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CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
The Effects of
Pandemic-Related
Legislation on Output
© Drazen Zigic/Shutterstock.com
SEPTEMBER 2020
At a Glance
In March and April of 2020, four major federal laws were enacted to
address the public health emergency and the economic distress created by
the 2020 coronavirus pandemic. That legislation provides financial sup-
port to households, businesses, and state and local governments. In this
report, the Congressional Budget Office estimates the legislation’s effects on
economic output.
• Deficits. The legislation is projected to add $2.3 trillion to the deficit in
fiscal year 2020 and $0.6 trillion in 2021.
• Short-Term Effects. CBO estimates that the legislation will increase
the level of real (inflation-adjusted) gross domestic product (GDP) by
4.7 percent in 2020 and 3.1 percent in 2021. From fiscal year 2020
through 2023, for every dollar that it adds to the deficit, the legislation is
projected to increase GDP by about 58 cents.
• Longer-Term Effects. By increasing debt as a percentage of GDP, the
legislation is expected to raise borrowing costs, lower economic output, and
reduce national income in the longer term.
• Uncertainty. The estimates in this report are subject to considerable
uncertainty, especially because of factors associated with the pandemic.
www.cbo.gov/publication/56537
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
Contents
Summary 1
Short-Term Effects 1
Longer-Term Effects 2
Uncertainty 2
The Legislation 2
The Economic Effects of the Legislation 3
How the Overall Legislation Affects Output in the Short Term 4
How Different Provisions of the Legislation Affect Output in the Short Term 8
How the Legislation Affects Output in the Longer Term 11
Uncertainty Surrounding the Effects of the Legislation 11
Economic Effects of Changes in Fiscal Policy Under Current Circumstances 12
Effects of Social Distancing and the Trajectory of the Pandemic 13
List of Tables and Figures 14
About This Document 15
Notes
This report presents estimates of the effects of pandemic-related legislation on real
(inflation-adjusted) gross domestic product. Those effects were incorporated into the
Congressional Budget Office’s July economic forecast (www.cbo.gov/publication/56442).
The estimates in this report are presented in relation to an implied projection of real GDP
that does not include the effects of the legislation—a projection computed by removing
the estimated effects of the legislation from the July forecast. However, CBO did not
construct a comprehensive projection of what the economy would have looked like
without those legislative effects.
Unless the report indicates otherwise, all years referred to are calendar years.
Numbers in the text, tables, and figures may not add up to totals because of rounding.
For a more detailed discussion of the methods that CBO used, see John Seliski and others,
Key Methods That CBO Used to Estimate the Effects of Pandemic-Related Legislation on
Output, Working Paper 2020-07 (Congressional Budget Office, forthcoming).
CBO has corrected this report since its original publication. Corrections are listed at the
end of the report.
The Effects of Pandemic-Related
Legislation on Output
Summary to individuals will boost the overall demand for goods and
In March and April of 2020, four major federal laws services by providing resources to households, many of
were enacted in response to the 2020 coronavirus which have experienced a significant loss in income. Loans,
pandemic. Those laws, which contained a wide array grants, and tax benefits will provide liquidity to businesses
of conventional and unconventional fiscal policies, will experiencing financial distress, increasing the likelihood
add $2.3 trillion to the deficit in fiscal year 2020 and that they will survive and preserve jobs for their employees
$0.6 trillion in 2021, according to the Congressional while economic activity is weak. Federal assistance to state
Budget Office’s estimates. and local governments will help pay for rising expenditures
related to the pandemic as those governments’ tax revenues
By providing financial support to households, busi- fall. And payments to health care providers will help sup-
nesses, and state and local governments, the legisla- port further testing for and treatment of COVID-19, the
tion will offset part of the deterioration in economic disease caused by the coronavirus.
conditions brought about by the pandemic.1 CBO
estimates that the legislation will boost the level of real Over the next several years, as a result of the pandemic,
(inflation-adjusted) gross domestic product (GDP) by output is projected to remain well below its potential
4.7 percent in 2020 and 3.1 percent in 2021.2 From fis- level, and inflation is projected to stay below the Federal
cal year 2020 through 2023, for every dollar that it adds Reserve’s long-run objective. CBO therefore expects that
to the deficit, the legislation is projected to increase GDP the Federal Reserve will not respond to the legislation’s
by about 58 cents.3 In the longer term, the legislation effect on demand by raising short-term interest rates. So
will reduce the level of real GDP, CBO estimates. All of the boost to output is expected to be larger than it would
those estimates are subject to considerable uncertainty. have been if output had been closer to its potential and
inflation had been higher, because then the Federal
Short-Term Effects Reserve would have been more likely to respond.
In the short term—that is, from 2020 through 2023—
the pandemic-related legislation will affect the economy In CBO’s assessment, the short-term boost in economic
through several channels. Payments and tax credits issued activity caused by the legislation will be tempered by
social distancing, especially during the second and third
1. The economic forecast that CBO published this past July quarters of this year. Social distancing refers to certain
incorporated the estimated economic effects of the recent actions that households, businesses, and governments in
legislation that are discussed in this report. See Congressional the United States and around the world have taken to
Budget Office, An Update to the Economic Outlook: 2020 to limit in-person interactions and thus slow the spread of
2030 (July 2020), www.cbo.gov/publication/56442.
the coronavirus. Those actions include reducing social
2. Those estimates do not include the effects of nonlegislative activities, dining out, and travel; curtailing the activity of
actions, such as those taken by the Federal Reserve (for example, schools and businesses; prohibiting large gatherings; and
lowering interest rates and purchasing mortgage-backed and
working from home. CBO estimates that social distanc-
Treasury securities) and the Administration (for example,
delaying deadlines for filing taxes). The estimates do account ing will cause the economic boost resulting from the
for the legislation’s funding of lending facilities established by legislation to be smaller than it would have been during a
the Federal Reserve to support the flow of credit to businesses, period without social distancing. CBO also expects that
households, and state and local governments. some of the spending by individuals and businesses that
3. That number does not incorporate the effects of the Federal is hampered in the near term by social distancing will
Reserve’s lending facilities. resume as those measures continue to ease.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
2 The Effects of Pandemic-Related Legislation on Output September 2020
Longer-Term Effects businesses and payments to health care providers sup-
The legislation will increase federal debt as a percent- plied in the CARES Act.4
age of GDP, and in the longer term, CBO expects that
increase to raise borrowing costs, lower economic output, This report analyzes the following provisions in the
and reduce the income of U.S. households and busi- four laws.
nesses. In addition, the higher debt—coming at a time
when the longer-term path for debt was already high— • Paycheck Protection Program and Related Provisions.
could eventually increase the risk of a fiscal crisis or of Through the Paycheck Protection Program (PPP),
less abrupt economic changes, such as higher inflation or the legislation funds loan guarantees for loans to
the undermining of the U.S. dollar’s predominant role small businesses to help them cover payroll and
in global financial markets. The timing and likelihood of other costs. CBO expects most PPP loans to be
those effects are not possible to estimate with precision. forgiven, so they will effectively become grants. In
addition, the legislation allocates funds to the Small
Uncertainty Business Administration (SBA), which lends them
CBO’s estimates of the economic effects of the legislation to businesses, provides debt relief, and administers
are subject to considerable uncertainty and represent the the Economic Injury Disaster Loan (EIDL)
middle of the distribution of potential outcomes. Some program. That program provides grants to businesses
important sources of that uncertainty are how consumers experiencing a temporary loss in income.
