A Retrospective Analysis of COVID-19 Economic Policy

Executive Summary

Since the COVID-19 pandemic's arrival on U.S. soil in January of 2020, tens of millions of Americans and their families have been affected. Beyond the health impacts of COVID-19, the economic ramifications have been catastrophically devastating. However, in the midst of such economic chaos, the U.S. government took action to aid the financial circumstances of American citizens. With three separate iterations of stimulus packages and various actions taken by the Federal Reserve, the government sought to jumpstart sectors of the economy while Americans were unable to leave their respective homes during quarantines and lockdowns. Still, there were numerous shortcomings in these government policies that left millions in continued financial despair. In this policy review, the fiscal and monetary approaches taken by the U.S. government in response to COVID-19 will be analyzed, and recommendations for future scenarios will be provided.

Overview

In December of 2019, the WHO China Country office learned of patients who obtained pneumonia of unknown etiology (unknown causes). These cases were detected in Wuhan City, Hubei Province of China. Approximately a month later, in January of 2020, the CDC had confirmed the first case of COVID-19 in the United States. This case had been detected in Washington State, and the patient had traveled back from Wuhan China. While there had been knowledge of this virus in other countries, the United States administration had treated the virus as a minor threat. On January 31st, when the White House declined to acknowledge COVID-19 as a public health emergency, the government initiated the executive, legal, and regulatory pandemic response procedures known to address a pandemic. In order to ensure the safety of American citizens, the FDC recommended that all individuals keep a distance of six feet from each other. This new "social distancing" policy resulted in the closure of all non-essential businesses, required all non-essential workers to shelter in place, and had a huge impact on the economy, causing parts of the economy to be shut down by mid-March. By Spring 2020, spending on goods and services had plummeted because businesses closed en masse and hundreds of workers were laid off. The unemployment rate had spiked to 14.7% in April and real GDP fell by 5%, causing serious damage to the economy. To address the critical state of the economy, the federal government implemented both fiscal and monetary policies. The Federal Reserve used monetary policy to respond to COVID-19 by lowering interest rates, stabilizing financial markets, and supporting the flow of credit. The federal government implemented fiscal policy by implementing three separate laws that provided economic assistance to hospitals, American citizens, and small businesses. This brief will provide an analysis of the use of monetary and fiscal policy during COVID-19 and recommend policy solutions to prevent future pandemic-induced economic shrinkages, like the one that followed COVID-19.

Pointed Summary

• COVID-19 caused an enormous contraction in the U.S. economy.
• The Federal Reserve and the government executed monetary and fiscal policies to stimulate economic activity and consumer spending.
• Interest rates, the Federal Funds rate in particular, were lowered to near-zero levels.
• Congress delivered three rounds of financial relief payments.

Relevance

By June of 2020, there were 2.5 million positive cases of COVID-19. This prevented 2.5 million individuals from working and receiving any type of income. By June of 2020, the unemployment rate was 11.1% and 40.4 millions reported that they were unable to work at some point in the month of June. This was largely because many business owners had closed or lost their business due to COVID-19. Of those 40.4 million individuals, 18.1 million were unemployed and the vast majority of them had been temporarily laid off because of the pandemic. 84.6% of laid-off individuals above the age of 16 did not receive pay for the hours they missed. Having a majority of American citizens not receive income in the month of June caused serious harm to the U.S. economy. During COVID-19, and specifically June of 2020, consumer spending had plummeted and several businesses had closed. In the United States, consumer spending is the driving force of the economy, and when consumer spending slowed down during COVID-19, the U.S. economy began to shrink. By December of 2020, the unemployment rate had declined to 6.7%, but the U.S. economy had lost 9.4 millions jobs. In order to ensure economic growth and increase the money supply, the federal government implemented fiscal and monetary policies to stimulate consumer spending.

