Fiscal Policy and Recovery from the COVID-19 Recession

July 22, 2020 – February 1, 2021 R46460

Fiscal Policy and Recovery from the COVID-19
February 1, 2021
Recession
Jane G. Gravelle
The economic contraction that began in February 2020 differs from previous contractions,
Senior Specialist in
including the Great Depression of the 1930s and the Great Recession of 2007-2009. It was
Economic Policy
caused in large part by concerns about the spread of the Coronavirus Disease 2019 (COVID-19)

and government policies aimed at limiting person-to-person contact. The health concerns of the
Donald J. Marples
public and the stay-at-home and shutdown orders designed to limit contact reduced cash flow to
Specialist in Public Finance
businesses and increased the number of unemployed workers.

Fiscal policy during the current contraction, recovery, and beyond may take two forms: (1) fiscal

policy designed to prevent business failures and sustain the unemployed during the initial
pronounced contraction; and (2) fiscal policy used during a traditional recession and recovery aimed at stimulating aggregate
demand in general and restoring full employment. Rises in reported case numbers suggest that parts of the economy are still
in the grip of the pandemic.
Economic theory and empirical evidence suggest that stimulative measures tend to move the economy toward full
employment as the economy recovers from the contraction, but that measures to reduce the debt (which would require the
opposite types of policies, reducing the deficit) are better put in place when the economy returns to full employment. Some
views hold that one of the “most significant policy mistakes” in recent times was a premature shift to this policy (termed
fiscal consolidation, or austerity) that removed fiscal support from the economy following the Great Recession when the
economy was still well below full employment and inhibited economic growth in most advanced economies .
The effectiveness of fiscal policy in stimulating demand depends on the type of policy and how much immediate spending it
produces. Government spending, grants to the states, or transfers (such as expanded and augmented unemployment benefits
or transfers to lower-income individuals) are considered by most economists to be more effective than tax cuts to higher-
income individuals or businesses in certain circumstances because such individuals and businesses are less likely to spend the
tax cuts. Spending on infrastructure is effective, but may occur with a delay. Given the outlook for a prolonged
underemployed economy, this delay may not be a serious limit, and investment in infrastructure would increase the public
capital stock and future output.
Some measures already undertaken to address the economic contraction were similar to those employed as general demand
stimulus in the Great Recession, such as direct payments (often referred to as “stimulus checks”), whereas others were
designed to sustain businesses during the shutdown and make it easier for individuals to comply with stay-at-home orders,
such as the Paycheck Protection Program (PPP) that provided forgivable loans to small businesses who retained workers.
Expanded and augmented unemployment benefits aim to fulfill both purposes of sustaining unemployed workers and
preventing a further decline in spending due to lost wages.
Preliminary studies that examined some of the major features of recently enacted measures suggest the expanded and
augmented benefits during the initial decline in output were effective at increasing spending, with stimulus checks being
effective to the extent they were received by lower-income individuals. Stimulus checks received by higher-income
individuals appeared to be largely saved and not effective as stimulus. The studies on the PPP are 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.
The current recession’s economic effects, including discretionary spending and the automatic revenue declines and spending
increases that accompany a recession, are projected to increase the debt significantly. Although there is a general consensus
among economists that it is premature to address the debt given the severity of the current contraction, mainstream economic
theory points to the importance of addressing an unsustainable debt as soon as economic conditions permit . Hence,
eventually, after the economy recovers, a substantially increased debt may lead policymakers to consider deficit reduction
policies, which may include raising taxes and/or reducing spending.

Congressional Research Service

Fiscal Policy and Recovery from the COVID-19 Recession

Introduction
The economic contraction that began in February 20201 differs from previous contractions,
including the Great Depression of the 1930s and the Great Recession of 2007-2009.2 It was
caused in large part by concerns about the spread of the Coronavirus Disease 2019 (COVID-19)
and government policies aimed at limiting person-to-person contact. The health concerns of the
public and the stay-at-home and shutdown orders designed to limit contact reduced cash flow to
businesses and increased the number of unemployed workers.3 Consistent with this cause, studies
found that spending declined across al income groups,4 reductions in spending were largely in
sectors requiring in-person contact (such as accommodations and restaurants),5 and job losses and
wage reductions appear to have been concentrated in low-wage workers.6 A review of numerous
studies of the causes of job losses indicates that job losses were largely due to fear of contracting
the virus by consumers rather than stay-at-home orders or mandated shutdowns.7 Some of that
contraction could be short-lived if the virus is contained. However, the growing number of
reported cases in the fal indicates that the virus is continuing to spread.8

1 As dated in National Bureau of Economic Research, “ Determination of the February 2020 Peak in US Economic
Activity,” June 8, 2020, https://www.nber.org/cycles/june2020.html.
2 Note that although the decline in output ended in 2009, output remained below potential for some time after that year.
3 Preliminary studies indicate that the major reason for the economic contraction was concerns about health (fear of
contracting the virus), rather than government restrictions. See Raj Chetty et al., “How Did COVID-19 and
Stabilization Policies Affect Spending and Employment? A New Real-T ime Economic T racker Based on Private Sector
Data,” Opportunity Insights, June 17, 2020, https://opportunityinsights.org/wp-content/uploads/2020/05/
tracker_paper.pdf, also published as National Bureau of Economic Research Working Paper no. 27431, June 2020,
https://www.nber.org/papers/w27431; Diane Alexander and Ezra Karger, Do Stay-at-Hom e Orders Cause People to
Stay at Hom e? Effects of Stay-at-Hom e Orders on Consum er Behavior, Federal Reserve Bank of Chicago, Working
Paper no. 2020-12, June 2020, https://www.chicagofed.org/publications/working-papers/2020/2020-12; Hunt Allcott et
al., Econom ic and Health Im pacts of Social Distancing Policies during the Coronavirus Pandem ic , Working Paper,
May 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3610422; Alexander W. Bartik et al., Measuring the
Labor Market at the Onset of the COVID-19 Crisis, Brookings Institution, Brookings Papers on Economic Activity,
BPEA Conference Draft, June 25, 2020, https://www.brookings.edu/wp-content/uploads/2020/06/Bartik-et-al-
conference-draft.pdf; and Austan Goolsbee and Chad Syverson, Fear, Lockdown, and Diversion: Com paring Drivers
of Pandem ic Economic Decline 2020 , Becker Friedman Institutes for Economics at UChicago, Working Paper no.
2020-80, June 17, 2020, https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202080v2.pdf (published in the Journal
of Public Economics, vol. 193 (2021), https://www.sciencedirect.com/science/article/pii/S0047272720301754).
4 Natalie Cox et al., Initial Impacts of the Pandemic on Consumer Behavior: Evidence from Linked Income, Spending,
and Savings Data, Brookings Institution, Brookings Papers on Economic Activity, BPEA Conference Draft, June 25,
2020, https://www.brookings.edu/wp-content/uploads/2020/06/Cox-et-al-conference-draft.pdf.
5 See Abe C. Dunn, Kyle K. Hood, and Alexander Driessen, Measuring the Effects of the COVID-19 Pandemic on
Consum er Spending Using Card Transaction Data , Bureau of Economic Analysis (BEA), BEA Working Paper Series,
WP2020-5, April 24, 2020,
https://www.bea.gov/research/papers/2020/measuring-effects-covid-19-pandemic-consumer-spending-using-card-
transaction.
6 See CRS Insight IN11457, COVID-19 Pandemic’s Impact on Household Employment and Income, by Gene Falk; and
T omaz Cajner et al., The U.S. Labor Market during the Beginning of the Pa ndem ic Recession, Becker Freidman
Institutes for Economics at UChicago, Working Paper no. 2020 -58, June 2020, https://bfi.uchicago.edu/wp-content/
uploads/HurstBFI_WP_202058_Revision.pdf.
7 Sumedha Gupta et al., Mandated and Voluntary Social Distancing During the COVID-19 Epidemic: A Review,
National Bureau of Economic Research, Working Paper no. 288139, November 2020, https://www.nber.org/system/
files/working_papers/w28139/w28139.pdf.
8 See Centers for Disease Control and Prevention, “Coronavirus Disease 2019 (COVID-19), Cases in the U.S.,”
https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html.
Congressional Research Service
1

Fiscal Policy and Recovery from the COVID-19 Recession

During an economic downturn, such as the current COVID-19 recession, the focus of fiscal
policy responses—that is, tax and spending measures—often takes one of two forms:
1. Relief that sustains businesses and individuals: Fiscal policy designed to help
prevent business failures and sustain the unemployed directly affected by an
adverse event, like the COVID-19 pandemic. Similar fiscal responses may occur
with respect to a natural disasters.
2. “Traditional” Stimulus: Fiscal policy used during a traditional recession aimed
at stimulating aggregate demand in general and restoring full employment.
Unlike fiscal policy designed to provide relief, more “traditional” stimulus is not
specifical y directed to certain businesses, sectors, or individuals.
Once an economy has recovered, fiscal policy’s purpose may shift to addressing the increasing
national debt.
Some initial measures undertaken to address this economic contraction were consistent with
traditional stimulus measures used to increase demand in the Great Recession, such as stimulus
checks.9 Others were designed to sustain businesses during the shutdown and make it easier for
individuals to comply with stay-at-home orders. Some benefits, such as expanded and augmented
unemployment insurance benefits, fulfil both purposes of sustaining the unemployed and
preventing a further decline in aggregate demand due to lost wages.10 As downturns continue,
fiscal policy may shift from policy focused on relief to more traditional stimulus.
This report provides an overview of the state of the economy and summarizes the fiscal measures
already taken in response to the current downturn. Many of these responses have largely been
aimed at providing economic relief. In the future, policymakers may consider more traditional
fiscal policies designed to boost aggregate demand. This report then discusses fiscal policy used
during more traditional recessions and recovery, both the theory and empirical evidence, and
reviews what types of fiscal policy are likely to be most effective during recovery from a
recession. The report concludes with a brief discussion of the pandemic’s effect on the debt.
The government can also use expansionary monetary policy to stimulate the economy, and the
Federal Reserve has already undertaken policies to lower interest rates and provide liquidity.11
Although monetary and fiscal policy are related (in that monetary policy can enhance or offset
fiscal stimulus), this report focuses on fiscal policy.
State of the Economy and the Fiscal Response
to Date
As of December 2020, the unemployment rate stood at 6.7% (for private, nonagricultural
workers), down from 13.3% in May and 14.7% in April but significantly above the 4.4% rate in