and businesses may respond to various policy changes
included in the legislation; how the timing, scale, and • Enhanced Unemployment Compensation. The
breadth of the legislation may affect consumers’ and legislation temporarily increased unemployment
businesses’ confidence; how responses to policy changes benefits by $600 per week through July 31, 2020. In
may be altered by the pandemic and social distancing; addition, the legislation created a temporary program
what the course of the pandemic may be; how social dis- for people not otherwise eligible for unemployment
tancing may change; and how quickly safe and effective benefits, such as self-employed workers and
vaccines and therapies may become widely available. independent contractors, and extended the number
of weeks of federally funded benefits available to
The Legislation beneficiaries who qualified for regular unemployment
This past March and April, four major federal laws were insurance in 2020. Finally, the legislation allowed
enacted to address the public health emergency cre- states to waive work-search requirements for people
ated by the pandemic and to directly assist households, receiving benefits.
businesses, and nonfederal governments affected by the
economic downturn. The Coronavirus Preparedness • Recovery Rebates for Individuals. The legislation
and Response Supplemental Appropriations Act, provides a refundable tax credit of $1,200 per
2020 (Public Law 116-123), and the Families First qualifying adult and $500 per dependent child to
Coronavirus Response Act (P.L. 116-127) increased taxpayers with income below specified limits. The
federal funding for some federal agencies and for state tax credit begins phasing out once the income of
and local governments, required employers to grant individuals and of married couples filing jointly
paid sick leave to employees, and provided payments passes $75,000 and $150,000, respectively.
and tax credits to employers. The Coronavirus Aid,
Relief, and Economic Security (CARES) Act (P.L. 116-
136) provided loans to businesses, payments to health 4. For the purposes of this analysis, to account for the estimated
outlays of P.L. 116-123, CBO used its cost estimate for
care providers, payments and tax credits to individuals,
H.R. 6074, the Coronavirus Preparedness and Response
additional funding to state and local governments, and Supplemental Appropriations Act, 2020 (March 4, 2020),
reductions in certain business taxes. Finally, the Paycheck www.cbo.gov/publication/56227. In contrast, CBO’s baseline
Protection Program and Health Care Enhancement Act budget projections incorporate funding for 2020 provided in
(P.L. 116-139) increased federal funding for the loans to P.L. 116-123 and adjust it for inflation for each subsequent
year through fiscal year 2030. For more detail about the other
laws’ provisions and their budgetary effects, see Congressional
Budget Office, An Update to the Budget Outlook: 2020 to
2030 (September 2020), www.cbo.gov/publication/56517.
September 2020 The Effects of Pandemic-Related Legislation on Output 3
• Direct Assistance for State and Local Governments. GDP in 2020 and 2.7 percent in 2021. Over the 2020–
The legislation provides grants to state and 2030 period, the laws are projected to add $2.6 trillion
local governments—and to tribal and territorial to the deficit (an amount that does not include budgetary
governments as well—for spending related to the changes resulting from the laws’ effects on the economy).5
pandemic.
Some measures recently taken by the Federal Reserve are
• Other Spending Provisions. The legislation provides not analyzed in this report. The Federal Reserve lowered
funding to the Department of Health and Human its target range for the federal funds rate—the interest
Services, the Department of Defense, the Department rate that financial institutions charge each other for over-
of Agriculture, the Department of Housing and night loans of their monetary reserves—nearly to zero.
Urban Development, the Federal Emergency It also established several facilities, some of them similar
Management Agency, the Department of Veterans to those created during the 2007–2009 financial crisis,
Affairs, and the Department of Transportation. It also to support certain financial markets and to help corpora-
increases funding for the Supplemental Nutrition tions and municipalities raise funds. And it made tempo-
Assistance Program and for public health programs, rary adjustments to regulations to let banks expand their
such as Medicaid and Medicare. Furthermore, it balance sheets to support their customers.
provides aid to people who have student loans (by
temporarily suspending their loan payments), credit The Economic Effects of the Legislation
assistance to airlines and other businesses, and relief CBO expects the pandemic-related legislation to affect
to aviation workers. the economy in both the short term and the longer
term.6 In the short term, the legislation will boost the
• Other Revenue Provisions. The legislation modifies economy, mainly by providing temporary support to
the rules relating to net operating loss deductions individuals, businesses, and state and local governments
and increases the limits on the losses and on the and by stimulating the overall demand for goods and
business interest deductions that businesses can services. However, the boost to economic activity will
use to offset their taxable income. Those changes be tempered by social distancing. Also, the economic
provide businesses with liquidity by letting them effects of the legislation will diminish over time as the
claim certain tax benefits sooner than they would economy’s output approaches its potential (or maxi-
otherwise have been able to. The legislation mum sustainable) level, which is projected to grow more
also provides payroll tax credits to employers to slowly over the next few years than CBO projected in
encourage them to retain employees, along with January 2020 because of the pandemic.7 And the various
refundable credits to compensate them for providing policies contained in the legislation will influence output
paid sick leave and family and medical leave. It in different ways, so the economic boost per dollar of
delays payroll tax payments by businesses, further budgetary cost will vary.
providing temporary liquidity. And it shifts some
of the costs of unemployment benefits from state In the longer term, the legislation is projected to increase
and local governments and nonprofits to the federal the ratio of federal debt to GDP. High and rising federal
government. debt makes the economy more vulnerable to rising
interest rates and also to rising inflation, depending on
• The Federal Reserve’s Emergency Lending Facilities. how that debt is financed. The growing debt burden
The legislation provides loss-absorbing capital to
Federal Reserve programs called facilities, which act
5. The amount is smaller than the increase in the deficit in fiscal
as a backstop to financial markets by making loans years 2020 and 2021 because later in the period, the legislation
or purchasing assets under the Federal Reserve’s will result in some increases in revenues.
emergency lending authority.
6. CBO did not analyze the effects of any legislation enacted,
executive orders made, or Federal Reserve actions taken after
In total, the pandemic-related legislation is projected August 4, 2020.
to increase the federal deficit by about $2.3 trillion in
7. See Congressional Budget Office, “Supplemental Material for
fiscal year 2020 and $0.6 trillion the following year (see An Update to the Economic Outlook: 2020 to 2030” (July 2020),
Table 1). Those amounts equal about 11.2 percent of www.cbo.gov/publication/56442.
4 The Effects of Pandemic-Related Legislation on Output September 2020
Table 1 .
The Effects of Pandemic-Related Legislation on the Deficit
Billions of Dollars
Total
2020 2021 2022 2023 2020–2023 2024–2030
a
Paycheck Protection Program and Related Provisions 616 13 0 0 628 0
Enhanced Unemployment Compensation 370 71 0 0 442 0
Recovery Rebates for Individualsb 272 20 0 0 292 0
Direct Assistance for State and Local Governments 150 * 0 0 150 0
Other Spending Provisionsc 359 218 101 21 700 13
Other Revenue Provisionsd 539 253 -186 -182 425 -50
Federal Reserve’s Emergency Lending Facilities 11 0 0 0 11 0
Total 2,317 576 -85 -160 2,648 -37
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
The years shown are federal fiscal years.