‍Current Stances

U.S. stimulus packages and economic policy were effective in their goal to mitigate the economic effects of COVID-19 to a significant extent. Despite harsh market conditions, 11.7 million people were lifted out of poverty in 2020, decreasing the poverty rate from 11.8% to 9.1%. Afterwards, the poverty rate fell to 7.7% in 2021 with unemployment almost reaching low pre-pandemic levels two years after the start of COVID-19.

However, the federal government’s efforts resulted in unintended consequences for the national economy. Albeit beneficial, stimulus checks caused the inflation rate to rise by 3% through the end of 2021. As wages only increased 5.6% annually, inflation at 8.5% outpaced income increases in March 2022 with a 3% decrease in inflation-adjusted compensation. Viewed as the most substantial contributor to the spike in inflation, the final round of stimulus spending resulted in excessive demand and thus pushed prices upwards. The American Rescue Plan’s third iteration of stimulus checks fell victim to overcorrection at a time in which the U.S. economy was rebounding. At the heart of this issue rests politics with larger stimulus checks serving as a key campaign promise by the Democrats in the 2021 Georgia Senate runoff election to sway voters in a historically Republican state. Subsequently, the victories of Jon Ossoff and Raphael Warnock placed politicians in a position in which they had to maintain the integrity of their word in a fragile political environment. Emphasizing the presence of politics before sound economic decision-making, Congress passed $1,400 stimulus checks to compound previous $600 stimulus checks months prior despite retrospective calls that the March 2021 stimulus should’ve been less. The decision calculus of policymakers in Congress and the Federal Reserve weighted the risk of injecting too little money above the risk of inserting too much money into the economy. As a result, the inverse of America’s 2008 economic policy, in which too little stimulus was considered to be implemented, experienced money directed to Americans that didn’t need it due to the absence of targeted payments to people in specific financial circumstances.

Beyond the inflationary impacts of the United States’ COVID-19 economic policy, the crisis underscored the federal government’s inability to efficiently distribute money to Americans. Ranging from three weeks to three months, the waiting period for recipients to obtain COVID-19 stimulus payments harmed their overall effectiveness. For the 64% of Americans living from paycheck to paycheck, waiting such long time spans for government assistance isn’t an option.

Furthermore, the administration of stimulus payments was highly flawed due to its susceptibility to fraud. From misuse of allocated money to fabricated documentation and fictional reports on the part of applicants, stimulus packages were evidently vulnerable to dishonest and illegal behavior. The urgent, dire need for emergency funds placed an immense burden on government agencies to adequately appropriate financial resources to small businesses, state governments, and U.S. residents. The problem was particularly highlighted within small business loans and unemployment insurance where individuals could inflate employee numbers, manufacture the existence of businesses, and falsify costs. With the Small Business Administration having to rapidly distribute approximately $1 trillion dollars in funds, the government entity received over 845,000 applications requesting support. Although stolen identities were rampant, oftentimes fraud would go undetected especially in the early stages of stimulus. During the outbreak’s 18-month height, criminal activity relating to the SBA rose by 37,000% with losses in the billions and over five dozen preventable instances of illegal financial activity.

The prominence of issues domestically placed concerns overseas on the back-burner for the government. Holistically, the lack of international cohesion on the global scale between nations left countries scrambling to keep up with the rapid spread of the coronavirus. Without cooperation particularly between the world’s superpowers, the developing world was left to fend for itself on their own. To make matters worse, many worldwide governments (i.e. the United States) applied restrictions on exports of PPE (personal protective equipment) and other medical resources in a counterproductive, naive, and shortsighted attempt to hoard supplies. The lackluster global fight against COVID-19 allowed the virus to perpetuate itself within corners of the world.

Tried Policy

During COVID-19, the Federal Government had several responses to the catastrophe the U.S economy was facing. In order to ensure the stability of the economy, the Government executed the use of fiscal and monetary policy to stimulate spending.