9 See CRS Report R46415, CARES Act (P.L. 116-136) Direct Payments: Resources and Experts, coordinated by
Margot L. Crandall-Hollick for information on CARES Act direct payment provisions.
10 See CRS In Focus IF11475, Unemployment Insurance Provisions in the CARES Act, by Katelin P. Isaacs and Julie
M. Whittaker for information on additional, temporary UI provisions enacted in response to the current recession ; CRS
Report R45478, Unem ployment Insurance: Legislative Issues in the 1 16th Congress, by Julie M. Whittaker and Katelin
P. Isaacs for additional proposals; and CRS Report RL34340, Extending Unem ployment Com pensation Benefits During
Recessions, by Julie M. Whittaker and Katelin P. Isaacs for UI legislative responses to previous recessions.
11 See CRS Report R46411, The Federal Reserve’s Response to COVID-19: Policy Issues, by Marc Labonte for a
discussion.
Congressional Research Service
2

Fiscal Policy and Recovery from the COVID-19 Recession

March; 11 mil ion workers were unemployed in November compared to 20 mil ion in May, 23
mil ion in April, and 7 mil ion in March.12 (These numbers may be an undercount.)13 These
unemployment levels followed a sustained period of low unemployment, with unemployment
rates general y less than 4%. The unemployed were particularly concentrated in the service
industry. The service industry accounted for almost 5 mil ion unemployed workers in December
(44% of the total), of whom slightly over 2 mil ion (19% of the total) were in the leisure and
hospitality industry.14 These shares compare to 37% and 12% of the unemployed in December
2019, and were higher earlier in the recession. Although the unemployment rate has declined, the
economy remains underemployed, and the significant surge in COVID-19 cases beginning in
October and continuing through January 2021 may lead to a worsening economy.15
In response to the COVID-19 pandemic, the federal government has enacted five laws that may
have reduced the impact of the pandemic-related reductions on unemployment, at a total fiscal
cost of $3.4 tril ion through FY2021 (and $3.3 tril ion for FY2020-FY2030).16 The third law, the
Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136),17 provided $1.7
tril ion in fiscal policy initiatives and lending authorities for FY2020-FY2030, including $349
bil ion for the Paycheck Protection Program (PPP); $268 bil ion in expanded and augmented
unemployment benefits; $293 bil ion in direct payments for individuals; and a variety of
authorizations for additional smal business lending (making the total of PPP and other Smal
Business Administration loans $377 bil ion), direct spending, additional tax benefits, payments to
state, local, and tribal governments, and credit authority for businesses (including lending support
for the Federal Reserve) harmed by the shutdown.18 Most of the spending and tax cuts in the
CARES Act occurs in FY2020 and FY2021. The PPP provided loans to smal businesses that
could be forgiven (effectively converting them into grants) if employers retained workers.19 Initial
CARES Act funding for the PPP was quickly exhausted, leading to an additional $310 bil ion in
supplementary funding in the Paycheck Protection Program and Health Care Enhancement Act
(P.L. 116-139), enacted at the end of April. To date, some PPP loan authority remains available.20

12 U.S. Department of Labor, Bureau of Labor Statistics, https://data.bls.gov/timeseries/LNS14000000;
https://www.bls.gov/charts/employment -situation/civilian-unemployment.htm.
13 For more information, see CRS Insight IN11456, COVID-19: Measuring Unemployment, by Lida R. Weinstock.
14 U.S. Department of Labor, Bureau of Labor Statistics, https://www.bls.gov/web/empsit/cpseea31.pdf.
15 T hese effects may arise from reinstitution of state restrictions (see Kaiser Family Foundation, State Data and Policy
Actions to Address Coronavirus, November 30, 2020, https://www.kff.org/coronavirus-covid-19/issue-brief/state-data-
and-policy-actions-to-address-coronavirus/) and increased consumer fears.
16 U.S. Congressional Budget Office, The Budgetary Effects of Laws Enacted in Response to the 2020 Coronavirus
Pandem ic, March and April 2020, June 16, 2020, https://www.cbo.gov/publication/56403. T he two laws not mentioned
in the text were the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 ( P.L. 116-123)
and the Families First Coronavirus Response Act (P.L. 116-127). A subsequent law, the Paycheck Protection Program
Flexibility Act (P.L. 116-142), provided for more generous terms for PPP loans.
17 U.S. Congressional Budget Office, H.R. 748, CARES Act, P.L. 116-136, April 16, 2020, https://www.cbo.gov/
publication/56334.
18 For appropriations from all legislation, see Government Accountability Office (GAO), COVID-19: Opportunities to
Im prove Federal Response and Recovery Efforts, Report to the Congress, GAO-20-625, June 25, 2020,
https://www.gao.gov/reports/GAO-20-625/.
19 See CRS Report R46284, COVID-19 Relief Assistance to Small Businesses: Issues and Policy Options, by Robert
Jay Dilger, Bruce R. Lindsay, and Sean Lowry for more information on the PPP and other COVID-19 assistance for
small businesses.
20 As of July 10, 2020, $518 billion in PPP loans had been approved. For ongoing totals, see U.S. Small Business
Administration, Paycheck Protection Program , https://www.sba.gov/funding-programs/loans/coronavirus-relief-
options/paycheck-protection-program.
Congressional Research Service
3

Fiscal Policy and Recovery from the COVID-19 Recession

The CARES Act expanded and augmented UI benefits by providing a federal y funded $600 per
week supplement to UI benefits, by effectively extending UI eligibility to those not otherwise
eligible (e.g., self-employed workers, independent contractors, and gig economy workers), and by
extending the duration of benefits by up to 39 weeks.21 One estimate found that the total
unemployment benefits rate exceeded prior wages for two-thirds of workers.22 The $600 per week
supplement to unemployment benefits expired at the end of July 2020.
As part of the Consolidated Appropriations Act, 2021 (P.L. 116-260), Division N, Additional
Coronavirus Response and Relief, was estimated to increase spending and reduce revenues by
$683 bil ion in 2021.23 (Other House and Senate legislation considered in the 116th Congress was
not enacted.24) The major components of this Division are increases and extensions in
unemployment benefits, including an 11-week extension and a $300 per week supplement ($117
bil ion), an additional rebate of $600 per person ($163 bil ion), and an additional $296 bil ion of
PPP and other smal business loans. Division N also includes spending for transportation,
banking, agriculture and nutrition, and broadband internet access. In addition, Division M, the
Coronavirus Response and Relief Supplemental Appropriations Act, provided an additional $78
bil ion in spending relating to combatting the coronavirus in FY2021 and $185 bil ion in
FY2021-FY2030.25
Prior to his inauguration, President Biden proposed an additional $1.9 tril ion of stimulus.
Reports indicate that the major aspects of this proposal (and their budgetary costs) include $1,400
rebates per person ($465 bil ion); state and local government assistance ($350 bil ion); an
extension of unemployment benefits through September and an increase of the weekly
supplement to $400 ($350 bil ion); funding for vaccination and testing ($160 bil ion); funding for
education ($170 bil ion); a temporary expansion of the child credit, including the refundable

21 T he CARES Act also extended the number of weeks UI could be claimed. For more information on the CARES Act
changes to unemployment insurance (UI), see CRS In Focus IF11475, Unem ployment Insurance Provisions in the
CARES Act, by Katelin P. Isaacs and Julie M. Whittaker. See also CRS Report R45478, Unem ployment Insurance:
Legislative Issues in the 116th Congress, by Julie M. Whittaker and Katelin P. Isaacs for additional UI information and
legislative responses to previous recessions.
22 Peter Ganong, Pascal Noel, and Joseph Vavra, US Unemployment Insurance Replacement Rates During the
Pandem ic, Becker Freidman Institutes for Economics at UChicago, Working Paper no. 2020 -62, May 14, 2020,
https://bfi.uchicago.edu/working-paper/2020-62/; and Zachary Parolin, Megan A. Curra, and Christopher Wimer, The
CARES ACT and POVERTY in the COVID-19 CRISIS, Center on Poverty and Social Policy at Columbia University,
vol. 4, no. 8, June 21, 2020, https://heavy.com/wp-content/uploads/2020/07/Forecasting-Poverty-Estimates-COVID19-
CARES-Act -CPSP-2020.pdf.
23 U.S. Congressional Budget Office, Estimate for Division N, January 14, 2021, https://www.cbo.gov/system/files/
2021-01/PL_116-260_div_N.pdf.
24 Proposals were made for further relief before the enactment of the Consolidated Appropriations Act, 2021, but with
disagreement between the House and the Senate on the size and nature of a package, none were enacted. In the 116th
Congress, the House passed a proposal with an estimated cost of $2.4 trillion; Senate proposals tended to be relatively
smaller, around $500 billion. For more information, see CRS Report R46358, Heroes Act: Revenue Provisions,
coordinated by Molly F. Sherlock; and CRS Report R46470, The Am erican Workers, Fam ilies, and Em ployers
Assistance Act (S. 4318): Title II—Revenue Provisions and Other “HEALS Act” Tax Provisions, coordinated by Molly
F. Sherlock.
25 U.S. Congressional Budget Office, Estimate for Division M, December 22, 2020, https://www.cbo.gov/publication/
56916.
Congressional Research Service
4