Positive numbers indicate an increase in the deficit.
Because of rounding, values in this table may not correspond precisely to values in Congressional Budget Office, An Update to the Budget Outlook:
2020 to 2030 (September 2020), www.cbo.gov/publication/56517. In addition, for the purposes of this analysis, to account for the estimated outlays of
Public Law 116-123, CBO used its cost estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020
(March 4, 2020), www.cbo.gov/publication/56227. In contrast, CBO’s baseline budget projections incorporate funding for 2020 provided in P.L. 116-
123 and adjust it for inflation for each subsequent year through fiscal year 2030.
* = between zero and $500 million.
a. The provisions related to the Paycheck Protection Program provide funds to the Small Business Administration to support business liquidity through
existing lending programs, debt relief, and the Economic Injury Disaster Loan program.
b. Incorporates the effects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on both outlays and revenues.
c. Includes aid for student loans, credit assistance for airlines and other businesses, relief for aviation workers, health care spending, the education
stabilization fund, and increased funding for the Department of Health and Human Services, the Federal Emergency Management Agency, the
Department of Veterans Affairs, and the Department of Transportation.
d. Includes payroll tax credits for employers, modifications of the net operating loss and business interest deductions, limitations on the losses that
businesses can use to offset tax liability, and a delay of certain payroll taxes.
also raises borrowing costs, slowing the growth of the time during a recession. All of those effects are beyond
economy and national income, and it could increase the the scope of this report.
risk of a fiscal crisis or a gradual decline in the value of
Treasury securities. How the Overall Legislation Affects
Output in the Short Term
In addition to affecting overall economic activity CBO estimates that the legislation will boost the econ-
as measured by real GDP, the legislation will affect omy over the next few years by increasing federal spend-
other important aspects of the economy and people’s ing and reducing federal revenues. The legislation will
well-being. For example, several provisions of the leg- increase the level of real GDP by 4.7 percent in 2020
islation affect people’s access to medical care and food. and 3.1 percent in 2021, CBO projects (see Table 2).
Other provisions fund medical research to develop a And from fiscal year 2020 through 2023, the legislation
vaccine. Still other provisions delay evictions and mort- is projected to increase GDP by about 58 cents for every
gage foreclosures. Also, the legislation has significant dollar that it adds to the deficit (see Table 3).8 The effects
effects on the distribution of income. And it may prevent of the legislation on economic activity will be largest in
some longer-term damage to the economy and to peo-
ple’s financial prospects—for example, by reducing the 8. That number does not incorporate the effects of the Federal
adverse effects of entering the labor market for the first Reserve’s lending facilities.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
September 2020 The Effects of Pandemic-Related Legislation on Output 5
Table 2 .
The Effects of Pandemic-Related Legislation on Real GDP
Percent
2020 2021 Annual
Policy Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2022 2023
a
Paycheck Protection Program and Related Provisions 0 0.9 1.4 1.0 0.7 0.4 0.2 0.1 0.8 0.3 * *
Enhanced Unemployment Compensation 0 1.1 1.8 1.5 0.8 0.5 0.3 0.1 1.1 0.4 * *
Recovery Rebates for Individualsb 0 1.1 0.8 0.6 0.6 0.3 0.1 0.1 0.6 0.3 * *
Direct Assistance for State and Local Governments 0 0.3 0.9 0.8 0.4 0.2 0.1 * 0.5 0.2 * 0
Other Spending Provisionsc 0 1.1 1.9 1.6 1.5 1.3 1.1 0.7 1.1 1.1 0.4 0.1
Other Revenue Provisionsd 0 0.5 1.1 0.7 0.6 0.9 0.4 0.2 0.6 0.5 -0.1 -0.2
Federal Reserve’s Emergency Lending Facilities 0 * 0.2 0.3 0.4 0.3 0.2 0.2 0.1 0.3 * -0.1
Total 0 5.0 8.1 6.4 5.0 4.0 2.4 1.3 4.7 3.1 0.3 -0.1
Memorandum:
Real GDP Without the Effects of the Legislation
Real GDP (Billions of 2012 dollars) 4,744 4,064 4,103 4,250 4,369 4,466 4,596 4,680 17,161 18,112 19,159 19,652
Growth since previous quarter (Percent) -1.3 -14.3 1.0 3.6 2.8 2.2 2.9 1.8 n.a. n.a. n.a. n.a.
Growth at annualized rates (Percent) -5.0 -46.2 3.9 15.1 11.7 9.2 12.2 7.5 -10.0 5.5 5.8 2.6
Real GDP in CBO’s Current Economic Forecast
Real GDP (Billions of 2012 dollars) 4,744 4,266 4,436 4,522 4,588 4,646 4,706 4,740 17,968 18,679 19,222 19,631
Growth since previous quarter (Percent) -1.3 -10.1 4.0 1.9 1.5 1.3 1.3 0.7 n.a. n.a. n.a. n.a.
Growth at annualized rates (Percent) -5.0 -34.6 17.0 7.9 6.0 5.1 5.3 2.9 -5.8 4.0 2.9 2.1
Source: Congressional Budget Office.
These values are presented as a percentage of an implied projection of real GDP that does not include the effects of pandemic-related legislation—a
projection computed by removing the estimated effects of the legislation from CBO’s July economic forecast. However, CBO did not construct a
comprehensive projection of what the economy would have looked like without those legislative effects. See Congressional Budget Office, An Update
to the Economic Outlook: 2020 to 2030 (July 2020), www.cbo.gov/publication/56442.
n.a. = not applicable; * = between zero and 0.05 percent.
a. The provisions related to the Paycheck Protection Program provide funds to the Small Business Administration to support business liquidity through
existing lending programs, debt relief, and the Economic Injury Disaster Loan program.
b. Incorporates the effects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on both outlays and revenues.
c. Includes aid for student loans, credit assistance for airlines and other businesses, relief for aviation workers, health care spending, the education
stabilization fund, and increased funding for the Department of Health and Human Services, the Federal Emergency Management Agency, the
Department of Veterans Affairs, and the Department of Transportation.
d. Includes payroll tax credits for employers, modifications of the net operating loss and business interest deductions, limitations on the losses that
businesses can use to offset tax liability, and a delay of certain payroll taxes.
the second half of 2020 and smaller thereafter. CBO’s CBO published in July. However, CBO did not con-
estimates take into account the effects of social distanc- struct a comprehensive projection of what the economy
ing, the Federal Reserve’s policy, and increased federal would have looked like without those legislative effects.9
borrowing.
CBO’s current projections of real GDP growth (which
The estimated effects of the legislation on real GDP are include the effects of the legislation) are −5.8 percent in
presented in relation to an implied projection of real 2020 and 4.0 percent in 2021. CBO’s analysis indicates
GDP that does not include the effects of the legisla- that without the legislation, real GDP growth would
tion—a projection computed by removing the estimated
effects of the legislation from the economic forecast that 9. Such a comprehensive projection would include, for example,
projections of employment, interest rates, and inflation.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
6 The Effects of Pandemic-Related Legislation on Output September 2020
Table 3 .
