COVID-19 Is Transforming Economic Policy in the United States — Claudia Sahm

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A Forum article by Claudia Sahm titled COVID-19 Is Transforming Economic Policy in the United States. The article says the economic policy response during the COVID-19 pandemic offers four key lessons, including that good policies require good administration and that macroeconomics must upgrade its tools and frameworks. It states that in March 2020 Congress enacted the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, with an extra $600 per week for the unemployed and $1,200 stimulus checks per adult. For the Great Recession, it says the extra weekly payments were $25 and the checks $500 per adult.

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DOI: 10.1007/s10272-021-0979-4 Forum

Claudia Sahm
COVID-19 Is Transforming Economic Policy in the United States

A global pandemic is bringing the sea change in econom- Yes, spending was restricted more than in past reces-
ic policy that the meltdown of ﬁnancial markets in 2008 sions, but people still had to have enough money to keep
did not. While the shift is incomplete and its success is far a roof over their heads and feed their children. Moreover,
from guaranteed, now is the time to reﬂect on its effects I argued from the start of the pandemic that we were also
and the challenges ahead. living “the mother of all demand shocks” (Sahm, 2020).
Millions of workers claimed unemployment insurance
The economic policy response during the COVID-19 pan- each week, and the ofﬁcial unemployment rate hurtled
demic offers four key lessons: First, the features of the toward 15% in April 2020 (Cox, 2020). The speed and
coronavirus crisis are different from and the same as past breadth of job losses rivaled only the Great Depression.
recessions. Second, we must use lessons learned from As shown in Figure 1, nearly half of US families lost in-
economic policies in this crisis to prepare for future re- come from employment during the crisis. While income
cessions. Third, good policies require good administra- loss was most common among low-income families,
tion, which was repeatedly missing during the COVID-19 those with higher incomes were also negatively affected.
crisis. Good policy is worthless if it never reaches the
people it was intended to serve. Finally, it is time for mac- Economic hardship was even greater among particular
roeconomics to upgrade its tools and frameworks, bring- groups. People of color (Spriggs, 2021), low-wage service
ing in new ideas and retiring some old ones. That effort workers (Gould and Kandra, 2021) and mothers (Heggeness,
will require introspection and collaboration. To remain rel- et al., 2021) were hit especially hard. While it is true that in all
evant, change in economics is imperative. recessions some are hurt more than others, the severity of
this recession magniﬁed the pain of the hardest hit groups.
Differences and similarities shape the policy re- Moreover, most families, even in the best of times, do not
sponse now and in the future have a sufﬁcient ﬁnancial buffer to weather a lost paycheck
(Bhutta et al., 2020). Without government aid, a collapse in
COVID-19 hit the United States hard. In mid-March 2020, demand was inevitable.
a $21 trillion economy locked down to keep people safe
and hospitals from being overburdened by a new, mys- Thankfully, policymakers went big, fast and broad. They
terious killer. Several prominent macroeconomists, such recognized the novel and the traditional features of this
as Mankiw (2020) and Summers (2020), heralded it as the crisis. In March 2020, Congress enacted the $2.2 trillion
ﬁrst true supply-side recession, since people could not, in Coronavirus Aid, Relief, and Economic Security (CARES)
their opinion, spend. They concluded that demand poli- Act. It combined targeted relief, such as an extra $600 per
cies in recessions, like stimulus checks, were unhelpful week for the unemployed, and broad-based support in
and would spark shortages, wasteful deﬁcit spending $1,200 stimulus checks per adult. By contrast, during the
and high inﬂation. They called for targeted relief only for Great Recession, the American Recovery and Reinvest-
people hardest hit like the unemployed and spending on ment Act was under $1 trillion, while the extra weekly pay-
public health efforts. Those actions were necessary but ments were $25 and the checks $500 per adult.
insufﬁcient. The breadth of the crisis was too broad for
such a narrow policy response. The large response in the CARES Act worked. Larrimore
et al. (2021) found using Internal Revenue Service records
© The Author(s) 2021. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
that these two relief programs more than replaced the lost
(https://creativecommons.org/licenses/by/4.0/). employment income for a typical worker with a large in-
Open Access funding provided by ZBW – Leibniz Information Centre come loss due to the COVID-19 recession and provided
for Economics. jobless beneﬁts. Moreover, the support was greatest for
low-wage workers.