Fiscal Policy and Recovery from the COVID-19 Recession

portion ($120 bil ion);26 rental support ($30 bil ion); and support for child care providers ($25
bil ion), along with some other programs.27
Estimated Effect of Recently Enacted Policies
Estimating the current effects of these fiscal policies is difficult, in part due to the lags in data.
However, studies using private data have examined the policies’ consequences and the causes of
the contraction. A recent study by Chetty et al., which used a wide variety of real-time data, found
that the economic collapse was largely due to the effect of reduced spending by high-income
individuals on services requiring in-person interactions out of concerns about health risks.28 This
reduction in turn caused revenue losses in businesses such as restaurants and accommodations
and job losses for workers. Chetty et al. found that the direct payments (often referred to as
“stimulus checks”) increased spending by lower-income individuals, but that spending was not
directed at the sectors most affected by the collapse in demand. They also did not find evidence
that the PPP reduced unemployment in smal businesses and suggested that most of these
forgivable loans went to firms that did not intend to lay off employees absent the program’s
assistance. Further, they found that reopening of the economy had a limited ability to affect
spending in these areas because it is largely constrained by individuals’ health concerns. The
researchers suggest that Congress continue measures to mitigate the hardship experienced by
lower-income workers through social insurance (such as expanded unemployment benefits). They
also suggest place-based measures for low-income individuals in urban areas especial y affected
by the virus. The study also concludes that the path to economic recovery in the short run requires
addressing the virus itself and restoring consumer confidence with respect to health concerns. It
acknowledges that the recession may, over time, turn into a more traditional economic shock
requiring traditional fiscal stimulus measures that affect a broad range of sectors.
Baker, et al., in a study focused on the effect of stimulus checks, found results consistent with the
Chetty et al. study.29 These direct payments generated a rapid response, with 35 cents of each
dollar spent within a month of receiving payments. The spending was greatest among those with
low income, those who had lost income, and those with the least liquidity, consistent with prior
studies of direct payments. In this case, however, in contrast to prior payments in 2001 and
2008,30 relatively little of the spending was on durable goods and more of the spending was on
food. Karger and Rajan found that 48% of the direct payments were spent within two weeks, with

26 T he proposal would increase the maximum credit from $2,000 to $3,000, and to $3,600 for those under age six, and
including 17 year olds, and make the credit fully refundable. T his is similar in some respects to the proposed changes to
the credit in the American Family Act (116th Congress: S. 690 and H.R. 1560). For more information, see CRS Report
R46502, The Child Tax Credit: Selected Legislative Proposals in the 116th Congress, by Margot L. Crandall-Hollick.
27 T hese estimates were prepared by the Committee on Responsible Government, and reported in Louis Jacobson,
“What’s in Joe Biden’s $1.9 T rillion American Rescue Plan?” Politifact, January 15, 2021, https://www.politifact.com/
article/2021/jan/15/whats-joe-bidens-19-trillion-american-rescue-plan/.
28 Raj Chetty et al., How Did COVID-19 and Stabilization Policies Affect Spending and Employment? A New Real-
Tim e Econom ic Tracker Based on Private Sector Data , Opportunity Insights, June , 2020, National Bureau of
Economic Research Working Paper no. 27431, June 2020, Revised November 2020, https://www.nber.org/system/files/
working_papers/w27431/w27431.pdf.
29 Scott R. Baker et al., Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments,
Becker Friedman Institute for Economics at UChicago, Working Paper no. 2020 -55, September 2020,
https://bfi.uchicago.edu/working-paper/income-liquidity-and-the-consumption-response-to-the-2020-economic-
stimulus-payments.
30 For more information on these 2001 and 2008 payments, see CRS Insight IN11256, COVID-19 and Direct Payments
to Individuals: Historical Precedents, by Gene Falk.
Congressional Research Service
5

Fiscal Policy and Recovery from the COVID-19 Recession

68% spent by those who live from paycheck to paycheck (i.e., those with little savings) and 23%
spent by others, suggesting stimulus checks targeted at those with lower incomes would be more
effective per dollar of cost.31 Coibion et al. found that 40% was spent, with spending greatest by
those who were liquidity constrained, out of the labor force, living in large households, less
educated, and who received smal er amounts, also suggesting that more targeted programs would
be more effective.32
The studies on PPP loans are mixed. Chetty et al. found PPP loans to be poorly targeted, as did a
study that found the loans did not go to areas most affected by the virus.33 Another study found
geographical distribution of PPP loans was not associated with impact of the virus but was
associated with the existence of prior lending relationships with banks and the prevalence of
community banks.34 In contrast, another study of employment by Bartik et al. found that states
with more PPP loans had milder declines and faster recoveries.35 A study by Autor et al. using
firm-level data from a major payroll processer provided preliminary estimates that the program
increased employment in affected firms by 7.5% and added 7.3 mil ion workers to the payroll.36
Hubbard and Strain found the PPP program was successful in achieving short-term goals of
maintaining employee connections to firms and business survival, but cautioned that it may be
too early to assess the program’s intermediate goals.37
The Bartik et al. study also found these milder declines and faster recoveries were associated with
higher unemployment benefits, perhaps because these benefits sustained spending. The authors
found no evidence that the high unemployment benefit replacement rates affected job losses or
slowed rehiring. A study by Altonji et al. also found no evidence that the benefits affected job loss
or a return to working.38 A JPMorgan Chase & Company study found that spending by the
unemployed overal fel by 10%, but spending by those receiving unemployment benefits
increased by 10%, indicating the expanded UI benefits helped to stabilize aggregate demand.
Spending by those waiting to receive UI benefits fel by 20%.39 A Marinescu et al. study, using

31 Ezra Karger and Aastha Rajan, Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19
Stim ulus Paym ents, Federal Reserve Bank of Chicago, Working Paper no. 2020 -15, May 28, 2020,
https://www.chicagofed.org/publications/working-papers/2020/2020-15.
32 Olivier Coibion, et al., National Bureau of Economic Research, Working Paper no.27693, August 2020,
https://www.nber.org/papers/w27693.33 João Granja et al., Did the Paycheck Protection Program Hit the Target?
National Bureau of Economic Research, Working Paper no. 27095, May 2020, Revised November 2020,
https://www.nber.org/system/files/working_papers/w27095/w27095.pdf.
33 João Granja et al., Did the Paycheck Protection Program Hit the Target? National Bureau of Economic Research,
Working Paper no. 27095, May 2020, Revised November 2020, https://www.nber.org/system/files/working_papers/
w27095/w27095.pdf.
34 Haoyang Liu and Desi Volker, Where Have the Paycheck Protection Loans Gone So Far? Liberty Street Economics,
Federal Reserve Bank of New York, May 6 , 2020, https://libertystreeteconomics.newyorkfed.org/2020/05/where-have-
the-paycheck-protection-loans-gone-so-far.html.
35 Alexander W. Bartik et al., Measuring the Labor Market at the Onset of the COVID-19 Crisis, Brookings Papers on
Economic Activity, BPEA Conference Draft, June 25, 2020, https://www.brookings.edu/wp-content/uploads/2020/06/
Bartik-et-al-conference-draft.pdf.
36 David Autor et al., An Evaluation of the Paycheck Protection Program Using Admin istrative Payroll Microdata,
Prelim inary, July 22, 2020, http://economics.mit.edu/files/20094?te=1&nl=the-morning&emc=edit_nn_20200722.
37 R. Glenn Hubbard Michael R. Strain, Has the Paycheck Protection Program Succeeded?, National Bureau of
Economic Research, Working Paper 28032, October 2020.
38 Joseph Altonji et al., Employment Effects of Unemployment Insurance Generosity During the Pandemic. July 14,
2020, https://tobin.yale.edu/sites/default/files/files/C-19%20Articles/CARES-UI_identification_vF(1).pdf.
39 JPMorgan Chase & Company, Consumption Effects of Unemployment Insurance during the COVID-19 Pandemic,
July 2020, https://institute.jpmorganchase.com/institute/research/labor-markets/unemployment-insurance-covid19-
Congressional Research Service
6

Fiscal Policy and Recovery from the COVID-19 Recession

data from a national job recruiting platform, found that job applications declined in early March,
prior to the CARES Act, and then remained stable. The study found some evidence of an effect on
applications among workers with higher replacement rates, but these effects may be associated
with other factors (such as health and childcare concerns). It also found that job vacancies fel
significantly more than job applications, leading to an increase in applicants per job. The study
did not measure, but noted, that the income support from the expanded UI sustained spending and
led to job creation.40 Another study suggested that an extension of expanded and augmented
unemployment benefits might, however, be replaced by a proportional benefit to avoid potential
work disincentives in the future, although such a proposal could be difficult for states to
administer in the short term.41 Some studies found evidence of a significant effect on spending
from supplemental unemployment insurance. A study by Casado et al. found a significant effect
on local spending from unemployment insurance supplements, indicating that they were an
effective fiscal stimulus.42 Farrel et al. found that spending by recipients of unemployment
benefits increased by 10% while spending by the employed declined by 10%. This finding is
consistent with the expectation that unemployment insurance is targeted at those most likely to
increase spending from the additional income.43 The unemployed who experienced a delay in
receiving benefits in 2020 had declines in spending of 20%. Farrel et al. concluded that the lapse
of the unemployment benefit supplement would decrease spending significantly.
Considerations for Policies Going Forward
To date, fiscal policy actions have been focused in large part on relief—sustaining businesses and
individuals through a short-term crisis imposed by health concerns and government (and business
self-imposed) restrictions—although some of these policies have also stimulated demand. The
Chetty et al. study suggested the need for continuing expanded unemployment benefits as long as
these government constraints and health concerns remain.
Some economists suggest a move to traditional fiscal policy that augments demand without being
specifical y directed to certain businesses or sectors once these restrictions are safely lifted and