Monetary Policy  

The Federal Reserve’s goal for the economy is to maintain maximum employment and price stability for all Americans. Because the majority of Americans were laid off and did not receive pay during COVID-19, the economy saw an enormous change in the price stability and increase in the rate of unemployment. COVID-19 caused an intense contraction in the economy, forcing the Federal Reserve to take significant action to minimize economic harm. During a recession the Federal reserve has the goal of increasing the money supply through spending, borrowing, and lending. In order to achieve this goal, the Federal Reserve lowered the federal funds rate.

Federal Funds Rate:

The first response the Federal Government had was to lower the Federal Funds rate. The Federal Funds rate is the interest rate on loans between private banks. This is set by the Federal Open Market Committee, which is a branch of the Federal Reserve system. On March 3 and March 15th, the Federal Reserve voted to decrease the federal funds rate by 1.5 percentage points. The new federal funds rate was lowered to a range of 0 percentage points  to 0.25 percentage points. The Federal Reserve’s decision to lower the federal funds rate allowed businesses and households to borrow from banks at a lower cost. This was crucial for the economy because banks and businesses needed to borrow in order to avoid a lack of cash flow. When the cost of borrowing is cheaper, it encourages consumer and business spending which will help increase the money supply in the economy.

Fiscal Policy

In order to support American working families, healthcare systems, and small business, the Government used fiscal policy to send out three rounds of direct relief payment. The CARES act was the first act to be sent out. The Appropriations Act of 2021 followed , and the American Rescue act was the most recent to be implemented.  This section will provide an in depth summary of each act that was passed.

CARES Act:

On March 25, 2020, Congress passed the Cares Act and on March 27, 2020 the bill was signed into law. This bill was the largest economic stimulus package in U.S. history at the time of its passing. By implementing this law, the CARES act provided $2 trillion of economic handout to American workers, families, small businesses, and industries. The CARES act included a significant amount of health provision that focused on providing individuals with assistance during COVID-19. These health provisions included paid sick leave, insurance coverage of coronavirus testing, and nutrition assistance. This act also provided individuals and families that were not making a sustainable income received up to $1,200 per eligible adult and $500 per qualifying child under age 17.  The implementation of this law protected struggling working families and preserved several jobs to an extreme extent.

Consolidated Appropriations Act of 2021:

In December of 2020, Congress passed a $900 billion stimulus package. This package sent billions of dollars to businesses, industries and households that were experiencing immense financial setbacks. during the pandemic. This bill contained $900 billion in COVID-19 relief and $1.4 trillion in government spending support to help  fund the federal government for fiscal year 2021. The $900 billion in COVID-19 relief was dispersed to a wide array of areas including individual payments, unemployment, and small business.

Individual Payments:

Individuals making an annual income of $75,000 received a stimulus check of $600. Families that earn an income of $112,500 and couples, or someone whose spouse died, who receive an income of  $150,000 a year will receive twice that amount.

Unemployment Benefits:

As of December 26th 2020, 12 millions individuals faced the possibility of losing unemployment benefits. Many of the programs that were passed in the CARES act were beginning to expire. Therefore, Congress agreed to extend jobless benefits. This allowed individuals to continue to receive jobless benefits up to $300 per week for 1l weeks. These unemployment benefits were extended until March 14th of 2020. This helped several Americans obtain payments they stopped receiving after being laid off.

Small Businesses:

This piece of legislation provided small businesses with $285 billions for additional loans and the chance for struggling businesses to receive a second loan under the Paycheck Protection Company. Under this bill, the Paycheck Protection Company was able to continue to preserve jobs and keep struggling businesses out of debt.  

The American Rescue Plan Act:

The final of the three acts was the American Rescue Plan.  This legislation was implemented to provide immediate relief for American Workers and reduce child poverty. This plan supported small owned businesses, working families, and hospitals through stimulus checks, unemployment benefits and healthcare aid. In this bill $59 billion was given to small owned businesses, and $246 billion was given to extend unemployment programs. This extension allowed unemployed individuals to continue to receive weekly job benefits of $300 per week until September 6th, 2021. $410 billion was given in stimulus checks. These stimulus checks provided individuals that made an annual income of $75,000 or less, married couples that received a joint income of $150,00 or less, and heads of households that made an annual income of $112,500 or less with  a $1,400 per person stimulus check. This bill provided $143 billion to expand the tax credit. The Child Tax Credit was increased from $2,000 to $3,000 for families with children six years old and up. The Child Tax Credit was also increased to $3,600 for families with children that were six and under. This bill took substantial measures in providing small business, working families, and health industries with the resources they needed to stay afloat.