The coronavirus crisis had unique features, too. First and
Claudia Sahm, Stay-at-Home Macro (SAHM) Con- foremost, it was caused by a pandemic. COVID-19 drove
sulting, Arlington, VA; and Jain Family Institute, New the crisis from the start and will continue to until its end. In
York, USA. response, Congress allocated billions of dollars in public
health efforts to ﬁght the pandemic and develop a vac-

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Figure 1 Figure 2
Many families lost income from work, fewer received CARES Act relief shielded low-income workers the
jobless beneﬁts most from large income losses
Percent of families by household income in 2019 Percent of workers who had large income losses after including relief, by
deciles of income in 2019

$150,000 and 60
above

$75,000 to
$149,999
40
$35,000 to Great Recession: 2009
$74,999

20
Under $35,000
COVID-19 recession: 2020
0 20 40 60 80
Received jobless benefits Lost employment income 0
0 20 40 60 80
Source: U.S. Census Bureau Householding Pulse Survey for Dec. 9 to
Dec. 21, 2020. Note: Authors use IRS data from W2 and 1099 forms. Income in 2019 is
wages or unemployment insurance. Calculations include workers age 25
or older with income in 2019. Large income loss is a decrease of 10% or
more.
cine. Another difference from the Great Recession is that
Source: Larrimore et al. (2020).
the fundamentals of the US economy and ﬁnances of
many families were the best they had been in decades.
Policymakers viewed their efforts as a bridge to the other
side of the pandemic. So, while income from employment Great Recession, the Federal Reserve and, especially,
fell broadly, massive relief from the government was able Congress declared victory far too early. Congress even
to keep many families aﬂoat. adopted “austerity” policies to reduce the federal debt
when unemployment remained elevated and household
Some beneﬁts, like enhanced unemployment insurance ﬁnances fragile. Then later the Federal Reserve raised in-
and stimulus checks, even reached people who were terest rates prematurely. The result was a long, painful re-
struggling before the coronavirus-induced crisis. Re- covery that took years longer than necessary and scarred
searchers at Columbia University estimate that the Amer- many workers and the overall economic growth.
ican Rescue Plan cut the poverty rate for children from
15% (without relief) to 6% (with the relief); among Black The $2 trillion American Rescue Package passed in
and Hispanic families, the reductions were sizeable, too, March 2021 brought the total ﬁscal aid within a year to
from around 20% to 10% (Parolin et al., 2021). Fiscal relief around $5 trillion or nearly a quarter of US GDP. It was
worked, and it worked most for groups who entered the the package that never came after the Great Recession.
COVID-19 crisis with the most economic challenges and It was massive and did, in fact, help fuel a sharp pick-up
who were hit hardest by the crisis. in demand, along with vaccinations and re-openings. The
Fed, too, continues to support a rapid, inclusive recovery.
Use lessons from economic policies in this crisis to It is a bumpy road with an unexpectedly strong rebound
prepare for future recessions in prices, as well as some employers ﬁnding it difﬁcult to
hire workers and producers coming up short on some
Go bigger, go faster, go broader – was the lesson from supplies. Nonetheless, it is clear that we are on a faster
the Great Recession when the policy response fell short. path to recovery than in “jobless” recoveries after the pri-
Congress and the Federal Reserve delivered in the spring or two recessions.
of 2020. The $2 trillion CARES Act was twice the package
that was offered in 2009. Support from Congress waned The takeaway for policymakers and their advisers for
last summer as COVID-19 cases decreased but then the the next crisis is to act forcefully at the start and stay the
surge in infection rates in late autumn and into the win- course until we have a recovery for all. It is worth it.
ter led to another $1 trillion in ﬁscal support at the end of
2020. Good policies require effective administration

The big test remained. How committed are policymakers Too often, relief during the coronavirus crisis did not reach
to pushing a rapid recovery? In the years following the all people who it was designed to help. Those groups who

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had the hardest time accessing the relief were often the Figure 3
ones who needed it most. Signing ceremonies for the leg- Six states ending jobless beneﬁts early have
islation and victory laps by politicians due to the gener- unemployment above national average
ous aid mean little to the people who got nothing or who State unemployment rate in June 2021, seasonally adjusted
struggled to get that aid. Administrative problems are
%
not new, and they plague nearly every aid program in the
Mississippi
United States, even outside of recessions. Policymakers
National = 5.9%
must grapple with administrative failings and build sys-
Maryland
tems that will serve all people in the next crisis.
Texas
Unemployment insurance suffered the most catastrophic
failures during the COVID-19 crisis (Pancotti, 2021). Dec- Alaska

ades of neglect and in some cases deliberate attacks on
Arizona
the state-run programs made it vulnerable. In addition,
Congress passed legislation to expand the measures and Louisiana
make weekly beneﬁts more generous. Outdated technolo-
0 2 4 6 8
gy systems made it impossible to raise replacement rates
of workers’ prior pay. Most states were only able to add Source: Bureau of Labor Statistics.