pandemic.
40 Iona Marinescu et al., Job Search, Job Posting and Uunemployment Insurance During the COVID-19 Crisis, July 30,
2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664265.
41 T his suggestion was made in Peter Ganong, Pascal Noel, and Joseph Vavra, US Unemployment Insurance
Replacem ent Rates During the Pandem ic, Becker Friedman Institute for Economics at University of Chicago, Working
Paper no. 2020-62, May 14, 2020, https://bfi.uchicago.edu/working-paper/2020-62/. Some experts caution that
proportional benefits could be almost impossible for state UI administrators to program in the short term. For example,
see the testimony of Michele Evermore, senior policy analyst at the National Employment Law Project, in U.S.
Congress, Senate Committee on Finance, Unem ploym ent Insurance During COVID-19: The CARES Act and the Role
of Unem ploym ent Insurance During the Pandem ic, 116th Cong., 2nd sess., June 9, 2020. T reasury Secretary Mnuchin
also alluded to the administrative difficulties in providing greater UI benefits proportional to a worker’s salary when
the $600 supplement was originally being considered, stating, according to media reports, that “the flat $600 per week
‘was the only way we could ensure the states could get money quickly and in a fair way,’ since it would take too long
to tailor benefits to a person’s most recent salary.” Steven T . Dennis, Erik Wasson, and Colin Wilhelm, “Senate Plans
Virus Bill Vote After Dispute Over Unemployment Aid,” Bloomberg, March 25, 2020, https://www.bloomberg.com/
news/articles/2020-03-25/some-in-gop-revolt-over-stimulus-unemployment-benefit.
42 Miguel Garza Casado et al., The Effect of Fiscal Stimulus: Evidence from COVID-19, National Bureau of Economic
Research, Working Paper 27576, August 2020.
43 Diana Farrell et al., Consumption Effects of Unemployment Insurance during the Covid -19 Pandemic, July 20, 2020,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3654274, compared the spending patterns of UI benefit recipients
and employed workers during March-May 2020.
Congressional Research Service
7

Fiscal Policy and Recovery from the COVID-19 Recession

individuals feel comfortable engaging in more activities.44 It is not clear when this phase will
arrive (especial y as some states have reversed the loosening of restrictions in the face of a rising
number of reported cases) or how long it wil last. In July, the Congressional Budget Office
(CBO) projected recovery beginning in the third quarter of 2020, with pre-recession output
achieved by the middle of 2022, and unemployment rates that exceed pre-recession levels for
several years.45 The Federal Reserve projects unemployment at higher rates through 2022.46 A
potential need for up to $3 tril ion in additional fiscal measures—in the form of support for the
unemployed, support for business, and aid to state and local governments—was suggested even
before the fal surge in cases.47 The additional measures enacted in December 2020 were, as noted
above, less than $1 tril ion. The former chairman of the Federal Reserve during the Great
Recession has stressed the need for additional fiscal measures, especial y aid to state and local
governments, whose budget cuts slowed the recovery from that recession.48 The current chairman
of the Federal Reserve has also supported fiscal measures.49 He stated again, in a press conference

44 For a discussion of the need to provide policies that do not prop up businesses that will fail, see testimony of Douglas
Holtz-Eakin, in U.S. Congress, House Budget Committee, Addressing the Econom ic Im pacts of COVID-19: Views from
Two Form er CBO Directors, 116th Cong., 2nd sess., June 3, 2020, https://budget.house.gov/legislation/hearings/
addressing-economic-impacts-covid-19-views-two-former-cbo-directors. Holtz-Eakin stated, “ Over the next few
months, the emphasis should shift from speedy, indiscriminate lending and grants to targeted lending programs where
needed. Policy should also shift its emphasis away from keeping workers attached to their firms and toward supporting
shifts in the demand for workers as some industries shrink and others expand.” See also Jose Maria Barrero, Nick
Bloom, and Steven J. Davis, COVID-19 Is Also a Reallocation Shock, Becker-Friedman Institute for Economics at
UChicago, Working Paper no. 2020-59, June, 2020, https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202059.pdf.
T he researchers say that “ unemployment benefit levels that exceed worker earnings, policies that subsidize employee
retention, land-use restrictions, occupational licensing restrictions, and regulatory barriers to business formation will
impede reallocation responses to the COVID-19 shock.”
45 U.S. Congressional Budget Office, An Update to the Economic Outlook: 2020 to 2030 , July 2, 2020,
https://www.cbo.gov/publication/56442. See CRS Insight IN11388, COVID-19: U.S. Econom ic Effects, by Rena S.
Miller and Marc Labonte. See also testimony of Douglas Elmendorf and Douglas Holtz-Eakin, in U.S. Congress,
House Budget Committee, Addressing the Econom ic Im pacts of COVID-19: Views from Two Form er CBO Directors,
116th Cong., 2nd sess., June 3, 2020, https://budget.house.gov/legislation/hearings/addressing-economic-impacts-covid-
19-views-two-former-cbo-directors.
46 Chair’s Federal Open Market Committee Press Conference Projections Materials, December 16, 2020,
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20201216.htm.
47 See T estimony of Douglas Elmendorf, in U.S. Congress, House Budget Committee, Addressing the Economic
Im pacts of COVID-19: Views from Two Form er CBO Directors, 116th Cong., 2nd sess., June 3, 2020,
https://budget.house.gov/legislation/hearings/addressing-economic-impacts-covid-19-views-two-former-cbo-directors.
Elmendorf suggests a need for $3 trillion. See also Glenn Hubbard et al., Taskforce Report: Prom oting Econom ic
Recovery After COVID-19, T he Aspen Institute, June 16, 2020, https://economicstrategygroup.org/resource/promoting-
economic-recovery-after-covid-19/, which suggests a need for $1 trillion with a rapid, V-shaped recovery and $2
trillion with a slower, U-shaped recovery. On July 30, the Washington Post reported a survey of 25 economists, with 20
proposing a stimulus of $2 trillion or more, and the remainder favoring a stimulus of around $1 trillion. See Heather
Long, “T his Recession is Already Deep. If Congress Fails to Act, a Lo t of Damage Could be Permanent,” The
Washington Post, https://www.washingtonpost.com/business/2020/07/30/economists-favor-big-stimulus/?wpisrc=
nl_powerup&wpmm=1&utm_campaign=wp_power_up&utm_medium=email&utm_source=newsletter.
48 Ben S. Bernanke, “Ben Bernanke: I Was Chairman of the Federal Reserve. Save the States,” New York Times, July
15, 2020, https://www.nytimes.com/2020/07/15/opinion/ben-bernanke-coronavirus-federal-aid.html?action=click&
module=Opinion&pgtype=Homepage. See also Ben S. Bernanke and Janet Yellen, “ Former Fed Chairs Bernanke and
Yellen T estified on COVID-19 and Response to Economic Crisis,” July 17, 2020, T he Brookings Institution,
https://www.brookings.edu/blog/up-front/2020/07/17/former-fed-chairs-bernanke-and-yellen-testified-on-covid-19-
and-response-to-economic-crisis/?utm_campaign=Economic%20Studies&utm_medium=email&utm_content=
91760963&utm_source=hs_email.
49 See U.S. Congress, House Committee on Financial Services, Monetary Policy and the State of the Economy,
hearings, 116th Cong., 2nd sess., June 17, 2020, https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=
406614. For a summary of the Q&A, see Matthew Boesler, “ Powell Urges Congress Not to Remove Fiscal Support
Congressional Research Service
8

Fiscal Policy and Recovery from the COVID-19 Recession

on July 29, 2020, a need for further fiscal stimulus, noting that preliminary data showed a slowing
of the recovery,50 and has continued to indicate the need for further fiscal measures, especial y
following the fal surge in cases.51 To date it is not clear whether and to what extent subsequent
fiscal support may be focused on relief versus more traditional stimulus designed to increase
aggregate demand. Aid to state and local governments and extensions of enhanced unemployment
benefits would serve the dual purposes of providing both relief (particularly in light of the surge
in cases) and a traditional stimulus.
The current recession is a novel situation with many uncertainties that may affect whether fiscal
policy is designed primarily to provide economic relief or as more traditional stimulus. One
uncertainty is when social distancing measures can be relaxed without risking increased
infections. This issue may dictate how quickly the economy can return to normal. Rising
infections could trigger a second round of shutdowns, which would make the economic recovery
more difficult. The increases in reported cases in June and July 2020 and in the fal in states that
lifted restrictions earlier have raised questions about how quickly the economy wil reopen. As
noted above, several states have reversed their reopenings in response to growing caseloads.52
Another surge in COVID-19 cases occurred in the late fal and through January 2021, partial y
reflecting reduced social distancing during the Thanksgiving and Christmas holidays.
A second uncertainty is the extent to which consumer demand is dampened. The outbreak of the
virus has been uneven across the United States, and in many places there are expectations of the
outbreak worsening.53 Consumers who feel uncertain about the future tend to save more and delay
big-ticket purchases, and consumer fears of contracting the virus may also dampen demand. The
uncertainty by consumers may have resulted in a surge in the savings rate to an unprecedented
33% in April and may reflect pent-up demand that could be translated into more spending as
restrictions ease, but much depends on how cautious consumers are.54
A third uncertainty may be how the economic fal out from COVID-19 changes the composition
of demand. A particularly long period may be required before consumption of travel and leisure
returns to its former levels (if it returns to those levels at al ), which would have consequences for
the restaurant, hotel, airline, and oil industries, among others. Social distancing rules that may
persist for many months or longer would also require cost-increasing changes in the provisions of
services that involve close contact, such as restaurants, airlines, and mass transportation.

