CA) speaks to reporters on Capitol Hill in Washington, U.S., December 3, 2020. REUTERS/Tom Brenner/File Photo
Report

Economic relief and stimulus: Good progress but more work to do

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Editor's Note:

This brief is part of the Brookings Blueprints for American Renewal & Prosperity project.

This piece was updated on January 22, 2021 to include new legislation and proposals from the Biden administration.

Blueprints for American Renewal & Prosperity

Contents 


Summary

The COVID-19 pandemic precipitated the sharpest and deepest economic contraction since the Great Depression. Although the economy has recovered somewhat since the spring of 2020, millions of Americans who lost their jobs remain unemployed, the economy is operating far below its capacity and the recovery appears to be stalling. The coronavirus continues to spread uncontrollably, exhausting public health and health care resources. Slow vaccine distribution leaves people vulnerable to the virus and delays economic reopening.

The pandemic has had particularly severe effects on certain economic sectors, low-income workers, women, and racial and ethnic minorities. Thus, even when the “headline” statistics eventually improve, the prospect of a K-shaped recovery is real; while the overall economy and those already faring well recover, many Americans may be left further behind in an already unequal economy.

In the face of these concerns, some Republicans have argued that high current and projected federal deficits should curtail any new economic stimulus. To be clear, the U.S. does in fact face a long-term fiscal problem. But the depth, breadth, and persistence of the economic decline and the remarkably low interest rates that exist today mean that concerns about the long-term federal budget should not stand in the way of policies that could help people and the economy now.

The $920 billion relief bill that Congress enacted, and President Trump signed in December was a move in the right direction, but more needs to be done. The key policy priorities currently are as follows. First, contain the virus. COVID policy is economic policy right now. It will be impossible to develop a strong economy until the virus is contained. Second, help state and local governments – this will both help the macroeconomy and preserve benefits for tens of millions of needy households. Third, expand the generosity and time frame for targeted relief – including unemployment insurance and rental assistance. President Biden’s newly released proposals contain these features and many others. Congress should move quickly to fight the virus and provide economic relief that will support households until the virus is contained.

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Challenge

The COVID-19 pandemic has had a devastating effect on the U.S. economy. From February to April, the unemployment rate rose from 3.5 percent to 14.7 and the employment-to-population ratio fell from 61.1 percent to 51.3 percent. Both measures have rebounded somewhat since then—in November, the unemployment rate had fallen to 6.7 percent, and the employment-to-population ratio had increased to 57.3 percent—but both measures remain substantially worse than their pre-COVID rates and in December both figures remained at their November levels, indicating the recovery has lost momentum.

The pandemic’s effects have varied across industries and population groups.  Sectors that require in-person interactions or travel have been hit particularly hard, including service industries in general and education, childcare, health care, social services, restaurants, and airlines in particular. As a result, increases in unemployment rates have been higher for workers who are less educated (who could less easily shift to working at home), young (reflecting lower levels of education and high representation in service industries), female (because women comprise the majority of the labor force in many industries most affected by the pandemic and because they have borne the majority of child care responsibilities when schools have been closed), and Black, Hispanic, Native American, and Asian American workers.

Certain regions, both Republican- and Democrat-leaning, remain vulnerable, too. Tourism hot spots like Orlando, Florida and manufacturing and energy hubs like Corpus Christi, Texas continue to have relatively high job losses and unemployment rates. Analysis shows that certain metro areas have faced various degrees of impact from the COVID recession and are on unequal recovery trajectories.

Concerns about the weak economy are compounded by concerns about the long-term federal fiscal outlook. Even before the pandemic, debt as a share of GDP was projected to rise continually and far exceed previous highs. The projected rise in debt can be attributed to two sources. First, an aging population and rising health care costs will raise federal spending on Social Security, Medicare, and Medicaid, while revenues are projected to rise very slowly. The mismatch between projected rising spending and projected flat revenues creates a systematic bias toward deficits in future budgets. But this does not make the rising debt a “spending” problem, any more than one side of the scissors does the cutting.

Second, as debt rises as a share of GDP, net interest payments will generally tend to rise relative to the economy as well. This tendency has not held in recent years because of the substantial decline in interest rates over the past 20 years. The pandemic has driven interest rates even lower, and these lower rates are projected to last several years, making the new debt accumulated during this period of crisis relatively cheap. However, rates are slated to rise steadily toward the end of the decade, in which case government interest payments would grow dramatically.

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Limits of historic and existing policies

Early responses: Spring 2020

Congress responded rapidly to the emerging COVID pandemic. In March and April 2020, Congress enacted a series of bills to support businesses, individuals, and public health efforts. These include the Coronavirus Preparedness and Response Supplemental Appropriations Act, the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Paycheck Protection Program and Health Care Enhancement Act. Combined, the various pieces of legislation cost $2.4 trillion.