The Effects of Pandemic-Related Legislation on the Deficit and on GDP, Fiscal Years 2020 to 2023
Cumulative Effect on
Effect on the Deficit Cumulative Effect on GDP GDP per Dollar of Effect
Policy (Billions of Dollars)a (Billions of Dollars) on the Deficit (Dollars)
Paycheck Protection Program and Related Provisionsb 628 226 0.36
Enhanced Unemployment Compensation 442 297 0.67
Recovery Rebates for Individualsc 292 175 0.60
Direct Assistance for State and Local Governments 150 132 0.88
Other Spending Provisionsd 700 548 0.78
Other Revenue Provisionse 425 157 0.37
Totalf 2,637 1,535 0.58
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
GDP = gross domestic product.
a. Positive numbers indicate an increase in the deficit.
b. The provisions related to the Paycheck Protection Program provide funds to the Small Business Administration to support business liquidity through
existing lending programs, debt relief, and the Economic Injury Disaster Loan program.
c. Incorporates the effects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on both outlays and revenues.
d. Includes aid for student loans, credit assistance for airlines and other businesses, relief for aviation workers, health care spending, the education
stabilization fund, and increased funding for the Department of Health and Human Services, the Federal Emergency Management Agency, the
Department of Veterans Affairs, and the Department of Transportation.
e. Includes payroll tax credits for employers, modifications of the net operating loss and business interest deductions, limitations on the losses that
businesses can use to offset tax liability, and a delay of certain payroll taxes.
f. The effects of the Federal Reserve’s emergency lending facilities on GDP are not directly related to the facilities’ effects on the deficit. Therefore,
CBO did not include the effects of those facilities on the deficit or on GDP in the totals in this table or calculate their effects on GDP per dollar of
effect on the deficit.
have been about −10.0 percent in 2020 and 5.5 percent half of this year and diminish further next year. As the
in 2021.10 pandemic wanes and social distancing declines, some
of the spending by individuals and businesses that is
Social Distancing. In CBO’s assessment, though the hampered by social distancing will resume, CBO expects.
legislation will increase economic activity by boost- After the first half of 2021, social distancing is expected
ing overall demand, social distancing will temper that to stop inhibiting the effects of the legislation on overall
increase. When people limit their social interactions, demand, though lingering uncertainty about the safety
they reduce households’ and businesses’ demand for of some activities may continue to hold back spending
goods and services. In addition, many businesses are on some services.
operating at limited capacity, and the number of hours
worked is lower than usual because of public health Economic Conditions and the Federal Reserve’s Policy.
considerations, keeping the supply of certain goods and To estimate the effects of higher federal spending and
services suppressed. lower revenues on overall demand, CBO considers
evidence about the effects of similar policies in the past
In its current economic projections, CBO expects that and uses results produced by macroeconomic models.11
the degree of social distancing will decline by about
two-thirds from its April 2020 peak during the second 11. For a recent review of research about the economic effects of
fiscal policy, see Valerie A. Ramey, “Ten Years After the Financial
10. Growth would have been faster in 2021 without the legislation Crisis: What Have We Learned From the Renaissance in Fiscal
because the growth rate depends on the level of GDP in 2020, Research?” Journal of Economic Perspectives, vol. 33, no. 2 (Spring
which would have been lower without the legislation. 2019), pp. 89–114, https://doi.org/10.1257/jep.33.2.89.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
September 2020 The Effects of Pandemic-Related Legislation on Output 7
In CBO’s assessment, the effects of changes in spending Crowding Out. The legislation will increase federal defi-
or revenues on output are larger when the economy is cits substantially in fiscal years 2020 and 2021, and that
weak or when short-term interest rates are near zero and borrowing could have long-lasting economic effects.13
are expected to remain there for several years, a situation Under normal circumstances, the increased deficits
known as being at the effective lower bound.12 At such would reduce national saving, and then private invest-
times, the Federal Reserve would not respond, in CBO’s ment, in part by causing interest rates to be higher than
view, by raising short-term interest rates to restrain the they would be otherwise, a process called crowding out.14
boost in overall demand. In contrast, if the increase in As a result, workers would, on average, have less capi-
spending or the reduction in revenues occurred when tal to use in their jobs. They would be less productive,
output was at or above its potential level, the Federal their compensation would be lower, they would thus be
Reserve would probably raise the path of short-term inclined to work less, and output would decline.
interest rates to prevent inflation from rising above its
long-term goal, thereby restraining the boost in overall However, under current conditions, the crowding out
demand and output. of private investment by increased federal deficits will
be minimal in the short term, CBO expects. That is
CBO expects the economy to operate considerably below mainly because the economy is expected to operate well
its potential level over the next several years. The Federal below its potential level for several years, resulting in the
Reserve is therefore expected to keep interest rates low Federal Reserve’s keeping interest rates very low through
over that period. As a result, the legislation’s changes the middle of the decade. Moreover, to the extent that
to federal spending and revenues—most of which are fiscal stimulus supports greater demand for goods and
projected to occur in 2020 and 2021—will boost overall services in the short term, businesses will increase their
demand and output more than they would under normal demand for equipment, structures, and other capital
economic conditions, CBO expects. goods, thereby reducing the effect of higher deficits and
debt on private investment.
12. Several studies examining the effects of government purchases on
output have found larger effects in recessions than in expansions. Another factor mitigating crowding out in the short term
See, for example, Òscar Jordà and Alan M. Taylor, “The Time for
Austerity: Estimating the Average Treatment Effect of Fiscal Policy,”
is the Federal Reserve’s increased holdings of Treasury
The Economic Journal, vol. 126, no. 590 (February 2016), pp. 219– securities. CBO expects the Federal Reserve to continue
255, https://doi.org/10.1111/ecoj.12332; Alan J. Auerbach and purchasing Treasury securities on the secondary market
Yuriy Gorodnichenko, “Measuring the Output Responses to through 2025, a policy that it initiated in response to the
Fiscal Policy,” American Economic Journal: Economic Policy, vol. 4, economic fallout from the pandemic. In CBO’s projec-
no. 2 (May 2012), pp. 1–27, https://doi.org/10.1257/pol.4.2.1;
tions, those purchases initially offset the upward pressure
and Rüdiger Bachmann and Eric R. Sims, “Confidence and
the Transmission of Government Spending Shocks,” Journal of on interest rates that increases in federal debt would
Monetary Economics, vol. 59, no. 3 (April 2012), pp. 235–249, normally create. But CBO expects the Federal Reserve’s
https://doi.org/10.1016/j.jmoneco.2012.02.005. In contrast, one holdings of Treasury securities, measured as a percentage
recent study has found no evidence that government spending of GDP, to decline gradually, beginning in 2025.15 Other
has different effects in recessions and in expansions; see Valerie A. things being equal, the consequent boost to interest rates
Ramey and Sarah Zubairy, “Government Spending Multipliers
in Good Times and in Bad: Evidence From U.S. Historical
would increase the government’s borrowing costs and
Data,” Journal of Political Economy, vol. 126, no. 2 (April 2018), reduce private investment and output.
pp. 850–901, https://doi.org/10.1086/696277. In addition, several
studies have found that government spending can have larger 13. CBO projects that the deficit will equal 16.0 percent and
effects on output when interest rates are near zero. See Lawrence 8.6 percent of GDP in fiscal years 2020 and 2021. The legislation
Christiano, Martin Eichenbaum, and Sergio Rebelo, “When Is is projected to account for 11.2 and 2.7 percentage points,
the Government Spending Multiplier Large?” Journal of Political respectively, of those deficits.