T oo Fast ,” Bloomberg, June 17, 2020, https://www.bloomberg.com/news/articles/2020-06-17/powell-urges-congress-
not-to-remove-fiscal-support-too-quickly.
50 Rachael Siefel, “ Fed Chief: New Surge in Cases is Beginning to Weigh on the Economy,” The Washington Post, July
29, 2020, https://www.washingtonpost.com/business/2020/07/29/powell-fed-economy/.
51 Sarah Hansen, “Powell Still T hinks U.S. Needs More Stimulus for Full Recovery,” Forbes, November 5, 2020,
https://www.forbes.com/sites/sarahhansen/2020/11/05/powell-still-thinks-us-needs-more-stimulus-for-full-recovery/?
sh=52eed49d1fe7; “ Fed Chair Powell Says Coronavirus Surge Will Hurt the Economy, Stimulus Needed Now More
T han Ever,” Forbes, November 17, 2020, https://www.forbes.com/sites/sarahhansen/2020/11/17/fed-chair-powell-says-
coronavirus-surge-will-hurt-economy-stimulus-needed-now-more-than-ever/?sh=627572482277.
52 Jasmine C. Lee et al., “ See How All 50 States Are Reopening (and Closing Again),” New York Times, updated
regularly, last updated July 10, 2020, https://www.nytimes.com/interactive/2020/us/states-reopen-map-
coronavirus.html; Kaiser Family Foundation, State Data and Policy Actions to to Address Coronavirus, November 30,
2020, https://www.kff.org/coronavirus-covid-19/issue-brief/state-data-and-policy-actions-to-address-coronavirus/.
53 Lauren Fedor and Christine Zhang, “ US Voters More Pessimistic on Chances of Economic Rebound,” Financial
Tim es, July 7, 2020, https://www.ft.com/content/808653be-b651-41aa-81b7-5f8ec3831e25?emailId=
5f045541d7a228000485f2f7&segmentId=13b7e341-ed02-2b53-e8c0-d9cb59be8b3b.
54 Bureau of Economic Analysis, “Personal Saving Rate,” https://www.bea.gov/data/income-saving/personal-saving-
rate.
Congressional Research Service
9

Fiscal Policy and Recovery from the COVID-19 Recession

These uncertainties make it difficult to determine when the focus of fiscal policy shifts from
primarily sustaining adversely affected businesses and individuals in the short term to fiscal
policy measures traditional y used in a recession and aimed at increasing demand in general while
al owing the composition of output to adjust in response to pandemic-related changes in the
economy’s structure.
The optimal timing of a shift from focused policies to support impacted businesses and
individuals to the type of demand stimulus used in traditional recessions is not clear, and both
needs may occur simultaneously. The efficiency of alternative types of stimulus in increasing
demand should be considered, although in some cases (such as fiscal assistance to the states and
localities and expanded and augmented unemployment benefits), the same policies would likely
be appropriate regardless of the principal objective. Insofar as policymakers seek to design fiscal
policies to increase aggregate demand, it may be helpful to understand how fiscal policy in
response to traditional economic downturns works, both theoretical y and empirical y.
How Fiscal Policy Works to Increase Demand
This section explains the basic theory underlining the use of fiscal policy in a traditional
economic downturn, followed by a discussion of empirical research on the effects of these
policies. This discussion is focused on fiscal policy to address the lack of sufficient demand and
wil general y be more applicable when virus transmission is reduced, the public is more
confident in engaging in normal activities, and stay-at-home orders and business closures can be
safely lifted or limited.
Review of Theoretical Effects of Fiscal Policy
Current fiscal policy theories began with a work published during the Great Depression by British
economist John Maynard Keynes.55 As a result, this type of policy is often referred to as
Keynesian, although there have been numerous refinements and developments in the theory.56
Since World War II, government policy to address business cycles has general y been guided by
some form of Keynesian theory. The fundamental concept behind this view of macroeconomics
and fiscal policy is that prices in an economy do not immediately adjust to shocks, which can lead
to underutilization of resources. Workers may become unemployed and capital may sit idle, due
to a lack of sufficient demand. To reduce unemployment, expansionary fiscal policy (an increase
in spending or a reduction in taxes to expand aggregate demand) can be employed.
The magnitude of fiscal policy’s effect is measured not only by the size of fiscal policy
intervention relative to the slack in the economy but also by its effectiveness, measured by a

55 John Maynard Keynes, The General Theory of Employment, Interest and Money, published in 1936,
https://www.files.ethz.ch/isn/125515/1366_KeynesTheoryofEmployment.pdf.
56 T hese developments include, among others, the standard model (referred to as IS-LM), which includes both
monetary and fiscal policy and refines the trade-off between inflation and unemployment, leading to the notion of a
natural rate of unemployment (where policies tend to affect price rather than output), the incorporation of expectations,
and modifications for an open economy (where goods and capital flow across borders). T he IS equation traces out the
equilibrium between output and interest rates in the econ omy based on the relationship between investment and
savings; the lower the interest rate, the larger the amount of output. T he LM curve traces out a relationship between
output and interest rates based on the demand and supply of money and is upward sloping, with output rising as interest
rates rise (because higher interest rates cause smaller holdings of money and free up money to support transactions).
T he IS curve is shifted with fiscal policy and the LM curve with monetary policy. Where they intersect determines the
level of aggregate demand at any given price level, and where that curve intersects with the supply curve determines
prices and output in the economy.
Congressional Research Service
10

Fiscal Policy and Recovery from the COVID-19 Recession

multiplier. If the government spends a dollar, aggregate demand is initial y increased by a dollar.
The person who sold a dollar worth of goods or services to the government also receives a dollar,
part of which might be saved and part of which might be spent. To the extent that it is spent, it
increases aggregate demand further. The recipients of this additional spending wil in turn spend
part of their receipts. This process continues with each amount of additional spending diminishing
a bit over time due to saving. The sum of al these rounds effectively equals the multiplier.57 As
demand increases, businesses hire additional workers and purchase more capital goods to satisfy
demand. Thus, successful fiscal policy depends on having a stimulus that is not only large
enough, but also effective enough.
The strength of the multiplier depends not only on the share that is spent in the initial and
subsequent rounds but also on the effect on interest rates and prices, as increases in these
measures can reduce the multiplier.58 The fiscal multiplier’s estimated size also depends on
assumptions about monetary policy and its response to a fiscal stimulus.59 Currently, monetary
policy is also aimed at stimulating the economy.
Some economists have come to believe that political lags make fiscal policy il -timed, whereas
monetary policy can be enacted quickly.60 Others have become less enamored of fiscal policy
because it becomes somewhat less effective in an open economy. At the same time, there are
circumstances where traditional monetary policy does not work wel (at very low interest rates,
for example) or where a contraction appears to be serious enough to warrant both monetary and
fiscal measures. During the 2007-2009 Great Recession, fiscal stimulus was enacted under both
the George W. Bush and Obama Administrations.61

57 Saving rates in the economy rose during the Great Recession from around 2% to 6% (personal savings rate),
presumably in part due to the loss in asset values. T he rate then declined to about 5%, but these rates are similar to the
levels in the early and mid-1990s and lower than in most periods since 1960. T hus, although savings rates increased,
they did not indicate fiscal multipliers were small by historical standards. Private savings rates (which include business
saving) rose from around 4% to 8% (according to the National Income and Product Accounts), but this rate was also
not high by historical standards. Savings rates have been increasing as the share of the population that is elderly has
increased, but the personal savings rate surged to 33% in April 2020 (Bureau of Economic Analysis, “ Personal Saving
Rate,” https://www.bea.gov/data/income-saving/personal-saving-rate). T his surge may be transitory because it reflects
pent -up demand due to closures.
58 As demand increases, it places upward pressure on interest rates, reducing private-sector spending on investment and
consumer durables, and also, in an open economy, attracting capital flows into the United States, appreciating currency,
and reducing net exports. When the economy is at full employment or close to full employment, the effects of a
stimulus are more likely to lead to price increases rather than real output growth. In this case, the deficit spending
crowds out investment and net exports. T hus, even for a particular type of spending or tax cut, its short -run effects are
likely smaller at higher interest rates, smaller for small open economies with a large trade sector and flexible exchange
rates, and smaller for economies at or close to full employment. One can think of the supply curve (output rises with
prices) as being relatively horizontal in an underemployed economy (a shift in the demand curve can increase output
without affecting prices very much) and curving an d becoming relatively vertical in a fully employed economy (a shift
in the demand curve largely increases prices without affecting output). T hese effects could reduce the stimulus
(theoretically to zero), but would not cause a stimulus to be contractionary .
59 One might think of a neutral monetary response as one that permits the fiscal stimulus to increase interest rates,
output, and prices (this policy can be thought of as a fixed money supply). T he monetary authorities may also, at one
extreme, keep the interest rate fixed, which will enhance the fiscal stimulus, or, at the other, keep prices fixed, which
will offset the fiscal stimulus. In a fully employed economy, fiscal stimulus will not affect output, but rather the
composition of output. Without an offsetting change in the nominal money supply, prices will rise to reduce the real
value of money. Alternatively, the money supply can be contracted to be consistent with total output without a price
increase.
60 Monetary policy lags are commonly thought to be six to eight quarters and monetary policy is generally considered
the blunter tool.
61 T he Economic Stimulus Act of 2008 (P.L. 110-185) and the American Recovery and Reinvestment Act of 2009 (P.L.
Congressional Research Service
11

Fiscal Policy and Recovery from the COVID-19 Recession

The textbook consensus is that spending increases are more effective than tax cuts, because the
full amount of the initial spending increase is actual y spent, whereas some of a tax cut is initial y
saved.62 Spending in the form of transfers could also be partial y saved, although it is believed
that some types of transfers benefit lower-income recipients who are likely to spend al or most of
the transfer. Different types of tax or spending policies may also have different effects depending
on the portion initial y saved.63 At the same time, much federal government spending is funneled
through the states, and a portion of spending in the form of grants to states could also be saved
(although this outcome may be unlikely given the current fiscal pressures on the states). The
spending funneled through the states could include both transfers and government purchases of
goods and services.
Review of Empirical Effects of Fiscal Policy
Numerous econometric studies have examined the short-run effects of fiscal policy adjustments
(i.e., increases or decreases in spending and/or taxes) on the economy.64 These models general y
fal into three types—macroeconometric forecasting models, aggregate country-level time series
models, and dynamic stochastic general equilibrium (DSGE) models—each with its own
strengths and limitations.65 These models attempt to quantify the “bang for the buck” of
government intervention or, in economics jargon, the size of the fiscal multipliers.