a ﬂat amount. Congress ﬁrst chose $600, which would
fully replace the typical unemployed workers pay. But that businesses and employees beneﬁted from the program, it
meant that about half of workers got more in beneﬁts than must be improved to accomplish its goals equitably.
they had earned before being laid off. That kicked off a
debate about disincentives to return to work and labor Solutions exist. The most effective one would be to put
shortages. It raged on and eventually led 26 Republican ﬁscal relief to families, the employed and small business-
Governors to cut off the extra federal aid months before es on autopilot. Tying extra support to economic condi-
Congress had enacted it. Some of the largest states like tions – such that they start as soon as a recession begins
Texas have unemployment rates well above the national and would continue until recovery is complete – would
average. Moreover, people of color are more likely to be take some of the politics out of ﬁghting recessions. For
unemployed. example, I argued for automatic stimulus checks to fami-
lies in recessions and recoveries (Sahm, 2019). Automatic
Another example of a well-intended, new policy that stabilizers for enhanced jobless beneﬁts are in numerous
suffered from administrative problems was the Pay- legislative proposals and were endorsed by President
roll Protection Program. The goal of the program was Biden. This approach would allow policymakers to focus
to loan money to small business owners so they could their energies on ﬁghting the novel features of the crisis,
continue to keep their employees on the payroll. If busi- whether a pandemic or underwater mortgage borrowers.
nesses did so, then their loans were converted to grants Committing to deliver a basic set of relief programs would
and they did not have to repay them. It is great policy, also force the government to build the administrative ca-
but it was run through the Small Business Administra- pacity for the programs. Congress enacts a set of policies
tion, a small agency, and banks, who have a proﬁt mo- in nearly every recession. We know what programs work.
tive rather than a public policy mission. As a result of We know what programs are used. We can avoid the ﬁre
weak administrative systems, the program failed to live drill and administrative failings by making a commitment
up to expectations. before the next recession.

Research by Doniger and Kay (2021) at the Federal Re- More broadly, we learned that near universal cash relief
serve shows that delays in the roll out of the Payroll Pro- is effective. Research shows that the three rounds of
tection Programs reduced the number of employees stimulus checks to most families provided both relief and
whose jobs could have been saved. Speciﬁcally, they esti- boosted economic activity (Sahm, 2021a). In contrast, tar-
mate that 1% fewer delayed loans would have lowered the geted programs are complicated and will often miss those
unemployment rate by one-tenth percentage point. The in need of relief in recessions, because families’ ﬁnancial
delays and other administrative failings of the program af- situations may deteriorate rapidly. The government has
fected the smallest businesses, the self-employed, lower no systems to track which families are suffering hard-
paid, and Black- and Hispanic-owned businesses most. ship and which are not. Moreover, an accepted deﬁnition
So again, the people who were least likely to get the relief of what qualiﬁed as hardship does not exist, especially
were often the ones in most need of it. While millions of in recessions, which are widespread events. Cash relief,

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speciﬁcally for nearly all children in the so-called child tax Figure 4
credit, shows that policymakers see the beneﬁts of the Income inequality was large and rising before the
approach. The Biden Administration has proposed ex- pandemic
tending the one-year program for another ﬁve years. This Average household personal disposable income in 2007 and 2018,
is the ﬁrst program – with no tax ﬁling or work require- dollars, by income decile
ments – to serve families with children. It has the potential
600.000
to cut the number of children living in poverty, especially 2018
2007
deep poverty, but only if it is administered well. 500.000

400.000
The crisis magniﬁed the existing shortcomings of our
300.000
safety net. The failure of unemployment insurance went
well beyond the administration of beneﬁts. Experts have 200.000
known for years that limited eligibility, geographic differ-
100.000
ences across states and insufﬁcient amounts and dura-
tion of beneﬁts were problematic, too. Numerous policy 0
10 %-1
-20%
proposals exist, some of which have been laid out by 20
30 %-30%
0%
40 %
%-4
-50%
50 0%
0% 60 %-60%
West et al. (2016). What is lacking is the political will to 70 %
%-7
-80%
80
90 %-90%
0%
%-100%
reform the system and an acknowledgement across the
political spectrum that the unemployed deserve aid, not Source: Bureau of Economic Analysis.

derision, during recessions and expansions alike.