Economy, vol. 119, no. 1 (February 2011), pp. 78–121, https://
14. For the basis of that estimate, see Jonathan Huntley, The
doi.org/10.1086/659312; Michael Woodford, “Simple Analytics
Long-Run Effects of Federal Budget Deficits on National
of the Government Expenditure Multiplier,” American Economic
Saving and Private Domestic Investment, Working Paper
Journal: Macroeconomics, vol. 3, no. 1 (January 2011), pp. 1–35,
2014-02 (Congressional Budget Office, February 2014),
https://doi.org/10.1257/mac.3.1.1; and John F. Cogan and others,
www.cbo.gov/publication/45140.
“New Keynesian Versus Old Keynesian Government Spending
Multipliers,” Journal of Economic Dynamics and Control, vol. 34, 15. See Congressional Budget Office, An Update to the Budget
no. 3 (March 2010), pp. 281–295, https://doi.org/10.1016/ Outlook: 2020 to 2030 (September 2020), www.cbo.gov/
j.jedc.2010.01.010. publication/56517.
8 The Effects of Pandemic-Related Legislation on Output September 2020
How Different Provisions of the Legislation Affect In CBO’s assessment, the effect of the PPP on output per
Output in the Short Term dollar of federal spending varies depending on how the
CBO expects different provisions of the legislation to funding is used by the recipient. The effect is expected to
affect the economy differently. As a result, those provi- be largest when the funds are used to preserve jobs that
sions will have different effects on real GDP per dollar would have been lost without them. CBO estimates that
of budgetary cost incurred. The provisions will have the PPP saved approximately 106 million job-weeks in
different effects on output because they will stimulate the 2020, though the program provided funds to finance
economy through different channels and because they substantially more than that.17 By contrast, when busi-
will support people and sectors that have been affected nesses use PPP funds to finance their payroll expenses
by the pandemic in different ways. for jobs that would have persisted anyway, the federal
spending has a smaller effect on output.18 In those cases,
For example, provisions that directly increase govern- the businesses are able to repurpose resources to cover
ment purchases of goods and services add to overall expenses in other areas of their operations that would not
demand on a dollar-for-dollar basis. But for provisions have qualified for loan forgiveness. The per-dollar effect
that increase payments to people, reduce taxes, and of that spending is similar to the per-dollar effect of PPP
increase aid to state and local governments, the size of spending on nonpayroll business expenses that qualify
the effect on demand depends on the provision’s impact for loan forgiveness. Finally, the per-dollar effects of PPP
on recipients’ behavior and on how the pandemic and spending are lowest when the businesses must repay
social distancing affect recipients’ spending and other the funds.
economic activities. In particular, increases in payments
boost spending more among lower-income people than All told, the PPP and related provisions are projected to
among higher-income people, partly because a larger quicken the pace of the recovery by limiting the num-
share of lower-income people could not previously ber of business closures and preserving relationships
borrow as much money as they would have wished in between employees and employers. CBO estimates that
order to spend more. Also, in CBO’s assessment, under
pandemic and social-distancing conditions, households 17. Because the PPP finances both part-time and full-time jobs for
initially tend to save a large proportion of the benefits various periods, CBO expresses those jobs as job-weeks, one of
which represents the average hours worked by full-time and part-
that they receive—but they will spend some of those
time workers in a typical workweek. CBO estimates that 70 percent
savings in subsequent months, as the pandemic eases. In of the job-weeks were saved in the second quarter of 2020.
CBO’s estimates, therefore, the government’s payments
18. CBO’s estimates of the effects of the PPP on employment
to people continue to be spent for several quarters after
are broadly similar to others’ findings, but those findings
they are received, reducing the possibility of a sudden vary significantly, depending on each study’s methods, data
drop in demand when the government stops making sources, and time frame. For more details, see David Autor and
those payments. others, An Evaluation of the Paycheck Protection Program Using
Administrative Payroll Microdata (Massachusetts Institute of
Paycheck Protection Program and Related Provisions. Technology, July 2020), https://economics.mit.edu/files/20094
(PDF, 3 MB); and Raj Chetty and others, How Did COVID-
The PPP stimulates the economy by providing businesses 19 and Stabilization Policies Affect Spending and Employment?
with funds (most of which will effectively become grants) A New Real-Time Economic Tracker Based on Private Sector Data,
to be spent on maintaining their payroll and covering Working Paper 27431 (National Bureau of Economic Research,
other business expenses.16 In addition, the loans provided June 2020), www.nber.org/papers/w27431. Also, the PPP made
through the SBA and the expansion of the EIDL pro- funds broadly available, not targeting particularly distressed
businesses or geographic areas. For more details, see Alexander
gram strengthen businesses’ financial standing and help
W. Bartik and others, The Targeting and Impact of Paycheck
bolster people’s income. Protection Program Loans to Small Businesses, Working Paper
27623 (National Bureau of Economic Research, July 2020),
www.nber.org/papers/w27623; and Robert P. Bartlett III
16. Some PPP funds are projected to cover nonqualifying expenses and Adair Morse, Small Business Survival Capabilities and
and as a result will have to be repaid to the government, but even Policy Effectiveness: Evidence From Oakland, Working Paper
those funds are a subsidy because the interest rate on PPP loans is 27629 (National Bureau of Economic Research, July 2020),
below the market rate. www.nber.org/papers/w27629.
September 2020 The Effects of Pandemic-Related Legislation on Output 9
from fiscal year 2020 through 2023, the PPP and related “backward-looking” earnings from the worker’s old job
provisions will boost GDP by 36 cents for every dollar and not on the lower-paying jobs now available. So the
of budgetary cost. The agency projects that the program net gain from returning to work is smaller when unem-
will increase real GDP by about 0.8 percent in 2020 and ployment is high, weakening recipients’ incentives to
0.3 percent in 2021 (see Table 2 on page 5).19 seek work.22
Enhanced Unemployment Compensation. The legisla- Third, because the legislation expanded eligibility for
tion expanded eligibility for unemployment compensa- unemployment compensation to many more workers—
tion, temporarily increased the amount of the benefits, including, for instance, self-employed workers and
and let people receive benefits for a longer time. The independent contractors—CBO expects it to reduce the
overall effect of those changes on output depends on fraction of unemployed workers who are not receiving
several factors. regular benefits. That smaller pool of people without
benefits means that a larger proportion of applicants
First, additional unemployment benefits boost overall for a given job would be less likely to accept a job offer.
demand for goods and services by providing resources to That lower job acceptance rate implies that the average
people who have experienced a significant loss in earned duration of an unemployment spell would increase,
income. That effect by itself increases output.20 making unemployment higher than it would have been if
not for the enhanced unemployment compensation. The
Second, enhanced unemployment compensation weak- ultimate result is lower output.
