During a pandemic, the MPCs and the fiscal multiplier, in turn, depend on the extent to which people practice social distancing. The impact on GDP of an additional dollar of federal aid-whether to people, businesses, or state and local governments-depends on how quickly the federal aid is disbursed, how much and how quickly each received dollar is spent (known as the marginal propensity to consume, or MPC), and how large the multiplier is. The resulting increase in real (inflation-adjusted) GDP for each initial dollar of spending is referred to as the fiscal multiplier. In turn, newly hired workers also increase their spending, which also leads to increases in production and GDP and a further upward pressure on prices. When recipients of federal aid increase their purchases of goods and services, businesses gear up production and hire more workers than they otherwise would, increasing production and GDP and putting upward pressure on prices. Aid to businesses ($150 billion): this category includes loans and grants to small businesses and paid sick leave.Aid to financially vulnerable households ($400 billion): this category includes the additional $400 per week in unemployment benefits and the extension of the pandemic unemployment programs and.Direct aid to families ($600 billion): this category includes the $1400 per person rebate checks and the child tax credit expansion.COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending ($750 billion): this category includes both the direct $350 billion in state and local aid, as well as money for vaccination, testing and tracing, and reopening schools.
(See Table 1 for a more detailed breakdown.) We divide the $1.9 trillion package into four categories based on who is receiving the money and how likely they are to spend it.
While our estimates show a “soft landing,” with a temporary and shallow decline in GDP after the fourth quarter of 2021, the slowdown could be more abrupt and painful than our projections suggest.Īnalysis of the Biden Administration Fiscal Package A risk worth noting is that the return of GDP back to its maximum sustainable level may create a difficult economic period after 2021. That positive output gap would likely put upward pressure on inflation, which the Federal Reserve has said would be welcome. By late 2021, we would likely see the economy operating above its maximum sustainable level. In all, with the $1.9 trillion package, we project that cumulative real GDP between 20 would end up close to its pre-pandemic projection over the next two years households and businesses would make up some of the economic activity foregone during the pandemic. Nonetheless, an analysis of how the fiscal package would affect the overall economy is instructive, although subject to a great deal of uncertainty. Indeed, Biden’s fiscal package should be judged primarily based on the extent to which it invests in COVID-19 containment and vaccination and provides needed relief to help households and businesses weather the pandemic. More broadly, millions of households will suffer as a result of waning fiscal support for the unemployed and households and businesses suffering financially. In the near term, without additional federal resources to contain the resurgence of the pandemic and distribute vaccines, the economy will face substantial headwinds. Without additional fiscal support, we project that real GDP would remain below the pre-pandemic level for the next several years. In the middle of 2022, GDP would show a temporary and shallow decline and then grow at an annual rate of about 1.5 percent, coming close to the path projected just before the pandemic (see figure 1). We project that if the Biden package were enacted, GDP would reach the Congressional Budget Office’s (CBO) pre-pandemic GDP projection after the third quarter of 2021, exceeding it by 1 percent in the fourth quarter. We estimate that the package would boost economic activity, as measured by the level of real gross domestic product (GDP), by about 4 percent at the end of 2021 and 2 percent at the end of 2022, relative to a projection that assumes no additional fiscal support. The Biden Administration recently proposed an additional $1.9 trillion in federal spending to address the ongoing pandemic.
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