Policy Problem

Stakeholders

First and foremost, America’s government entities remain on the frontlines of both the economic and public health crises as key stakeholders. As the drivers of U.S. economic policy, Congress and the Federal Reserve serve in significant roles both on the receiving end of the public’s response to COVID-19 era ramifications and on the dispensing end of governmental policies. With immense power and responsibility, legislators and bureaucrats have the ability to improve circumstances for the better or cause additional harm.

Despite their incapacity to propel change on a large scale, U.S. consumers, small businesses, and local legislatures are primary stakeholders highly vulnerable to the impact of COVID-19 and its subsequent legislative effects in the federal government. The unforgiving devastation of COVID-19 has left entire communities decimated, local governments disoriented, and the backbone of the U.S. economy in shambles.

Although secondary stakeholders were not forced to bear the brunt of the onslaught post-COVID-19, international economies and trading partners were not spared of substantial economic losses. With businesses shut down and consumers unable to stimulate the economy, American production slowed, prices soared, and trade partnerships were tested. Global economic powerhouses suffered considerable decreases in GDP due to both domestic and foreign causes, and America’s ripple “domino effect'' was felt in interconnected countries around the world. COVID-19 had no boundaries.

Risks of Indifference

As of June 2022, 86.6 million people have been victims of COVID-19 and over 1 million Americans have died due to the pandemic. The worst economic downturn since the Great Depression, the coronavirus recession caused median global GDP to fall 3.9% in between 2019 to 2020. Furthermore, the long-term effects meant $8.5 trillion in loss output over the past two years, leaving both the developed and developing worlds in shambles. Everyday, hard-working Americans have felt the toll the hardest with the pandemic resulting in 200,000 permanent closures of small businesses. Moreover, US loan delinquency rates rose from 2.3% in 2019 to 3.1% in 2021. The national economic catastrophe reversed years of economic growth and prosperity in America’s recovery from the 2008 global financial crisis, forcing the globe into economic panic.

Nonpartisan Reasoning

COVID-19 had no political affiliation, race, nor boundaries. The consequences of COVID-19 were widespread and felt nationally by Americans of all political beliefs, demographic groups, and backgrounds. In fact, even the state with the lowest number of COVID-19 cases, Vermont, had over 135,000 people contract the infectious disease. Although both sides of the political aisle were in agreement that a colossal problem faced America, Democrats and Republicans disagreed about the details of the issue, the extent to which Americans should be concerned, and the approach that the federal government should take to address the matter.

Policy Options

To prepare for the next pandemic-caused recession, it is absolutely essential that the federal government adjusts its fundamental response and systematic procedures for remedying such large-scale crises. Primarily, COVID-19 revealed the inadequate nature of America’s social safety net which failed to focus on the people that really needed immediate help and relief. Automatic stabilizers, such as unemployment insurance programs, function as immediate mechanisms to aid individuals once they cross a specified threshold. As opposed to fiscal or monetary policy, automatic stabilizers do not require any government entity (i.e. Congress) to enact discretionary policy and actively implement a policy. Instead, it independently identifies those in need of support and subsequently administers financial aid.