Macroeconomists must upgrade their tools and
frameworks is the heavy reliance on aggregate statistics like GDP, the
savings rate or personal income to evaluate the need for
During the ﬁrst year of the COVID-19 crisis, Congress aid. Metrics such as potential output hide the wide dif-
enacted almost $5 trillion in ﬁscal relief and the Federal ferences across families. Decades of rising inequality in
Reserve pumped trillions more into the ﬁnancial system. the United States have magniﬁed the shortcomings of ag-
Economists played a key role in shaping and debating this gregate data. In fact, data from the Bureau of Economic
massive push to stabilize the economy. Many programs, Analysis, which disaggregates national personal dispos-
like stimulus checks and extra weekly jobless beneﬁts, able income shows that in 2018 (the latest available data)
were supersized. Several new programs like the payroll the top 10% of US households had as much personal
loans and Fed loans to municipalities were put together income as the bottom 70%. The gap has risen since the
on the ﬂy. Economists were instrumental – albeit far from Great Recession.
uniﬁed – in crafting the big and bold policy response.
Moreover, while the ﬁscal relief was generous by histori-
Economists, along with other policy experts, govern- cal standards, it is trivial compared to the pre-crisis in-
ment staff and data scientists, have led efforts to evaluate equality. This helps explain why personal income – and
the effects of the policies, often as soon as the ﬁrst data aggregate – is higher now than before the pandemic, but
become available. Studies like the one by Ganong et al. the unemployment rate – in which each individual counts
(2020) found that the extra $600 per week in jobless ben- equally – remains nearly three percentage points higher
eﬁts did not create meaningful work disincentives. The and we have seven million fewer jobs than before. Aggre-
Census Bureau created two new surveys of households gate statistics are useful in economic debates, but they
and small businesses to track the rapidly changing eco- need to be combined with other data that capture the het-
nomic conditions. Private data also offered timely insights erogeneity in the US economy.
on labor market conditions and consumer spending. The
ﬂood of studies and data was overwhelming at times, and Another example of a longstanding framework that led
as with any topic, research often differed in the ﬁndings. some of the economic policy discussions astray is po-
Even so, policymakers in Congress, the Administration, tential output. It is an estimate using methods developed
and the Federal Reserve had more information than in in the 1960s of the economic capacity of the economy.
past crises to craft effective, evidence-based policies. How much demand could the businesses meet without
inﬂation getting out of hand? While we can measure
Arguments made by economists in the policy debates, GDP, potential output to which GDP is compared is nev-
especially surrounding the American Rescue Plan, also er observable. Nonetheless, economists like Blanchard
showed that their tools need an upgrade. A key example (2021) used estimates from the Congressional Budget

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Ofﬁce to argue against the Rescue Plan. He treated the Introspection among economists about the federal debt is
estimates of potential output as if they were a precise one of many examples where collaboration across groups
reality. Policy that hinges crucially on things we can- would lead to the best outcomes. Other areas that could
not see is problematic. Making matters worse, the of- beneﬁt from an upgrade are how to design the social
ﬁcial estimates assume that the racial inequalities in the safety net, including unemployment insurance, so it sup-
labor market are the best we can do. Speciﬁcally, as I ports people in need and overall economic growth. Mod-
discuss in Sahm (2021b), the estimates of potential out- els that incorporate differences across people, such as
put assume a Black unemployment rate of 10%, the level Heterogeneous Agent New Keynesian models, should be
achieved in 2005, as the lowest sustainable level of un- integrated into policy debates (Kaplan et al., 2018). Tak-
employment for Black workers. ing those models from academic journals to the halls of
Congress will take considerable effort. They are complex,
More broadly, economists have wasted precious time dur- often black-box models, but they improve on aggregate
ing the coronavirus crisis using and defending falsiﬁed models that are less and less effective given the inequal-
models. Empirics and common sense must sort out the ity in the economy.
old models that do not work and bring in new models that
do. An upgrade, not a deletion of economic frameworks is Finally, economists need to grapple more with the con-
necessary. Inexcusably, the Great Recession and its pain- cept of full employment and the fact that the US economy
fully slow recovery did not lead to an economics upgrade. has likely been operating below its potential for decades.
As a result, the COVID-19 crisis showed once again how Most economic models assume that – after a shock like
much intellectual baggage the economics profession car- a recession – the economy naturally moves back to a full
ries with it. In large part, the falsiﬁed models lost out and employment equilibrium. However, other macroeconomic
new, bold policies were enacted. That is good, but it would models, such as stock-ﬂow consistent models (Nikiforos
be even better to have robust, evidence-based models and Zezza, 2017), do not assume self-healing dynamics.
to guide these new policies. In some cases, like the new, The need for ﬁscal and monetary policy is notably dif-
near-universal child beneﬁts, policy is running ahead of ferent if the economy is perpetually operating below full
our economic understanding. That program is essentially employment. Again, it is not clear that one model is bet-
universal basic income for children, but the potential mac- ter than the other, but both bring useful insights. Unfor-
roeconomic, long-term effects of such cash transfers have tunately, debates about frameworks and tools often be-
hardly been studied. Flogging the “dead parrots” of macro come contentious and unproductive. A true sea change
models incurs opportunity costs. It is time that would be in economic policy will require that economists embrace
better spent on creating new, lively models. and promote change.

Better tools and frameworks do exist. The most impor-
tant shift relative to the Great Recession is the economic References
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