111-5).
62 See Charles R. Nelson, Macroeconomics: An Introduction, Chapter 11, Keynesian Fiscal Policy and Multipliers,
2006, http://faculty.washington.edu/cnelson/Chap11.pdf.
63 See CRS Report RS21126, Tax Cuts and Economic Stimulus: How Effective Are the Alternatives?, by Jane G.
Gravelle.
64 Surveys of the fiscal multiplier literature include Charles J. Whalen and Felix Reichling, The Fiscal Multiplier and
Econom ic Policy Analysis in the United States, U.S. Congressional Budget Office, CBO Working Paper no. 2015 -02,
February 2015; Valerie A. Ramey, “Can Government Purchases Stimulate the Economy,” Journal of Economic
Literature, vol. 49, no. 3 (September 2011), pp. 673 -685; Valerie A. Ramey, “ T en Years After the Financial Crisis:
What Have We Learned from the Renaissance in Fiscal Research?” Journal of Econom ic Perspectives, vol. 33, no. 2
(Spring 2019), pp. 89-114; and Menzie Chinn, “ Fiscal Multipliers,” in New Palgrave Dictionary of Econom ics, ed.
Steven N. Durlauf and Lawrence E. Blume (Palgrave Macmillan, 2013).
65 Macroeconometric forecasting models, which generally form the underpinnings of the forecasts from economic
consulting firms, are based largely on historical relationships among aggregate economic variables and informed by
theories of how those variables are determined. T he reliability of macroeconometric projections depends heavily on the
validity of the economic assumptions used.
T ime series models, in their most basic form, summarize the correlation between economic variables over time. As a
result of their reliance on correlation and a general lack of theoretical grounding, it can be difficult to use time series
models to assess the direction of causation between policies and the economy.
DSGE models are built on a structure of individuals maximizing well-being by choosing consumption and leisure over
time (hence dynamic). As a result, estimated multipliers are constrained by the basic structure of the model. Individuals
and firms in the model are rational and forward-looking. T he original dynamic model on which DSGE models are built
(the real business cycle model) did not allow for involuntary unemployment. Current DSGE models have been
modified in a variety of ways to permit fiscal and monetary policy to have effects, but they are often criticized for
assumptions that seem at odds with evidence (such as an expectation that decreased taxes today will lead to increases in
the future that the individual takes into account) or reflect priors. See Paul Romer, “ T he T rouble with
Macroeconomics,” delivered January 5, 2016, as the Commons Memorial Lecture of the Omicron Delta Epsilon
Society. Forthcoming in The Am erican Econom ist. Available at https://paulromer.net/the-trouble-with-macro/WP-
T rouble.pdf.
A detailed description of these model types (and others) can be found in Menzie Chinn, “ Fiscal Multipliers,” in New
Palgrave Dictionary of Econom ics, ed. Steven N. Durlauf and Lawrence E. Blume (Palgrave Macmillan, 2013).
Congressional Research Service
12

link to page 15 link to page 15 Fiscal Policy and Recovery from the COVID-19 Recession

How effective a fiscal stimulus is depends on the share of the spending or tax cut that is initial y
spent, which can be summarized in a multiplier. As noted earlier, a multiplier estimates how much
additional output is produced for an additional dollar of spending or tax cuts. For example, a
multiplier of 1.5 indicates that $1 dollar of fiscal stimulus leads to $1.50 in output. Many factors
affect the size of the multiplier (e.g., how close the economy is to full employment, the reaction
of monetary policy, and the period of time over which it is measured), but given those factors,
some policies are more effective in increasing demand and output than others.
Estimates of the fiscal multipliers of government policy choices span a broad range. Fiscal
multiplier estimates, as discussed in the studies below, range from 0.3 to 3.5.66 (A multiplier of
0.3 can be interpreted as a dollar of spending or tax cut increasing output by 30 cents, and a
multiplier of 3.5 can be interpreted as a dollar of spending or tax cut increasing output by $3.50.)
The range of estimates does not appear to be driven by the model chosen,67 but results from the
combination of several factors:
 Modeling and data assumptions: A portion of the variation in fiscal multiplier
estimates results from how different modeling chal enges are addressed and the
assumptions built into the models.68 Additional variation occurs because analyses
can differ with respect to the period over which the multiplier is measured
(cumulative effects versus peak effects) or the years in which the multiplier
forms its basis.69
 Economic conditions: A portion of the variation in fiscal multiplier estimates
results from the estimates’ economic starting points—with fiscal multipliers
being larger during recessions than during expansions.70 The size of fiscal
multipliers is also affected by the “room” that monetary policy has to intervene—

66 See footnote 64 for surveys of the fiscal multiplier literature.
67 Charles J. Whalen and Felix Reichling, Assessing the Short-Term Effects on Output of Changes in Federal Fiscal
Policies, U.S. Congressional Budget Office, CBO Working Paper no. 2012-08, May 2012, finds estimates for the
United States, as measured (on a cumulative basis) after eight quarters, ranging from 0.75 to 2.25 for
macroeconometric forecasting models, from 0.3 to 3.5 for time series models, and from 0.5 to 2.25 for DSGE models.
See footnote 64 for surveys of the fiscal multiplier literature.
68 A common challenge for these models is what economists refer to as “identification.” Identification, in this context,
refers to the model’s ability to differentiate the economic results of the specific policy under study from other unrelated
policy changes. See Daniel Riera-Crichton, Carlos A. Vegh, and Guillermo Vuletin, “ T ax Multipliers: Pitfalls in
Measurement and Identification,” Journal of Monetary Economics, vol. 79 (May 2016), pp. 30-48, for a discussion of
methods used to help address issues with identification.
69 Valerie A. Ramey, “Identifying Government Spending Shocks: It’s All in the T iming,” The Quarterly Journal of
Econom ics, vol. 126, no. 1 (February 2011), pp. 1 -50, finds fiscal multipliers differ when WWII is included in the time
period versus when it is excluded.
70 Alan J. Auerbach and Yuriy Gorodnichenko, “Measuring the Output Responses to Fiscal Policy,” American
Econom ic Journal: Economic Policy, vol. 4, no. 2 (May 2012), pp. 1-27, found general multipliers between 0.0 and 0.5
during economic expansions and between 1.0 and 1.5 during economic recessions. T he authors also found that
unexpected fiscal policy yields a larger fiscal multiplier than expected actions. T hese results are consistent with other
similar studies, including Robert J. Barro and Charles J. Redlick, “ Macroeconomic Effects From Government
Purchases and T axes,” The Quarterly Journal of Economics, vol. 126, no. 1 (February 2011), pp. 55-102; and Steven
M. Fazzari, James Morley, and Irina Panovska, “State-Dependent Effects of Fiscal Policy,” Studies in Nonlinear
Dynam ics & Econom etrics, vol. 19, no. 3 (2015), pp. 285-315. In contrast, Valerie A. Ramey and Sarah Zubairy,
“Government Spending Multipliers in Good T imes and in Bad: Evidence from U.S. Historical Data,” Journal of
Political Econom y, vol. 126, no. 2 (April 2018), pp. 850 -901, presents an alternative view—that fiscal multipliers are
not larger during recessions—using military spending shocks to identify their model.
Congressional Research Service
13

Fiscal Policy and Recovery from the COVID-19 Recession

with fiscal multipliers growing larger as the duration of constrained interest rates
increases.71
 Fiscal policy details: Further variation is derived from the nature of the fiscal
policy—the fiscal policy tools used (e.g., taxes or government spending),72 the
policy area to be affected (e.g., infrastructure versus general government
spending),73 and the characteristics of those affected (e.g., high-income
households versus low-income households).74
Much of the relatively recent interest in fiscal multipliers has been driven by an examination of
the Great Recession, which began in late 2007.75 Initial y, policymakers responded with
conventional stimulus—the Economic Stimulus Act of 2008 (P.L. 110-185) and the American
Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA)—which provided a substantial
expansionary boost to the U.S. economy.76 Concerns about growing budget deficits, driven in part
by an alternative view on fiscal policy, resulted in a policy shift toward fiscal consolidation
(increases in taxes and/or decreases in government spending or transfers).77 This view was
referred to popularly as “austerity,” and, as noted earlier, has been viewed by some as a major
policy misstep.78 The following section discusses the empirical research on austerity.

