Economic Activity and the Expiration of COVID-19 Relief Provisions

Economic Activity and the Expiration of COVID-19 Relief Provisions

INSIGHTi
Economic Activity and the Expiration of
COVID-19 Relief Provisions
July 30, 2020
The federal response to the Coronavirus Disease 2019 (COVID-19) crisis has included programs
providing economic relief to individuals, businesses, and state and local governments. The recent or
looming expiration or exhaustion of several of these programs has generated congressional discussions on
the effect that this could have on the U.S. economy’s short- and long-term performance. This Insight
briefly summarizes the current economic recession and fiscal policy response, highlights some programs
that are near expiration or exhaustion of funding, and discusses underlying economic issues.
Recession Characteristics
The COVID-19 crisis generated a sudden and severe decline in economic activity. The national
unemployment rate rose from 3.5% in February 2020, the last month before the declaration of a national
emergency under the Stafford Act, to 14.7% in April 2020, the highest monthly rate recorded by the
Bureau of Labor Statistics (dating back to 1948). The advance estimate from the Bureau of Economic
Analysis (BEA) estimated that real GDP declined at an annual rate of 32.9% in the second quarter of
2020, which is larger than any single quarterly change in real GDP measured by the BEA (dating back to
1947).
Both supply-side and demand-side issues are contributing to the current economic decline. Social
distancing measures have resulted in many businesses not being able to supply goods and services at the
same level or in the same manner as prior to the pandemic. Fears about the virus and uncertainty about
future economic conditions have also led to high savings rates and low consumption and investment. That
this decline is rooted in a public health crisis has generated much uncertainty in predicting the path of the
recession and subsequent recovery. An eventual arrival of a vaccine and easing of public health concerns
may lead to a quick recovery relative to the experience in other recessions. The size of the economic
decline, however, indicates that even a relatively brief decline may have lasting financial effects on
households and businesses.
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Fiscal Policy Response
Conventional macroeconomic theory general y supports the use of fiscal stimulus—short-term spending
increases or tax decreases designed to increase short-run economic output—in moderate to severe
recessions. According to this theory, fiscal stimulus can reduce the severity of economy-wide output and
employment gaps and guide the economy back to the full-employment level of output more quickly than
would otherwise occur. Fiscal stimulus programs are general y most effective when they can deliver
benefits relatively quickly and support recipients earlier in the economic downturn.
In response to the COVID-19 pandemic, the federal government enacted several laws providing fiscal
relief, summarized in Table 1. In total, the legislation made changes projected to increase FY2020-
FY2030 deficits by $2.4 tril ion. Of that effect, $2.2 tril ion (about 90% of the 11-year total) was
estimated to occur in FY2020.
Table 1. Projected Deficit Increases from Pandemic-Related Legislation
As a % of
Date of
Combined FY2020-
FY2020
FY2020
Pandemic-Related Bill
Enactment
FY2030 Increase
Increase
GDP
The Coronavirus Preparedness and
March 6, 2020
$8 bil ion
$8 bil ion
0.0%
Response Supplemental Appropriations Act
(P.L. 116-123)
The Families First Coronavirus Response
March 18, 2020
$192 bil ion
$135 bil ion
0.7%
Act (P.L. 116-127)
The CARES Act (P.L. 116-136)
March 27, 2020
$1,721 bil ion
$1,606 bil ion
7.8%
The Paycheck Protection Program and
April 24, 2020
$483 bil ion
$434 bil ion
2.1%
Health Care Enhancement Act (P.L. 116-
139)
Total

$2,404 billion
$2,183 billion
10.6%
Source: CBO cost estimates and July 2020 economic forecast.
Many of the largest stimulus programs are near or have reached expiration or exhaustion. The economic
impact payments providing direct payments to households, estimated to increase deficits by $270 bil ion
in FY2020, were largely distributed by May. The Payroll Protection Program (PPP), which provided up to
a total of $659 bil ion in forgivable loans to eligible smal businesses and nonprofits, had made $519
bil ion in approved loans as of July 23. The federal moratorium on evictions expired on July 24, and the
temporary increase of $600 per week in unemployment benefits is set to expire on July 31. Final y, the
Coronavirus Relief Fund, which provided up to $150 bil ion in direct assistance to state, local, and tribal
governments, had made $149.5 bil ion in payments as of July 23, 2020.
Future Considerations
As fiscal stimulus programs expire or are exhausted, the federal government may (1) al ow the programs
to expire as scheduled; (2) extend or add capacity to some or al of the programs; or (3) modify an
existing program or create new stimulus programs. Should the federal government al ow these programs
to expire with no additional legislation, there wil likely be a greater immediate decline in aggregate
demand (total spending), and therefore GDP, in the short term as more Americans lose disposable income
and, potential y, housing. Longer-term effects, such as the effect on the labor supply, are difficult to
predict. There is a great deal of uncertainty surrounding how quickly the economy wil recover (although
there are some indications that the recovery slowed in July).

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CBO analysis of extending the temporary increase in unemployment benefits through January 31, 2021,
concluded that the extension would result in greater output in the second half of 2020 but lower output in
calendar year 2021 and lower employment in both the second half of 2020 and calendar year 2021. CBO
estimates that the overal boost to demand that the extension could provide would be offset by a reduced
labor supply. The effects to the aggregate economy wil not always mirror effects within specific
population groups. Approximately five out of six recipients receive benefits that exceed their normal
paycheck, indicating that low-wage workers are currently unemployed at higher rates than other groups.
Therefore, low-wage workers are likely to be disproportionately affected by expirations, extensions, or
changes to this provision.
Active legislation that would modify, extend, or create new stimulus programs includes The Heroes Act
(H.R. 6800), which passed the House on May 15, 2020, and the American Workers, Families, and
Employers Assistance Act (S. 4318), which was introduced in the Senate on July 27, 2020.

Author Information

Grant A. Driessen
Lida R. Weinstock
Analyst in Public Finance
Analyst in Macroeconomic Policy

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