ens recipients’ incentive to search for and take jobs,
thereby reducing the supply of labor and output. In Finally, all of those effects are complicated by the extent
CBO’s assessment, that effect is smaller under high of social distancing and the fact that workers consider-
unemployment and social distancing than under normal ing a return to work may weigh the risk of increasing
conditions.21 That is because fewer job openings, along their exposure to the coronavirus. That could result in
with widespread business closures, make a job search less employers’ offering higher wages than they would have
likely to quickly result in employment, so the reduction otherwise, which would reduce the effect of enhanced
in overall job-searching induced by enhanced unem- unemployment benefits on work incentives and ulti-
ployment benefits matters less. Pushing in the opposite mately on output.
direction is that during periods of high unemployment,
unemployment benefits replace a larger portion of a In CBO’s assessment, the effects of enhanced unemploy-
worker’s future, or “forward-looking,” earnings from a ment compensation on the labor supply were smallest
potential new job because those benefits are based on earlier this year and will increase as social distancing
wanes. All told, CBO estimates, the net effect of the
enhanced unemployment benefits will be to boost GDP
19. The Paycheck Protection Program Flexibility Act of 2020 by 67 cents for each one-dollar increase in budgetary cost
(P.L. 116-142) modified the conditions under which PPP loans
may be forgiven. The effects of those modifications on GDP are
from fiscal year 2020 through 2023. The agency projects
reflected in these estimates. that the enhanced unemployment compensation will
increase real GDP by 1.1 percent in 2020 and 0.4 per-
20. Researchers have recently shown that spending among recipients
of enhanced unemployment benefits fell 22 percent below
cent in 2021.
prepandemic levels in the weeks before they received the benefits
and rose roughly 10 percent above prepandemic levels once they Recovery Rebates for Individuals. These tax cred-
received the benefits. See JPMorgan Chase Institute, Consumption its provide direct payments to people at a time when
Effects of Unemployment Insurance During the Covid-19 Pandemic many households are experiencing a significant loss
(July 2020), https://tinyurl.com/y2o8jpn3.
21. For some preliminary evidence—based on data through early 22. For more details about how unemployment insurance benefits
July 2020—that is consistent with that assessment, see Joseph affect incentives to work during times of high unemployment,
Altonji and others, Employment Effects of Unemployment Insurance see Congressional Budget Office, Unemployment Insurance in the
Generosity During the Pandemic (Tobin Center for Economic Wake of the Recent Recession (November 2012), www.cbo.gov/
Policy, July 2020), https://tinyurl.com/y3mkataz (PDF, 2 MB). publication/43734.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
10 The Effects of Pandemic-Related Legislation on Output September 2020
in income. The funds help people meet their finan- tax increases and spending cuts that would have been
cial obligations, such as mortgage, rent, or credit-card required for many state and local governments to balance
payments, and support overall demand for goods and their budgets.
services, thereby boosting output.23 In CBO’s assess-
ment, higher-income households, whose income was less The size of the effects of such assistance on output
disrupted by the pandemic, probably spend a smaller depends on how it is targeted and on whether it is
portion of the funds they receive than lower-income disbursed in a timely fashion. The effects also depend
households do.24 CBO estimates that the tax credits will on how large the assistance is; there may be diminishing
boost GDP by 60 cents for every dollar of budgetary cost effectiveness for very large programs. CBO estimates
from fiscal year 2020 through 2023. CBO also expects that the assistance provided by the legislation will be
most of the effect on output to occur in the second disbursed mostly during 2020, that the assistance will
and third quarters of 2020, near the time when people amount to less than the governments lose in tax revenues
received the payments.25 The agency projects that the losses in that year, and that much of the assistance was
rebates will increase real GDP by 0.6 percent in 2020 provided for specific purposes. Some of the additional
and 0.3 percent in 2021. funding will be used to replenish or avoid drawing down
states’ reserve funds, CBO expects; funding used in that
Direct Assistance for State and Local Governments. way will not boost the economy in the short term.
Federal assistance helps state, local, tribal, and territorial
governments pay for rising expenditures related to the All told, CBO estimates that increased funding for the
pandemic as their tax revenues decline. CBO expects governments will boost GDP by 88 cents for every dollar
that additional funding to increase overall demand, of budgetary cost from fiscal year 2020 through 2023.
and thus increase output, by reducing the size of the The agency projects that the direct assistance to state and
local governments will boost the level of real GDP by
23. The Internal Revenue Service provided a larger proportion of 0.5 percent in 2020 and 0.2 percent in 2021.
these credits within a few weeks of their authorization than it did
in 2008, when a similar tax rebate program was implemented in
the wake of the recession then.
Other Spending Provisions. The major components
of the other spending provisions increase funding for
24. CBO estimates that families in the top 5 percent of the income various federal departments, agencies, and programs.
distribution will receive virtually none of the benefits.
Those provisions, in addition to several smaller ones,
25. Several recent studies have estimated the initial boost to the will increase direct government spending on goods and
consumption of goods and services caused by the recovery services, boosting GDP by 78 cents for every dollar of
rebates. One of them found that for every dollar of rebate,
consumption in goods and services increased by 25 cents to
budgetary cost from fiscal year 2020 through 2023. The
35 cents during the first 10 days after the rebate was received; see agency projects that the increased spending will lift real
Scott R. Baker and others, Income, Liquidity, and the Consumption GDP by 1.1 percent in 2020 and 1.1 percent in 2021.
Response to the 2020 Economic Stimulus Payments, Working Paper
27097 (National Bureau of Economic Research, May 2020), Other Revenue Provisions. The legislation’s other
www.nber.org/papers/w27097. Another estimated the overall
revenue provisions include payroll tax credits for employ-
increase in consumption per dollar of rebate as 40 cents, noting
that the change in consumption varied substantially among ers, the deferral of certain payroll taxes for businesses,
households; see Olivier Coibion, Yuriy Gorodnichenko, and modifications of net operating loss and business interest
Michael Weber, How Did U.S. Consumers Use Their Stimulus deductions, limits on business losses that can be used
Payments? Working Paper 27693 (National Bureau of Economic to offset tax liability, and payroll tax credits to support
Research, August 2020), www.nber.org/papers/w27693. compensation for sick, family, and medical leave for
Similarly, another study found that for every dollar of rebate,
consumption increased by 48 cents during the first two weeks
employees. CBO expects that those provisions, espe-
and then returned to prior levels. That study also found that cially the payroll tax credits, will boost overall demand,
households that historically tended to spend most of their income mostly by increasing businesses’ cash flow and spending.
increased their consumption by 68 cents per dollar of rebate, In addition, the provisions modifying net operating loss
whereas households that tended to save a large portion of their and business interest deductions will improve liquidity
income increased their consumption by 23 cents per dollar of
for businesses (and thus increase overall demand) by
rebate. See Ezra Karger and Aastha Rajan, Heterogeneity in the
Marginal Propensity to Consume: Evidence From Covid-19 Stimulus allowing them to use losses for tax years 2018, 2019,
Payments, Working Paper 2020-15 (Federal Reserve Bank of and 2020 to offset taxable income from earlier years. In
Chicago, May 2020), https://tinyurl.com/y4p6dgzm. total, the revenue provisions will boost GDP by 37 cents
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
September 2020 The Effects of Pandemic-Related Legislation on Output 11
for every dollar of budgetary cost from fiscal year 2020 The legislation’s contributions to rising federal debt could
through 2023, CBO estimates. The agency projects have further negative consequences in the longer term.