71 Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo, “When Is the Government Spending Multiplier
Large?” Journal of Political Economy, vol. 119, no. 1 (February 2011), pp. 78-121, finds that the size of this effect
increases as the duration of a binding zero bound on interest rates grows. Specifically, the authors find a fiscal
multiplier of 0.7 when interest rates are not constrained, versus 1.2 when interest rates are constrained for 8 periods and
1.6 when interest rates are constrained for 12 periods. Günter Coenen et al., “Effects of Fiscal St imulus in Structural
Models,” American Economic Journal: Macroeconomics, vol. 4, no. 1 (January 2012), pp. 52-68, and Robert E. Hall,
“By How Much Does GDP Rise if the Government Buys More Output?” Brookings Institution, Brookings Papers on
Econom ic Activity vol. 40, no. 2 (Fall 2009), pp.182 -331, find similar results.
72 U.S. Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on
Em ploym ent and Econom ic Output from January 2011 through March 2011 , May 2011.
73 Alan J. Auerbach and Yuriy Gorodnichenko, “Measuring the Output Responses to Fiscal Policy,” American
Econom ic Journal: Economic Policy, vol. 4, no. 2 (May 2012), pp. 1-27.
74 Mark Zandi, “ At Last, the U.S. Begins a Serious Fiscal Debate,” Moody’s Analytics, April 14, 2011,
https://www.economy.com/economicview/analysis/198972.
75 Lawrence J. Christiano, The Great Recession: A Macroeconomic Earthquake, Federal Reserve Bank of Minneapolis,
Economic Policy Papers, February 7, 2017, https://www.minneapolisfed.org/article/2017/the-great -recession-a-
macroeconomic-earthquake.
76 U.S. Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on
Em ploym ent and Econom ic Output in 2014 , February 20, 2015, https://www.cbo.gov/publication/49958; and Brian I.
Baker, Fiscal im petus and the Great Recession, U.S. Bureau of Labor Statistics, Monthly Labor Review, January 2015,
https://www.bls.gov/opub/mlr/2015/beyond-bls/fiscal_impetus_and_the_great_recession.htm.
77 T he Budget Control Act of 2011 (P.L. 112-25, BCA) was designed to limit the growth in discretionary spending. See
CRS Report R44874, The Budget Control Act: Frequently Asked Questions, by Grant A. Driessen and Megan S. Lynch
for further information on the BCA.
78 See T estimony of Douglas Elmendorf, in U.S. Congress, House Budget Committee, Addressing the Economic
Im pacts of COVID-19: Views from Two Form er CBO Directors, 116th Cong., 2nd sess., June 3, 2020,
https://budget.house.gov/legislation/hearings/addressing-economic-impacts-covid-19-views-two-former-cbo-directors.
See also William G. Gale, “We Can Afford More Stimulus,” Brookings Institution, April 30, 2020,
https://www.brookings.edu/blog/up-front/2020/04/30/we-can-afford-more-stimulus/, noting that the premature move
away from stimulus was even more damaging to the UK and continental Europe. See also Christopher L. House,
Christian Proebsting, and Linda L. T esara, “Austerity in the aftermath of the great recession,” Journal of Monetary
Econom ics, June 13, 2019. See also Ben S. Bernanke, “ Ben Bernanke: I Was Chairman of the Federal Reserve. Save
the States,” New York Times, July 15, 2020, https://www.nytimes.com/2020/07/15/opinion/ben-bernanke-coronavirus-
federal-aid.html?action=click&module=Opinion&pgtype=Homepage.
Congressional Research Service
14

Fiscal Policy and Recovery from the COVID-19 Recession

Review of Empirical Research on Austerity Measures During the Great
Recession
Given the prescription for austerity measures (which are general y seen as contractionary in an
economy below full employment) during the Great Recession, several studies examining the
short-run effects of fiscal consolidation or adjustments (i.e., spending reductions and/or tax
increases) on government debt and the economy were circulated and subsequently published
during the early stages of recovery from the Great Recession.79 A critical piece of these analyses
was the identification of the discretionary fiscal policy.80 In general, the fiscal policy variables are
identified using (1) cyclical y adjusted variables or (2) a narrative approach.81
 A study by Alesina and Ardagna identified the discretionary fiscal change by
cyclical y adjusting the fiscal variables and found fiscal consolidation improved
economic growth.82 In addition, the authors concluded that spending reductions
are less likely to create recessions than are tax increases which has been pointed
to as evidence that cutting spending in the United States wil be expansionary
rather than contractionary.83 These findings are general y inconsistent with the
mainstream view of fiscal policy, where short-term multipliers for spending
decreases are negative and also tend to be larger in absolute value than those for
tax cuts. A key limitation in applying these findings to an economy in recession is
that the successful fiscal consolidations occurred in economies at or near full
employment.84
 An International Monetary Fund (IMF) study identified the fiscal change using a
narrative approach and found that fiscal consolidation had a contractionary effect

79 Alberto Alesina and Silvia Ardagna, “Large Changes in Fiscal Policy: T axes versus Spending,” in Tax Policy and the
Econom y, ed. Jeffrey R. Brown, vol. 24 (Chicago: University of Chicago Press, 2010), pp. 35 -68; and International
Monetary Fund, “ Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” in World Econom ic
Outlook (Washington: International Monetary Fund, 2010), pp. 93-124, available at http://www.imf.org/external/pubs/
ft/weo/2010/02/pdf/c3.pdf.
80 As discussed above, a challenge to estimating fiscal multipliers is separating the effects of the discretionary fiscal
policy from existing policies and general economic conditions. For these studies, the specific challenge was that
government spending, tax revenue, and the budget deficit can change due to automatic st abilizers that react to
economic changes or to discretionary (often legislated) changes. T ypically , transfer payments (e.g., unemployment
compensation) increase and tax revenue decreases automatically when the economy enters a recession and,
consequently, budget deficits increase. T he reverse is true when the economy recovers.
81 A narrative or action-based approach attempts to identify the fiscal policy action through the use of
contemporaneously reported fiscal policy actions. See Kristie M. Engemann, Mich ael T . Owyang, and Sarah Zubairy,
“A Primer on the Empirical Identification of Government Spending Shocks,” Federal Reserve Bank of St. Louis,
Federal Reserve Bank of St. Louis Review, March/April 2008, https://files.stlouisfed.org/files/htdocs/publications/
review/08/03/Engemann.pdf for further detail.
82 Continued refinements to this methodology have been made. See Alberto Alesina, Carlo A. Favero, and Fr ancesco
Giavazzi, “What Do We Know about the Effects of Austerity?,” AEA Papers and Proceedings, vol. 108 (May 2018),
pp. 524-530, for a more recent example.
83 See discussions of these arguments in Paul Krugman, “Contraction is Contractionary,” New York Times, March 29,
2011, http://krugman.blogs.nytimes.com/2011/03/29/contraction-is-contractionary/. See also T im Fernholz and Jim
T ankersley, “GOP Prescription: Spending Cuts and Lower Wages Equal More Jobs,” National Journal, March 25,
2011, http://www.nationaljournal.com/economy/gop-prescription-spending-cuts-and-lower-wages-equal-more-jobs-
20110325; T estimony of Andrew Biggs in U.S. Congress, Committee on Ways and Means, Hearing on Im pedim ents to
Job Creation, 112th Cong., 1st sess., March 30, 2011, https://gop-waysandmeans.house.gov/UploadedFiles/Biggs_—
_Ways_and_Means_T estimony.pdf.
84 CRS Report R41849, Can Contractionary Fiscal Policy Be Expansionary?, by Jane G. Gravelle and T homas L.
Hungerford.
Congressional Research Service
15

Fiscal Policy and Recovery from the COVID-19 Recession

on output.85 The IMF paper also found that spending cuts are less contractionary
than tax increases, but attributed this effect in part to the greater offset ing
monetary stimulus. These results are consistent with the mainstream view of
fiscal policy.
Several post-Great Recession studies have assessed the effects of fiscal consolidation on
economies operating below full employment and have general y found that fiscal consolidation
reduced economic growth. A study by Blanchard and Leigh concluded that in advanc ed
economies fiscal consolidation is associated with lower economic growth, with the relationship
being especial y strong early in a recession.86 A study by House, Proebsting, and Tesar found a
similar contractionary effect of fiscal consolidation across 29 advanced economies.87 A study by
Gechert, Horn, and Paetz found that fiscal consolidation in the EU shortly after the Great
Recession was poorly timed and thus not only deepened the crisis but also persisted after fiscal
consolidation measures were relaxed.88
In sum, the empirical studies of fiscal consolidation consistently found that traditional fiscal
stimulus (increasing spending and/or decreasing taxes) in an economy below full employment
would lead to increased output, whereas austerity measures would reduce output.
Fiscal Policy Stimulus Alternatives and Multipliers
As previously discussed, the amount of stimulus that can be generated by a given policy proposal
depends on the share of the spending or tax cut that is initial y spent and can be summarized in a
multiplier.89 The multipliers discussed below refer to a variety of measures that were considered
in the Great Recession or are being discussed in the context of the pandemic-related contraction.
They include increased spending, transfers to states, direct payments to individuals (i.e.,
“stimulus checks”), payments to individuals that are proportional to earnings with a cap (such as
the Making Work Pay credit enacted in 2009), payroll tax holidays, income tax cuts, and a variety
of business tax cuts.
Relative Sizes of Multipliers90
Much of the research suggests that the largest multipliers are associated with direct federal
spending. Larger multipliers are also associated with transfers to state and local governments,
which are likely to spend funds in a recession because they have lost part of their revenue base, as

85 International Monetary Fund, “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” in World Economic
Outlook (Washington: International Monetary Fund, 2010), pp. 93 -124, https://www.elibrary.imf.org/view/IMF081/
10685-9781589069473/10685-9781589069473/ch03.xml?redirect=true.
86 Olivier J. Blanchard and Daniel Leigh, “Effects of Fiscal Policy in Deep Recessions: Simple and Hopefully Credible
Empirical Evidence,” American Economic Review: Papers & Proceedings, vol. 103, no. 3 (May 2013), pp. 117-120.
87 Christopher L. House, Christian Proebsting, and Linda L. T esar, Austerity in the Aftermath of the Great Recession,
National Bureau of Economic Research, Working Paper no. 23147, February 2017, https://www.nber.org/papers/
w23147.pdf.
88 Sebastian Gechert, Gustav Horn, and Christoph Paetz, “Long‐term Effects of Fiscal Stimulus and Austerity in
Europe,” Oxford Bulletin of Econom ics and Statistics, vol. 81, no. 3 (June 2019), pp. 647-666.
89 Lists of estimated multipliers for a variety of policies referred to in this section by the Congressional Budget Office
and a private forecaster, Moody’s Analytics, can be found in CRS Report R45780, Fiscal Policy Considerations for the
Next Recession, by Mark P. Keightley; CRS Report R42700, The “Fiscal Cliff”: Macroeconom ic Consequences of Tax
Increases and Spending Cuts, by Jane G. Gravelle; and CRS Report R41849, Can Contractionary Fiscal Policy Be
Expansionary?, by Jane G. Gravelle and T homas L. Hungerford.
90 Ibid.
Congressional Research Service
16