These bills appropriately largely provided relief, rather than stimulus. The distinction between relief and stimulus is important. Relief provides support for people while they are observing public health guidelines that require them to stay home and lose employment. The goal of relief is to reduce economic activity and encourage people to act in ways that lessen the spread of the virus. As many commentators have noted, the goal was to put the economy in a temporary coma so that public health efforts could have a better chance of containing the virus. In contrast, stimulus provides incentives for people increase spending or work effort and businesses to increase hiring and investment. The goal of stimulus is to raise economic activity. The key insight is that until the virus is sufficiently contained, relief will be needed, and stimulus will be ineffective.

The COVID response measures established the paycheck protection program (PPP); provided a direct payment to most households; expanded eligibility for—and the level and duration of—unemployment insurance; increased SNAP benefits; provided funds for health care providers, vaccine development, and health institutions; funded loans and direct support for state, local, and tribal governments; and established pandemic-related health care rights for workers.

Although the policies were implemented imperfectly—social services agencies and the Internal Revenue Service struggled to meet heightened demands placed on them and agencies had to quickly issue rules related to the new policies—the policies did support household income and preserve jobs as people observed social distancing guidelines.

Summer and fall 2020 impasse

Though these policies were a good start, they were inadequate in addressing the pandemic, for a variety of reasons.  First, automatic stabilizers in the federal budget—changes in taxes and spending programs that are triggered by changes in economic conditions—are weak, relative to those in other countries.

Second, several of the policies were not meant to provide relief for a year-long pandemic.  Some measures, like the Paycheck Protection Program and Pandemic Unemployment Compensation, expired. The Economic Impact Payment (or “stimulus check”) reached most households over the summer but was a one-time benefit.

Third, the benefits of additional policies would be substantial. Funds targeted to state and local governments help mitigate the recession and retain vital human services. States face balanced budget rules and thus would otherwise have to cut spending as their revenues decline, deepening the downturn. Funds provided to firms would help preserve jobs and potentially stimulate new employment. Expanded unemployment insurance help the millions of people currently out of work through no fault of their own. Increasing resources for the rest of the safety net—including the Earned Income Tax Credit, the Child Tax Credit, SNAP, WIC, housing assistance, the Low-Income Home Energy Assistance Program, TANF, Supplemental Security Income, and Medicaid—would also provide needed support. Investments in the social safety net not only help people in the short-term, but often provide long-term benefits back to the economy that exceed the initial costs.1 Federal investments in infrastructure and research and development, which can generate high returns, have fallen short for decades now and should be raised. Aid to businesses protect jobs, helping to speed up the recovery when people can safely return to work. And, of course, increasing resources devoted to fighting the virus—including testing, tracing, research, vaccine distribution, and so on—is necessary and economically productive. Sheiner and Edelberg (2020) estimated – before the package Congress enacted in December – that implementing five policies (rebates to households, additional unemployment insurance, aid to state and local governments, support for businesses, and other aid to public health and highly impacted industries) at a total cost of $2 trillion would let GDP regain its pre-pandemic path by mid-2021, much sooner than it would under current law projection, according to CBO.

Fourth, helping the economy now is relatively inexpensive, thanks to low interest rates, and could help the long-term economy. Adjusted for projected inflation, interest rates on government debt are negative over most horizons. Indeed, there may not be any net costs at all if additional stimulus enables the economy to effectively outgrow deficits. In any case, not all debt is bad. What distinguishes good and bad debt is how it is used. Bad debt is unproductive. Good debt serves genuine national investments. New debt issued today to fight an unprecedented viral pandemic, cushion the effects of the pandemic on those most harmed by it, restart the economy, and invest in physical and human capital would pay proceeds now and in the future. The U.S. public debt is not going to trigger a crisis like the one Greece faced in the wake of the 2008 recession. The U.S. borrows in its own currency and can pay its debts for decades to come. And interest rates as low as ours signal that government bonds remain in demand. Even in 2008, when the U.S. literally exported a financial crisis, the rest of the world responded by sending funds here because we were a safe place to invest.  Because interest rates are so low and because COVID policies enacted to date are temporary in nature, the COVID bills have only moderately affect the long-term budget projections.  The spring bills raised the 2050 debt GDP ratio by about 15 percentage points—basically the size of the intervention as a share of the economy at that time. The bill that Congress enacted and President Trump signed in December will raise the long-term debt-to-GDP ratio by another 5 percentage points or so.

Fifth, history indicates that policymakers have a knee-jerk tendency to cut off stimulus too quickly after a recession. Short-term austerity will likely only worsen the long-term economic outlook. During the Great Depression, in the 1990s in Japan, and in the past decade—in the U.S. but especially in the U.K. and continental Europe—law makers’ premature moves to austerity held back recoveries and, in some cases, created new recessions. In this crisis, the risks of doing too little far outweigh the risks of doing too much.