that those revenue provisions will increase real GDP by The higher debt, adding to an already high longer-term
0.6 percent in 2020 and 0.5 percent in 2021. path for debt, would increase the risk of a fiscal crisis—
that is, a situation in which investors lose confidence
The Federal Reserve’s Emergency Lending Facilities. in the U.S. government’s ability to service and repay its
The existence of the Federal Reserve’s emergency lending debt, causing interest rates to increase abruptly, infla-
facilities bolsters the confidence of market participants, tion to spiral upward, or other disruptions to take place.
leading to easier credit conditions and less volatility in Rising debt could also have less abrupt negative effects,
financial markets. In addition, the facilities make credit such as creating expectations of higher inflation and
available to businesses, households, and state and local undermining the U.S. dollar’s predominant role in global
governments—which would otherwise face higher bor- financial markets. In addition, high and rising debt
rowing costs or fail to secure loans altogether. In CBO’s would contribute to businesses’ and households’ uncer-
assessment, the increase in confidence and the lending tainty about government policies and economic condi-
boost overall demand by supporting businesses’ and con- tions. Finally, the burden of higher interest payments on
sumers’ spending, helping increase businesses’ chance of federal debt could limit policymakers’ ability to respond
survival, and preserving production capacity, all of which to future economic downturns by borrowing to finance a
will help expedite a recovery. stimulus.
The Federal Reserve’s lending is projected to generate Uncertainty Surrounding the
interest income and other income for the federal govern- Effects of the Legislation
ment that will roughly offset the budgetary cost of the CBO’s estimates of the effects of the pandemic-related
lending facilities, in CBO’s assessment. Also, although legislation on real GDP are subject to significant uncer-
the emergency lending facilities will have effects on tainty. To illustrate that uncertainty, CBO is reporting
GDP, those effects are not strongly related to the facili- not only a central estimate of the legislation’s economic
ties’ budgetary cost because they result mainly from the effects but also a likely range of outcomes. Those out-
facilities’ existence, not the actual lending. Taking those comes reflect different assessments of two parameters—
considerations into account, CBO did not calculate the how much changes in federal spending and revenues
cumulative GDP effect per dollar of budgetary cost, as affect overall demand, and how much changes in overall
it did with the other provisions. CBO estimates that the demand affect output in the short term—for each set
lending facilities will increase real GDP by 0.1 percent in of policies contained in the legislation. CBO’s range is
2020 and 0.3 percent in 2021. intended to cover roughly the middle two-thirds of the
likely outcomes when those parameters are varied.26
How the Legislation Affects Accounting for those two sources of uncertainty, CBO
Output in the Longer Term estimates that the increase in the level of real GDP
By increasing the deficit in the short term, the legislation attributable to the legislation would probably be between
influences investment, output, and income in the longer 2.0 percent and 8.2 percent in the second quarter
term. In CBO’s current projections, federal budget of 2020, for example, and between 1.9 percent and
deficits raise the ratio of federal debt to GDP from 15.2 percent in the third quarter of 2020 (see Figure 1).
79 percent in 2019 to 109 percent in 2030. The legisla-
tion is responsible for roughly 9 percentage points of that In addition to those two sources of uncertainty, which
increase (an amount that does not include budgetary are quantifiable on the basis of existing evidence, there
changes resulting from the laws’ effects on the economy). are several factors that are very difficult to assess and that
CBO expects that over the longer term, accumulated are not accounted for in CBO’s range of estimates. Those
debt resulting from the legislation will raise interest rates, factors include the effects of changes in fiscal policy
increase borrowing costs, and crowd out private invest- on the economy under current circumstances and the
ment, reducing the level of real GDP by about 0.4 per-
cent in 2030. Also, higher interest payments associated
26. To calculate the range of estimates for the effects of each set
with the higher debt will increase remittances from the of provisions, CBO used a range of values for each parameter.
Treasury to foreign holders of U.S. debt, further reduc- To calculate the central estimates, CBO used values for the
ing U.S. national income. parameters at the midpoints of those ranges.
CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.
12 The Effects of Pandemic-Related Legislation on Output September 2020
Figure 1 .
The Likely Range of the Effects of Pandemic-Related Legislation on Real GDP
Percent
16
CBO’s estimates of the
economic effects of
pandemic-related legislation
12
are uncertain. Therefore, the
Likely Range of Effects agency is reporting a likely
range of outcomes that
8 accounts for two sources
of uncertainty: how much
changes in federal spending
4 Central Estimate of Effects and revenues affect
overall demand, and how
much changes in overall
0 demand affect output in the
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 short term.
2020 2021 2022
Source: Congressional Budget Office.
These values are presented as a percentage of an implied projection of real GDP that does not include the effects of pandemic-related legislation—a
projection computed by removing the estimated effects of the legislation from CBO’s July economic forecast. However, CBO did not construct a
comprehensive projection of what the economy would have looked like without those legislative effects. See Congressional Budget Office, An Update
to the Economic Outlook: 2020 to 2030 (July 2020), www.cbo.gov/publication/56442.
CBO’s likely range is intended to cover roughly the middle two-thirds of the outcomes after accounting for uncertainty about how much changes in
federal spending and revenues affect overall demand and how much changes in overall demand affect output in the short term.
GDP = gross domestic product.
impact of social distancing and the trajectory of the pan- pandemic-related legislation—affected economic activity.
demic on the effectiveness of fiscal policy in stimulating Such evidence may be less informative than usual, how-
economic activity. ever, given the unique circumstances surrounding the
pandemic and the related economic developments.
Furthermore, in CBO’s assessment, the timing, scale,
and breadth of the legislation may have bolstered Individuals, businesses, and state and local governments
consumers’ and businesses’ confidence—and therefore could respond more (or less) readily than CBO expects
economic output—beyond what is estimated in this to the large amount of federal support being provided
report. Those effects would be positive, but CBO does to the economy, resulting in higher (or lower) levels of
not currently have enough information to quantify them. economic output than CBO anticipates. A specific area
Moreover, that effect on confidence was probably stron- of uncertainty is how certain provisions—in particular,
gest in response to legislation passed in March, and it those that increased weekly unemployment benefits and
could be weaker if future rounds of stimulus arrive when expanded eligibility for unemployment benefits, pro-
economic activity is increasing and some uncertainty has vided loans and credit assistance to businesses, provided
already been alleviated. funding for state and local governments’ operations, and
reduced certain business taxes—will affect people’s incen-
Economic Effects of Changes in Fiscal Policy tives to work and businesses’ incentives to hire workers.