Fiscal Policy and Recovery from the COVID-19 Recession

wel as direct transfers to low-income individuals or those in reduced circumstances (such as the
unemployed) because these individuals are likely to spend most of any additional income. For
example, CBO estimated that, by the first quarter of 2012, the 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.
Tax cuts for individuals tend to have smal er multipliers, depending on where individuals are in
the income distribution. Economists have long been concerned that temporary tax cuts (compared
to permanent ones) have smal er effects on spending because they are seen as one-time benefits to
spread over a longer period. However, if individuals are general y liquidity constrained (would
like to spend more than they earn but do not have access to borrowing), they wil largely spend
what they receive (and thus have no savings). Lower- and middle-income taxpayers are likely to
be in these circumstances and for a variety of other reasons are likely to spend a larger share of
any tax cut.91 For example, for the same period of time, CBO found the refundable Making Work
Pay tax credit (which was equal to a percentage of income up to a dollar limit rather than a flat
dollar amount and was received per paycheck as reduced withholding), payroll tax reductions,
and tax cuts for low- and middle-income taxpayers to have multipliers of 0.7 to 0.9, while tax cuts
for high-income individuals had smal er multipliers of 0.35.
The lowest multipliers are general y associated with tax cuts for business. A business tax cut
would increase demand if it leads to more investment. A corporate rate cut, which mostly benefits
returns to investment already in place, has a relatively smal effect on investment, and it may be
difficult to stimulate investment given slack demand. CBO estimated corporate rate cuts to have a
multiplier of 0.2. For a tax cut associated with investment, the multiplier should be larger, and
CBO estimated the multiplier for an investment subsidy (expensing or bonus depreciation, which
al ows part or al of an asset’s cost to be deducted immediately rather than spread over the life of
the asset) to be 0.6.
Other Concerns About the Effectiveness of Alternative Policies
Several other issues with respect to tax cuts have been examined in some detail. During earlier
recessions, economists were concerned with the possibility that one-time lump-sum payments
would be less effective than tax cuts that show up in withholding and are spread out over
paychecks because lump-sum payments would be perceived as a one-time windfal more likely to
be saved. Extensive studies of these payments have suggested that their lump-sum nature is not a
serious concern.92
There is, however, a concern that the direct payments during the recent COVID-19-related
contraction might have been less effective because demand was constrained by concerns about
health and the restrictions (stay-at-home orders and shutdowns), especial y in light of the very
high savings rate in April. However, studies cited above indicated that much of these payments
were spent. The direct payments may also fund pent-up demand once consumers become more
confident and restrictions ease.
Theory also suggests some circumstances where a temporary tax cut is more effective than a
permanent one, such as a sales tax holiday or a temporary investment subsidy. Sales tax holidays,
although discussed in the past, are probably too chal enging for the federal government to adopt

91 See the discussion in CRS Report RS21126, Tax Cuts and Economic Stimulus: How Effective Are the Alternatives? ,
by Jane G. Gravelle.
92 Ibid.
Congressional Research Service
17

link to page 18 Fiscal Policy and Recovery from the COVID-19 Recession

because sales taxes are imposed by the states (requiring an agreement for a reimbursement).
Expensing for equipment as a stimulus is no longer possible because equipment is already
expensed through 2025 under the 2017 tax cut, popularly known as the Tax Cuts and Jobs Act
(P.L. 115-97). It would be possible, however, to devise additional subsidies, such as investment
credits or more than 100% depreciation deductions, or to extend subsidies to investment in
structures. Investment subsidies would also have the effect of increasing the capital stock at the
same time as they increase demand. Studies of past bonus depreciation provisions have, however,
found bonus depreciation to be relatively ineffective.93
Another issue with respect to federal spending is lags in infrastructure spending. Spending on
infrastructure serves two goals: in addition to stimulating demand, it also the increases the stock
of public capital and increases long-run productivity. Spending on infrastructure is subject to lags
compared to some other types of spending,94 although such lags may not be an issue in the current
crisis, because there may be a delay in the time when traditional stimulus is needed. Thus,
infrastructure spending might be appropriated now to provide planning time, with the actual
spending delayed.
Long-Term Issues: Addressing the Federal Debt
Fiscal policy measures to provide relief and stimulus often lead to an increased debt. Hence,
eventual y, after the economy recovers, a substantial y increased debt may turn Congress’s focus
to deficit reduction, which may include raising taxes and/or reducing spending. During the
previous recession, expansionary policy was ended while the economy was stil below full
employment, in part due to the influence of a theory referred to as “austerity.” As noted earlier,
some view this reversal as having been premature, characterizing it as one of the most significant
fiscal policy missteps in many years.95
Although there is a general consensus among economists that it is premature to address the debt
given the severity of the current contraction, it may be useful to consider the options available
when the economy returns to full employment. Moreover, mainstream economic theory points to
the importance of addressing an unsustainable debt as soon as economic conditions permit.96

93 See CRS Report R43432, Bonus Depreciation: Economic and Budgetary Issues, by Jane G. Gravelle.
94 See CRS Report R46343, Transportation Infrastructure Investment as Economic Stimulus: Lessons from the
Am erican Recovery and Reinvestm ent Act of 2009 , by William J. Mallett .
95 See T estimony of Douglas Elmendorf, in U.S. Congress, House Budget Committee, Addressing the Economic
Im pacts of COVID-19: Views from Two Form er CBO Directors, 116th Cong., 2nd sess., June 3, 2020,
https://budget.house.gov/legislation/hearings/addressing-economic-impacts-covid-19-views-two-former-cbo-directors.
See also William G. Gale, “We Can Afford More Stimulus,” Brookings Institution, April 30, 2020,
https://www.brookings.edu/blog/up-front/2020/04/30/we-can-afford-more-stimulus/, which notes that the premature
move away from stimulus was even more damaging to the UK and continental Europe. See also the review of the
empirical evidence in this report (“ Review of Empirical Research on Austerity Measures During the Great Recession”).
96 T he debt can grow without increasing the ratio of debt to GDP as long as it rises at a rate less than or equal to GDP
growth. For example, if the debt is 80% of GDP and the economy is growing at 1.6%, a deficit of 1.28% of GDP (1.6%
of 80%) will maintain t he debt to GDP ratio. T he FY2019 deficit was 4.6% of GDP. See CBO data at
https://www.cbo.gov/data/budget-economic-data#1. T his traditional prescription has been questioned by adherents of a
non-mainstream theory called “ Modern Monetary T heory.” For a discussion, see CRS Report R45976, Deficit
Financing, the Debt, and “Modern Monetary Theory”, by Grant A. Driessen and Jane G. Gravelle.
Congressional Research Service
18

Fiscal Policy and Recovery from the COVID-19 Recession

The Debt Outlook and the Pandemic’s Effect
Even before the COVID-19 pandemic, the United States was experiencing an unsustainable
growth in debt, which reflected, under current policies, a growth in mandatory programs, mainly
Social Security and Medicare, without an accompanying growth in revenues. According to CBO,
the debt held by the public at the end of FY2019 (the relevant measure for considering the debt
burden) was $16.8 tril ion, 79% of GDP, and projected to rise to 98% by 2030.97 This debt level
was the highest since World War II (debt as a percentage of GDP peaked at 106% in 1946). It
declined, reaching 23% in 1974, then began rising in the 1980s, reaching 35% in 2007. The debt
relative to GDP increased substantial y during the Great Recession and its recovery, reaching
70% by 2012. Rather than declining as the economy returned to full employment, it continued to
rise.
The current recession’s economic effects, including discretionary spending and the automatic
revenue declines and spending increases that accompany a recession, are projected to increase the
debt. The Congressional Budget Office projects that by the end of 2020, federal debt wil equal
98% of GDP. It projects the debt to equal 104% of GDP in 2021, 107% of GDP in 2023, and
195% of GDP by 2050.98 These estimates were made before the enactment of the December
spending package that added $0.9 tril ion to the debt for FY2021, amounting to 3.6% of third
quarter 2020 GDP. The pandemic’s economic effects bumped up the debt, and it is projected to
continue on its upward (albeit higher) trajectory. In addition to exacerbating the debt, the
economic contraction wil mean a longer period, perhaps of years, before the debt can be
addressed through increases in revenues and/or reductions in spending, requiring extensive
changes to stabilize the debt.
Eventual y this debt may be addressed by either a reduction in mandatory spending, an increase in
revenues, or both.99
Author Information

Jane G. Gravelle
Donald J. Marples
Senior Specialist in Economic Policy
Specialist in Public Finance

97 U.S. Congressional Budget Office, Federal Debt: A Primer, March 2020, https://www.cbo.gov/publication/56309.
98 U.S. Congressional Budget Office, The 2020 Long Term Outlook, September 2020, https://www.cbo.gov/system/
files/2020-09/56516-LTBO.pdf.
99 Options for addressing the deficit are addressed in CRS Report R45717, Addressing the Long-Run Deficit: A
Com parison of Approaches, by Jane G. Gravelle and Donald J. Marples.
Congressional Research Service
19

Fiscal Policy and Recovery from the COVID-19 Recession

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R46460 · VERSION 10 · UPDATED
20

Download PDF

Download EPUB

Revision History

Feb. 1, 2021

HTML · PDF

1% changed

Dec. 3, 2020

HTML · PDF

4% changed

Jul. 31, 2020

HTML · PDF

1% changed