How America got Kovid-19. cashed in on the economic response of

The initially pandemic-induced shutdown was the worst hit for the US economy since the Great Depression. Both employment and output declined more last year than in 2008 during the financial crisis.

And yet poverty, by its widest measure, went down. Figures reported by the Census Bureau this week show why: The share of households in poverty rose to 11.4% last year, from 10.5% in 2019, based on cash income like wages and Social Security. But taking into account government benefits such as stimulus checks, food stamps and tax credits, the share declined from 11.8% to 9.1%.

In other words, the fiscal response to the pandemic was successful in pushing poverty in the opposite direction that typically occurs in a recession.

After the 2007–09 recession, it took three years for economic output to return to its pre-recession levels and never return to the growth path it was on before the crisis. Conversely, after just 18 months, US GDP has already returned to its pre-pandemic level and could return to its pre-pandemic path by the end of the year.

Much of the loss of a recession comes after it technically ends because human and business capital atrophy due to prolonged unemployment and depressed sales may never be used again. The speedy return to normalcy this time around should preserve years of economic potential that could have otherwise been wasted.

Several factors are responsible for this rapid economic recovery. Much of the initial drop in activity was due to government-imposed restrictions, and as soon as those restrictions ended, some rebound was inevitable. Nevertheless, the recovery continued after that, as it faltered amid rising Covid cases in several other countries.

The Federal Reserve gets some credit for rapidly bringing interest rates to near zero and intervening in the markets to keep the economic crisis from becoming a financial crisis. But once the Fed’s interest rate ammunition ran out, fiscal policy rose to the challenge. According to a responsible federal budget committee, Congress ultimately authorized emergency measures worth $5.9 trillion, of which $4.6 trillion has been spent.

As important as the magnitude of this relief was the diversity. Unsure about the most effective measure, Congress introduced several: forgivable loans for small businesses that kept their employees (paycheck protection programs or PPPs), stimulus checks to nearly everyone, unemployment insurance expanded to gig workers, and additional $ 300 topped with $600 per week, low-cost loans to medium and large businesses from the Fed and Treasury, aid to state and local governments.

Much of this was experimental, and the lessons learned could lessen the toll of a future recession. By depositing cash directly into domestic bank accounts, the Treasury has learned how, with Congressional approval, to deliver stimulus almost as quickly as the Fed. PPPs have gained new tools to preserve employer-employee bonds in the event of setbacks, thereby reducing wasted economic potential.

There are cautionary lessons as well. We do not know how fast recovery would have been in the absence of stimulation. A pandemic is like a natural disaster, and historically recovery from natural disasters is faster, while recovery from financial crises is slower.

Had to borrow money. The publicly held federal debt is now 98% from 79% of GDP at the end of 2019, and there are no credible plans yet to keep it on the bottom again. It is not a burden as long as interest rates remain close to zero. But interest rates are likely to be higher in the future than lower, so reducing debt to 20% of GDP is not a real response to every future recession.

There was a huge loss of incentive money. Funds were sent to the states to overcome the budget shortfall which never happened. More than 90% of jobs in firms receiving PPP loans would have been protected without the program, concluded a study by Eric Zwick at the University of Chicago and three co-authors. Thanks to the $300 and $600 weekly supplements, unemployment insurance paid many recipients more than the job they lost. Whatever its other benefits, insurance that pays more than a lost job discourages work (how much is debated) and, once demand for labor returns, returns are back to normal.

In future, better state information systems will enable the UI benefits to be calibrated to the actual wage history of the workers. Benefits may also automatically adjust with economic conditions such as unemployment and job vacancies.

Finally, the case for the latest round of stimulus checks, which was weak from the outset, has weakened. They funneled more demand into a supply-constrained economy, adding to the problem of inflation. It’s the Achilles heel of excitement: it’s so politically appealing that it’s easy to overdo it. In fact, the final decision on economic policy response awaits a solution to these supply problems and inflation.

Nonetheless, today’s economy is in a far healthier place than I imagined in the spring of 2020. It is worth celebrating.