The roughly $5 trillion in COVID-19 stimulus spending was one of the boldest experiments in the history of America’s social safety net. Proponents of the legislation that authorized the aid said an immediate and massive outpouring of cash was necessary to keep the economy afloat during one of the most destructive public health crises in the modern era. Its detractors called it a waste of money that would bury the country in debt, foster a culture of dependence, trigger steep inflation and make a recession more likely.
The opposing sides still disagree on the wisdom of post-pandemic stimulus spending, but one thing is not up for debate: Its impact on individuals, households and the economy as a whole has been as massive as its price tag.
A Flood of Cash Supported but Also Overheated the Economy
The pandemic stimulus packages had macroeconomic effects that impacted everything from the stock market and the national GDP to unemployment and inflation.
The fear and uncertainty that defined the early days of the pandemic manifested as extreme stock market volatility. Between Feb. 20 and April 7, 2020, the Dow lost 37% of its value and the S&P 500 lost 34%. On the market’s three worst days, March 9, 12 and 16, the Dow shed 7.79%, 9.9% and 12.9%, respectively.
The selloffs were severe enough to trigger emergency NYSE “circuit breakers” that halted all trading, a safeguard the SEC erected after the 1987 crash to prevent a market collapse.
But then came the first stimulus checks, which reinvigorated investors with optimism. By November, the market had rebounded to its January levels and by early 2021, the market had ridden what Reuters called “stimulus euphoria” to new record highs.
But those same aid payments soon sent the pendulum swinging in the other direction.
“One potential downside is that these measures might have indirectly inflated asset prices as people invested their stimulus checks, leading to concerns about potential market bubbles,” said Branson Knowles, certified financial analyst and the current head of U.S. digital banking at Top Mobile Banks.
Those stimulus-inflated securities would soon tumble down from their newfound highs. A downturn welcomed the start of 2022, and by June of last year, the market was officially in bear territory, where it languished until just last month.
The U.S. GDP plummeted by 32.9% in the second quarter of 2020, the fastest, steepest economic decline in American history, including the Great Depression. As businesses shuttered and demand cratered, unemployment peaked at 14.7%, a post-Depression high.
The American economy endured, however, thanks to $1.7 trillion in government stimulus spending for business recovery, including:
- Paycheck Protection Program (PPP): $835 billion
- Economic Injury Disaster Loan (EIDL) program: $349 billion
- Loosened limits on business losses: $193 billion
- Delay of employer payroll taxes: $85 billion
- Airlines: $80 billion
- Restaurants: $29 billion
- EIDL advances: $27 billion
- Employee retention payroll tax credit: $26 billion
- Federal Reserve loans: $25 billion
- Interest deductions: $13 billion
- Paid leave credit: $11 billion
- Misc. tax breaks: $9 billion
According to the New York Times, hundreds of thousands of business owners who would have been doomed without the spending kept their doors open. More than 9 million businesses — most with fewer than 500 employees — received PPP loans. The National Restaurant Association estimated that the fund saved 900,000 service industry jobs alone. In the end, the economy regained 90% of the 22 million jobs it lost in the early weeks of the pandemic.
But in terms of success, the results were mixed. The government spent $4.13 in public funds for every dollar in lost wages it prevented.
Inflation peaked at 9.1% in June 2022, the highest rate in 40 years. Gas topped $5 per gallon for the first time in history, and the price of everything from eggs to energy skyrocketed, straining budgets and wiping out household savings.
“On a macroeconomic level, there’s the concern of inflation,” said Dennis Shirshikov, professor of finance, economics, and accounting at the City University of New York and the head of growth at Awning. “As we pump more money into the economy, there’s a risk that prices might rise, and our national debt could increase. A small business owner I advise saw an unusual surge in demand during the stimulus disbursement periods, but also had to deal with increased prices for supplies, a typical sign of inflation.”
Midterm election ads placed the blame solely at President Biden’s feet because of his administration’s massive stimulus spending; but, according to FactCheck.org, that doesn’t tell the whole story. While the American Rescue Plan’s $1.9 trillion cash injection certainly contributed to a spike in demand that sent prices higher, a St. Louis Fed report found that stimulus payments likely accounted for only 2.6 percentage points of the peak inflation rate.
But the tradeoff was that the cash infusion prevented millions of households from suffering a fate much worse than rising prices.
A fast and massive flood of direct payments gave households the power to use their dollars where they needed them the most.
The most direct and immediate impact of pandemic stimulus came from the $1.8 trillion paid to individuals and families, which included:
- Stimulus checks: $817 billion
- Unemployment benefits: $678 billion
- Expanded Child Tax Credit: $93 billion
- SNAP and other food assistance: $71 billion
- Delayed student loan payments: $39 billion
- Child care block grants: $28 billion
- Child care provider grants: $24 billion
- Retirement plan rules: $14 billion
- Other tax breaks and miscellaneous spending: $34 billion
The first round of payments gave $1,200 to each adult and $500 per child. The second delivered $600 each. The third and final round was for $1,400 per adult and $1,400 per child.
Nearly 150 million households received direct payments. The fired and furloughed masses received $600 per week on top of the standard unemployment benefits they collected from their states. Food stamp recipients had at least $95 more per month to spend on groceries.
For the average American, the impact was immediate and dramatic.
“With more money in their pockets, individuals could purchase essential goods and services, pay off debt, or even invest, thereby keeping the economy afloat,” said Shirshikov.
A University of Michigan study found that relief from “material hardship” was evident across the income spectrum; but, for low-income households, the stimulus packages were the greatest anti-poverty program in modern history.
“Stimulus payments and student loan deferrals have undoubtedly provided an economic lifeline for many households, especially those hardest hit by the pandemic’s financial fallout,” said Shirshikov.
Food insecurity fell by more than 40%. Financial instability fell by more than 45%. The stimulus prevented 5.2 million children from going hungry. The sudden assuagement of financial stress led to a dramatic drop in depression and other mental health issues.
The Census Bureau estimates that stimulus spending lifted 45.4 million people out of poverty in 2021 on top of 29.6 million in 2020.
Peterson Foundation research shows that people spent their stimulus payments differently during each of the three rounds. The first, from the CARES Act, came at the start of the crisis during peak unemployment. Cash-strapped recipients spent 74% of it right away on household necessities — catching up on bills, repairing cars, buying food and paying rent.
The second round saw a shift to paying down debt. By the time the third round came, people had the luxury of saving — and they banked nearly one dollar in three.
“The check size, coupled with reduced spending opportunities during lockdowns, resulted in a similar or even smaller spending response compared to previous rebate checks,” Knowles said.
The result was an unprecedented $2.1 trillion worth of accumulated excess savings. For many, it was more money than they’d ever had in their lives — but it didn’t last.
According to the Federal Reserve Bank of San Francisco, Americans began drawing down on their savings accounts by an average of $34 billion per month from September through December 2021. Then, searing inflation took its toll and the average monthly drawdown soared to $100 billion per month. As inflation cooled, the national savings drawdown cooled with it and, in the first quarter of 2023, Americans were draining their once mighty savings by $85 billion per month.
“The economic landscape in the post-pandemic era has been fascinating and complex, influenced significantly by a variety of factors, including stimulus payments, student loan deferrals and other sources of unexpected income,” Knowles said. “The post-pandemic era has shown us the powerful tools at our disposal for managing economic downturns.
“However, it has also underlined the need for more targeted approaches and technological investments to ensure these tools are effectively deployed. To end on an optimistic note, one thing is clear: The lessons we’re learning now will undoubtedly shape our future responses, making us better equipped to navigate such economic storms.”
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