Under Current Circumstances For example, the effects of business loans on economic
CBO’s analysis of the economic effects of the legisla- activity depend on the number of distressed businesses,
tion is informed by evidence about how past legislative how distressed they were before the pandemic, and their
actions—those that are most comparable to the financial viability. Moreover, CBO did not consider
September 2020 The Effects of Pandemic-Related Legislation on Output 13
how the decisions about spending and working made interest rates, and the crowding out of private invest-
by households, businesses, and state and local govern- ment. As a result, the effect of fiscal stimulus on real
ments in response to the existing legislation might be GDP is smaller at such times. Therefore, should the
affected by their anticipation of further pandemic-related growth of potential output, in relation to that of actual
legislation. output, be slower (or faster) than CBO projects, the
resulting boost to real GDP from the legislation could be
There is also uncertainty about the legislation’s long-term smaller (or larger) than CBO estimates.
effects on the economy. For example, if the legislation
is successful in preserving businesses—particularly Effects of Social Distancing and the
small businesses—it may preserve capital (both the Trajectory of the Pandemic
physical and the intangible kinds) and reduce the cost CBO is uncertain about the extent to which social dis-
of reallocating labor across industries or locations. The tancing will dampen the economic effects of the legisla-
legislation could also help alleviate long-term harm to tion. Moreover, the evolution of social distancing itself
the job prospects and lifetime earnings of many workers, is unclear, and the speed at which disrupted economic
especially younger ones. Some studies have shown that activity will resume is unknown. And the development
people entering the labor market for the first time during and administration of safe and effective vaccines and
a recession suffer adverse consequences—for example, therapies remain a significant source of uncertainty.
lower earnings—even after the economy has recovered.27
Furthermore, the support to businesses, households, As the nation learns more about how to reduce the
and communities offered by the legislation may prevent spread of the coronavirus, that knowledge may alter
workers from having to move to different locations to the economic effects of the legislation. For example,
find employment, reducing the pandemic’s disparate fiscal policies might prove more effective if measures
effects on different regions. Constructing a precise esti- were adopted that reduced the scale of social distanc-
mate of those effects is particularly challenging because ing needed to slow the spread of the coronavirus, such
of the unique nature of this crisis; however, CBO expects as more widespread use of masks, greater testing, and
them to grow weaker as time passes. increased contact tracing.
Another contributor to uncertainty about the legislation’s In addition, many factors that will influence the prog-
economic effects is uncertainty about the pandemic’s ress of the pandemic, including people’s social distanc-
effect on long-term potential output. When output ing and various epidemiological characteristics of the
is near its potential level, the economy’s resources of coronavirus, are unclear. CBO’s economic projections
labor and capital are closer to being fully used, and account for the possibility that social distancing could
fiscal stimulus is more likely to bid up the price of those increase or decrease, depending on whether the transmis-
resources—resulting in inflationary pressure, rising sion rate of the virus rises or falls. If infections and social
distancing subside sooner than CBO projects, the boost
in economic activity resulting from the legislation will be
27. See Hannes Schwandt and Till von Wachter, “Unlucky Cohorts: larger than CBO’s central estimate. By the same token, if
Estimating the Long-Term Effects of Entering the Labor Market
in a Recession in Large Cross-Sectional Data Sets,” Journal of
social distancing persists longer than CBO projects, the
Labor Economics, vol. 37, no. S1 (January 2019), pp. S161–S198, economic effects of the legislation will be weaker than
http://doi.org/10.1086/701046. CBO’s central estimate.
List of Tables and Figures
Tables
1. The Effects of Pandemic-Related Legislation on the Deficit 4
2. The Effects of Pandemic-Related Legislation on Real GDP 5
3. The Effects of Pandemic-Related Legislation on the Deficit and on GDP,
Fiscal Years 2020 to 2023 6
Figures
1. The Likely Range of the Effects of Pandemic-Related Legislation on Real GDP 12
About This Document
This report provides additional information about the economic projections that the
Congressional Budget Office presented in An Update to the Economic Outlook: 2020 to
2030 (July 2020), www.cbo.gov/publication/56442. It examines the effects—which were
incorporated into those projections—that federal policies adopted in response to the
2020 coronavirus pandemic and recession are expected to have on economic outcomes. In
keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no
recommendations.
Prepared with guidance from Jeffrey Werling, John Kitchen, and Devrim Demirel, the report
represents the work of many analysts at CBO. Jaeger Nelson wrote the report, James Otterson
prepared the tables and figures, and Sarah Robinson fact-checked the report. Robert Arnold,
Aaron Betz, William Carrington, Yiqun Gloria Chen, Justin Falk, Michael Falkenheim,
Daniel Fried, Edward Gamber, Edward Harris, Wendy Kiska, Mark Lasky, Junghoon Lee,
Michael McGrane, Jaeger Nelson, James Otterson, Kerk Phillips, Brooks Pierce, John Seliski,
Robert Shackleton, Chad Shirley, and Christopher Williams estimated the macroeconomic
effects. Kim Cawley (formerly of CBO), Chad Chirico, Meredith Decker, Kathleen FitzGerald,
Nathaniel Frentz, Kathy Gramp, Lori Housman, Justin Humphrey, Aaron Krupkin, Paul Masi,
Jeffrey Perry, Dan Ready, Sarah Sajewski, and Susan Willie estimated the budgetary effects.
Christina Hawley Anthony, Sebastien Gay, Theresa Gullo, Deborah Kilroe, John McClelland, and
Sam Papenfuss provided helpful comments.
CBO thanks external reviewers Alan Auerbach, Karen Dynan, Wendy Edelberg (formerly of
CBO), Gregory Mankiw, Emi Nakamura, Jonathan Parker, Valerie Ramey, David Wilcox,
and Mark Zandi for their valuable feedback. (The assistance of external reviewers implies no
responsibility for the final product, which rests solely with CBO.)
Mark Doms and Jeffrey Kling reviewed the report. Benjamin Plotinsky was the editor, and
Casey Labrack was the graphics editor. An electronic version of the report is available on CBO’s
website (www.cbo.gov/publication/56537).
CBO continually seeks feedback to make its work as useful as possible. Please send any comments
to communications@cbo.gov.
Phillip L. Swagel
Director
September 2020
Corrections
The Congressional Budget Office has corrected this report since its original publication. Both the
PDF and online versions were corrected, but for ease of reference, this list indicates the locations of
the corrections in the PDF.
The following changes were made on October 1, 2020:
At a Glance, second bullet point; page 1, left-hand column, second paragraph; and page 4, right-
hand column, first full paragraph: “59 cents” was changed to “58 cents.”
Page 4, Table 1: “subsidies for paid sick leave” was deleted from footnote c; “certain” was added to
footnote d.
Page 5, Table 2: Various values were changed, mostly in the rows called “Other Spending Provisions”
and “Other Revenue Provisions”; in the notes, “between -0.05 percent and 0.05 percent” was
changed to “between zero and 0.05 percent”; “subsidies for paid sick leave” was deleted from
footnote c; “certain” was added to footnote d.
Page 6, Table 3: All values in the second and third columns were changed; “subsidies for paid sick
leave” was deleted from footnote d; “certain” was added to footnote e.
Page 9, left-hand column, second line: “37 cents” was changed to “36 cents.”
Page 9, right-hand column, last full paragraph: “68 cents” was changed to “67 cents.”
Page 10, left-hand column, ninth line: “61 cents” was changed to “60 cents.”
Page 10, right-hand column: “89 cents,” “89 cents,” “1.3 percent,” “1.3 percent,” and “24 cents”
were changed to “88 cents,” “78 cents,” “1.1 percent,” “1.1 percent,” and “37 cents.”
Page 11, left-hand column, fourth line: “0.3 percent” and “0.4 percent” were changed to “0.6
percent” and “0.5 percent.”