Despite all these concerns, no new relief measures were signed into law between May and December. In mid-May, the House passed the HEROES Act, a $3.4 trillion deal. The HEROES Act would have provided more than $1 trillion to state and local governments, nearly $500 billion to both safety net and direct payments to households, and nearly another trillion to related to health care, tax expenditures, and small businesses. The Senate never voted on this version of the HEROES Act.

The House passed a revised $2.2 trillion HEROES Act on October 1. Senate Majority Leader Mitch McConnell publicly regarded this version as “unserious.” Without any action from the Senate, Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin continued to lead stimulus talks. The administration started negotiations from the Senate’s $1.1 trillion HEALS Act proposal. Relief talks fell apart before the August summer recess. In the fall, the administration offered $1.6 trillion deal, but by mid-October had a new $1.8 trillion proposal. President Trump’s position on additional relief and stimulus was inconsistent. In September Trump called for Congress send out more stimulus payments, counter to the Republican position against another large relief deal. In October, he stopped negotiations only to reverse course three days later and again support negotiations for a large deal. The negotiations between Pelosi and Mnuchin appeared to break down by the end of October (over twitter).

In the summer and fall, McConnell was seen as a major cause of stalemate on the issue of relief. After refusing to bring either version of the HEROES Act to the Senate for a vote, McConnell instructed congressional Republicans to not pursue a deal with Democrats to pass more relief and stimulus. At the time, the Senate was in the process of confirming Amy Coney Barrett to the Supreme Court. On October 21, the Senate failed to pass a $500 billion relief package that was opposed by Democrats for being too small (the White House had already offered a $1.8 trillion package). McConnell would not bring a more expensive aid deal to a vote.

The December Deal

Following months of stalemate, the proposal that eventually led to a deal was put forward  by centrists in the Senate after the Presidential election. On December 21, Congress passed the $920 billion bipartisan package, an eleventh-hour deal as 14 million people were set to lose unemployment benefits just after Christmas. After claiming he would not sign it because the direct payments to individuals were too small, President Trump reversed course and signed the bill on December 27.

Already, politicized revisions of history have shifted the blame for a late response. After directing Republicans not to support a bill until after the presidential election, Senator McConnell recently claimed that “for months Senate Republicans have been calling for another targeted package.”  The Senate Majority Leader also expressed regret that the deal could not have been passed sooner.

The delays in passing a second round of relief allowed more business to fail, more people to fall behind on rent, more people to be food insecure. Though late, the year-end deal was better than the alternative of no deal. The omnibus package, the Consolidated Appropriations Act, 2021, includes not only COVID-related relief but also extensions of temporary tax provisions (“the extenders”), limits to surprise medical billings, and surprisingly strong climate change provisions, and it ensures that the government will continue to operate for the rest of the fiscal year. The COVID relief is large relative to past relief and stimulus efforts, but small relative to ongoing economic problems. Overall, the COVID-related measures are complex with some attractive features and some problematic choices.

First, the UI extension provides an extra $300 a week for unemployment recipients for 11 weeks (Trump’s delay in signing led worry about a week-long gap in coverage, but the Department of Labor‘s interpretation of the bill did not leave a gap). The year-end package extends the Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC) programs authorized by the CARES Act.

Second, as in the CARES Act, millions of Americans are eligible for direct payments. The benefit level and eligibility criteria have been updated, including slightly fewer people in this round of direct payments (158 million compared to 160 million). For single qualified recipient, the payment is a maximum of $600, compared to $1,200 under the CARES Act.  Treasury will use 2019 tax returns to determine eligibility instead of 2018 or 2019 as it did this spring (the Economic Impact Payments this spring were sent out before the 2019 tax filing deadline). The income thresholds remain unchanged, though because the benefit is less, it phases out to $0 at lower income levels. Unlike the CARES Act, the new deal expands eligibility to households with a non-citizen spouse. Like the CARES Act, children older than 16 and dependent adults are not eligible, excluding college students and adults cared for by their families.

Third, the new PPP loans will send $284 billion to small businesses, compared to $366 billion in CARES and $321 in the Paycheck Protection Program and Health Care Enhancement Act. Several rule changes affect which businesses will benefit and how much support they can receive. Loans are capped at $2 million and are calculated using monthly payroll (2.5x for most businesses and 3.5x for businesses in hospitality). Following loan misallocation problems from the earlier rounds of PPP, publicly traded companies will no longer be eligible for loans. These loans should help businesses remain open until more people get vaccinated and provide income to more workers.

Fourth, the year-end package also extended and increased funding for SNAP and Pandemic Electronic Benefits Transfer (P-EBT) benefits. Fifth, an extension of a rental eviction moratorium until January 31 and $25 billion in rental assistance will help some people stay in their home.

