Kem C. Gardner Policy Institute: Unprecedented federal fiscal response to COVID-19 propped up economy, but created significant challenges

In the midst of the tremendous challenges created by the COVID-19 pandemic,  which included significant health impacts and widespread layoffs, the federal government began its fiscal  response to help prop up the U.S. economy. A report released today by the Kem C. Gardner Policy Institute  details the federal government’s 2020 and 2021 fiscal policy (i.e., spending and taxing) responses to the pandemic and the initial impacts of these fiscal responses, particularly on western states. 

“While the Federal Reserve’s expansionary monetary policy (i.e., money supply increase and corresponding  interest rate reduction) played a significant role in stabilizing the U.S. economy through the early pandemic, the  massive scale of the federal government’s fiscal response to the COVID-19 pandemic (about 25% of 2020 GDP)  far exceeded its fiscal response to other economic downturns,” said Gardner Institute Chief Economist and  Public Finance Senior Research Fellow Phil Dean. “The enormous and rapid response stabilized household and  company budgets, which in turn helped stabilize state budgets; however, the unprecedented level of stimulus  also contributed to current economic and budget challenges being faced today across the country.” 

Key findings from the report include the following: 

Massive pandemic fiscal stimulus – Within a year of the COVID-19 pandemic beginning in the U.S., the federal  government enacted three waves of unprecedented fiscal stimulus amounting to nearly 25% of 2020 GDP (over  $5 trillion). 

Pandemic aid significantly exceeded that of recent recessions – Pandemic federal fiscal support exceeded a full  year’s worth of regular federal spending and more than tripled the amount of aid as a percent of GDP provided  for the Great Recession. Federal fiscal support provided during the Dot-com recession was even smaller tallying  0.4% of GDP, compared with 7.0% for the Great Recession, and 24.6% for the pandemic.

Direct and indirect state budget impacts – This federal funding supported state and local government budgets  both (a) directly through state and local government grants and (b) indirectly through economic support to firms  and households. 

Fiscal stimulus benefits and costs – While helping the U.S. economy overcome early pandemic challenges, the  fiscal stimulus also contributed to goods shortages, inflation, and long-term debt. 

Impact on western states – As with states throughout the nation, western states received significant benefits  from the federal fiscal response, unexpectedly maintaining and increasing budgets as revenues increased. At the  same time, the federal fiscal response is contributing to current economic challenges faced by both state  governments and the average consumer.  

The full analysis and report are now available online