The COVID-19 pandemic caused a severe contraction in U.S. economic activity, prompting the federal government to spend over $5 trillion on subsidies, transfers, grants, and tax cuts. However, administrative capacity issues significantly hindered the policy response during this critical period. A massive spike in unemployment insurance (UI) claims led to delays in benefit disbursement, which had a notable impact on aggregate consumption. Research by Michael Navarrete, published on September 9, 2024, highlights that 22 states had modernized their UI systems by 2020, abandoning the outdated COBOL programming language. In contrast, states that continued to rely on COBOL experienced a 2.8-percentage-point larger decline in consumption from March 13, 2020, to December 31, 2020. This failure to modernize UI systems resulted in at least $105 billion lower real GDP, as delays in UI benefits reduced consumption due to a lower marginal propensity to consume. [36f0373b]
In light of these findings, recent research suggests that overshooting the recovery, as the U.S. economy did in the pandemic recession, is preferable to the alternative. Studies indicate that workers who graduate into weak labor markets face persistent negative impacts on their earnings and other outcomes. They also experience higher mortality rates and other life-cycle impacts. The policy response to the COVID-19 recession, characterized by aggressive fiscal stimulus, helped bring back a tight labor market and limited the damage to new labor market entrants. Research on worker scarring and macroeconomic hysteresis suggests that it is better to overshoot rather than undershoot on fiscal stimulus during downturns. The differing approaches and results of the past two fiscal policy responses to U.S. recessions support this idea. However, a return to equitable levels of income and wealth inequality from the mid-20th century is unlikely in the near future. [61084709]
Additionally, Equitable Growth has announced new investments in research aimed at better understanding the effects of the fiscal response to the COVID-19 recession. This initiative focuses on policies implemented from March 2020 to March 2021, emphasizing the need for empirical evidence to guide future policymaking. Janelle Jones, a prominent figure in the initiative, highlighted the importance of this research in informing effective policy responses. Six funded projects will explore various aspects of the fiscal response, including cash grants, wage subsidies, Short-Time Compensation, economic impact payments, child care provisions, and wage supplements. An advisory committee featuring notable economists such as Alan Blinder and Karen Dynan will oversee these studies, which aim to provide insights into the effectiveness of the fiscal measures taken during the pandemic. [56b7332b]