While the relief bill helps people and business with income replacement and welfare benefits, there are some provisions that will not help those in need or help the economy recover.

One such provision expanding the deduction for business meals (colloquially, the “three martini lunch”) to 100 percent from 50 percent, is an unneeded and undesirable corporate tax break. The deduction, heavily supported by President Trump, allowed Democrats to negotiate for expanded tax credits to low-income households. As a matter of tax policy, the deduction is questionable policy in good times, as it is always unclear how much of the cost of a business lunch should be considered a personal expense (since people have to eat) and thus not eligible for deduction.  Expanding the deduction during a pandemic is doubly wrong – the economics are just as sketchy as in normal times and to the extent that expanding the deduction encourages more business lunches, which require people sitting in close proximity without masks on during a pandemic, it could increase the spread of the coronavirus.

Another inappropriate decision was to make expenses paid with PPP loans tax deductible. The forgiven PPP loans are not taxed as income, so tax deductions are a double benefit at the taxpayers’ expense. The deduction of these PPP-funded expenses may reduce tax revenues by $203 billion, and $120 billion of that could go to the top 1 percent of earners.

One of the biggest failures of the new relief package is the absence of any aid to state and local governments. As described above, there are substantial humanitarian and economic benefits to helping state and local governments during economic downturns. Estimates of government budget shortfalls vary, but most states will lose income, sales, corporate, and other tax revenue over the next few years.2 At the same time, economic hardship increases the demand for welfare programs. Public education institutions and hospitals will also need financial support. Since March, 1.3 million state and local employees have lost their jobs, deepening the pandemic’s economic harm. Congress needs to again pass a relief bill with provisions to help state and local governments fight back the virus and a recession.

Lastly, Congress’ deal essentially bars the Federal Reserve from restarting lending facilities authorized by the CARES Act. The Fed retains the budget authority, $429 billion remaining from an initial $454 billion, for these loans but cannot use the same program to issue the funds. Restricting the Fed’s emergency powers could make recovery more difficult and future economic downturns more severe.

President Biden’s proposals

Ahead of his inauguration, President Biden released proposals to address the virus and the economy.  The $1.9 trillion package, the president’s American Rescue Plan, is comparable in size to the CARES and provides support for people, state and local governments, and businesses, in addition to resources to control COVID-19.

Recognizing that economic recovery will not occur until the virus is contained, the pandemic response measures would provide $160 billion for testing, and vaccination distribution and administration. Another $170 billion will facilitate school reopening. Additional funds will allow the rollout of emergency interventions, like a National Guard deployment, and pay for vaccines administered to Medicaid recipients.

State and local governments would receive substantial aid, $350 billion, to cushion revenue shortfalls and prevent cuts to essential public services. Democrats were unable to secure this aid in the year-end deal.

The largest portion of the proposal – about $1 trillion – is direct aid. To help households, Biden’s plan includes another round of direct payments, expanded unemployment insurance benefits, and additional tax credits. If passed, this third round of direct payments would send $1,400 to eligible adults. Unemployment insurance benefits would include a $400 weekly supplement through the end of September. The Child Tax Credit would be expanded significantly. Biden’s plan also includes paid leave provisions to help people stay home in the pandemic and rental assistance to help people stay housed. New grants and loans to small businesses would aim to keep businesses open and workers employed.  The proposal anticipates being able to leverage $35 billion in funds into $175 billion for loans.

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Policy Recommendations

There is cause for hope. First, Biden’s package meets several key requirements for effective legislation, devoting very substantial resources to battling the coronavirus, the defeat of which is a necessary condition for economic recovery. Until the virus is contained, the package would provide substantial economic relief to individuals, including unemployment insurance, direct payments, and rental assistance. The proposal provides substantial resources to help state and local governments, allowing them to preserve benefits, a move strongly justified on both macroeconomic and humanitarian grounds.

Second, the way the December deal came about—with a bipartisan group of senators coming together to draft a centrist package—demonstrates how legislation can move without the blessing of top party leadership. The bipartisan process demonstrates the power of Congress’ rank-and-file members and the political center to come together.  The potential for further, similar changes to unblock the fiscal policymaking process is significant.

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Conclusion

The nation needs to address its long-term fiscal shortfalls, which are worse now than they were before the pandemic. But it is also clear that we now face different problems – the virus and the economy – that dwarf the federal debt in urgency. The only way to achieve a strong long-term budget is to first generate a strong economy. And we cannot fix the economy until the virus is under control. Federal relief can help manage the virus and help people, state and local governments, and businesses, strengthening our long-term economic and budget prospects despite increasing the current deficit. Being timid in our policy solutions during this crisis would be a mistake.

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