Unfortunately, unemployment insurance systems were unable to calibrate to directly recognize the extent to which Americans necessitated economic support. Consequently, many people were compensated when unemployed by an amount substantially greater than that of their occupation. One of the driving factors in “the Great Resignation,” millions of Americans fell victim to the welfare trap in which the benefits of staying unemployed outweighed the financial opportunity cost derived from their lost income. As a result, it is important for policymakers to acknowledge this systematic dilemma, adjust automatic stabilizers to implement effective social welfare infrastructure, and thus eliminate the need for a blanket response that lacks specificity. As a whole, such economic reforms would favor surplus-friendly policies reducing the budget deficit and inflationary impacts. By strengthening the U.S. economy’s ability to automatically respond to economic shocks, Americans are less vulnerable while the government is able to pinpoint their policies for deliberate, evidence-based decision-making.

Furthermore, the federal government must update emergency assistance measures to address twenty-first-century problems with twenty-first-century solutions. In order to do so, all Americans must have access to basic financial tools like bank accounts to efficiently receive government payments. In the status quo, 94.6% of U.S. households have an account with a bank, credit union, or other financial institution. However, people of color disproportionately lack access to these aforementioned accounts. Beyond privacy concerns, geographic obstacles, and a lack of trust, the main barriers for minority communities to bank access are the financial costs and a shortage of money. In fact, 44% of non-account holders report that finances are the primary reason behind their lack of access to a bank account. Consequently, Congress and federal regulators must implement no-cost bank account programs with low balance minimums, minimal fees, and near-zero overdrafts. With the advent of technology, many of the challenges faced by those without a bank account are removed. As a result, federal decision-makers should remove the chief roadblock for Americans by requiring all financial institutions, which are chartered by federal or state governments, to provide basic accounts for all American citizens. Moreover, such a policy would facilitate a real-time payment system that requires banks and the Treasury to make funds immediately available, per the Expedited Funds Availability Act, under the authority of the federal government via legislation.

Conclusions and Recommendations

America’s blanket fiscal policy meant less financial capital and political will for future spending on long-term issues such as climate change, sustainable infrastructure, etc. The additional total $6 trillion spent in the span of two years exceeded the United States annual budget and exacerbated the federal budget deficit. From legislators to voters, future proposals seeking to increase government spending, regardless of their merit, will be considerably more difficult to rationalize in the face of growing U.S. debt and skyrocketing inflation. Therefore, it is important that the U.S. must address the increasing rate of inflation.

The United States has several different policy options to improve the high rates of inflation caused by COVID-19. As of May 2020, the inflation rate was 8.6%, which is extremely high. This is largely due to the economic response that was given during COVID-19. The government pumped a lot of demand into the economy through lowering interest rates, and sending out three stimulus relief packages. Each factor either increased the amount of money individuals had, or made it cheaper for business and individuals to borrow money from banks. Currently, many individuals have money to spend - maybe even too much. Therefore, the demand right now in the economy cannot be accommodated by the supply causing an increase in the rate of inflation. With consumer demand driving up the rate of inflation, the Federal government should implement contractionary monetary policy.

Contractionary monetary policy is when the Federal Reserve reduces the amount of money supply in the economy resulting in consumer demand decreasing as well. The Federal Reserve should achieve this by either raising the interest rates, or selling treasury bonds. The goal of decreasing the money supply would make it more expensive for consumers to buy goods in services, resulting in lower demand in the economy. If this is done correctly, less demand will slow economic growth and lower the inflation rate.

To promote an effective, timely response for future pandemic-induced recessions, America must restore its trust in government and our elected leaders need to validate that trust by giving the public good reason to do so. Existing in a two-way street, the federal government and its constituents must streamline direct communication and accurate decision-making from the onset. In order to make that a reality, information from both the public and our politicians must be reliable and accurate.

Moreover, the United States is not in the fight against infectious diseases alone. Pandemics like COVID-19 do not recognize borders nor do they have boundaries. As global leaders in a rapidly changing political environment internationally, the United States must remain at the forefront of multilateral diplomacy to instill cooperation and cohesion among ourselves and fellow nations in our united front to respond to future crises.

Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Lucas Yang, Marielle DeVos, Paul Kramer, Carlos Bindert, Sydni Faragalli, and other contributors for developing and maintaining the Institute.