COVID-19 shutdown cre- ated a short-term supply shock. Its recovery is swifter
because commercial banks remain sound, and resourc- es do not need to be real- located before normal eco- nomic growth can resume. Nevertheless, Washing-
ton overreacted to the 2020 recession. The Fed cut its target
range for the federal funds rate by 1.5 percentage points between March 3 and March 15 to between zero and 0.25%.
Then it shifted to quantitative eas-
ing, doubling the size of its balance sheet from $4.3 trillion on March 11 to $8.6 trillion on Nov. 3, 2021. During March, Congress also enact-
ed two relief and stimulus bills that benefited state and local governments. The Families First Coronavirus
Response Act increased the federal share of the Medicaid match, amount- ing to an $85 billion transfer to states. The $1.7 trillion Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) appropriated $150 bil- lion to state and local governments directly and $40 billion to educational institutions, indirectly benefiting state and local governments.
O
n April 24, 2020, President Don- ald Trump signed a bill spend-
ing $484 billion to replenish programs funded in the CARES Act. On Dec. 27, 2020, Trump signed the FY2022 Con- solidated Appropriations Act, which appropriated nearly $900 billion in relief and stimulus spending, includ- ing $85 billion for educational institu- tions and $14 billion for mass transit. By the end of 2020, the U.S. econ-
omy was recovering. Real GDP grew by 8.7% in the second half of 2020, nonfarm jobs increased by 11.9 million from the April 2020 trough to Decem- ber 2020, and the unemployment rate fell from a peak of 14.7% in April 2020 to 6.7% in December 2020.
Billions Here, Billions There How the federal government spent $5 trillion on COVID-19 relief in one year.
March 6, 2020 March 18, 2020 March 27, 2020 April 24, 2020 Dec. 27, 2020 March 11, 2021
Coronavirus Preparedness and Response Appropriations Act Families First Coronavirus Response Act
Coronavirus Aid, Relief, and Economic Security (CARES) Act Paycheck Protection Program, Healthcare Enhancement Act Consolidated Appropriations Act American Rescue Plan Act
Most year-end forecasts envisioned
strong economic growth, continuing job creation, and a falling unemploy- ment rate in 2021. No further stimulus was needed. This did not deter President Joe
Biden or congressional Democrats from adding more fuel to the fiscal fire. Having won control of Washington
in November 2020 and facing chal- lenging midterm elections, Demo- crats were determined to shower billions and billions of taxpayer dol- lars on their favorite constituencies, however unnecessary, wasteful, and even counterproductive such spend- ing might be. On March 11, 2021, Biden signed
the American Rescue Plan Act of 2021, authorizing another nearly $1.9 trillion in relief and stimulus spend- ing, including $350 billion directly to state and local governments, $169 bil- lion for educational institutions, and $30 billion for mass transit. In contrast with past recessions,
overly generous relief and stimulus caused real household income to surge. Government-imposed supply restrictions caused personal savings to balloon 134%, from $1.2 trillion in 2019 to $2.9 trillion in 2020. The issues facing the economy
were like the end of World War II, when there was large pent-up demand and an ability to buy from accumu- lated savings, yet bottlenecks con- strained supply. Rising inflation was inevitable. In 2021, the Fed should have
phased out QE and normalized the target range for the federal funds rate,
$8 billion
$192 billion $1,722 billion $484 billion $896 billion $1,856 billion
TOTAL $5.158 trillion
but the Fed did not. Biden and congressional Dem-
ocrats should have helped the Fed contain inflation by scaling down the American Rescue Plan and abandon- ing the Build Back Better agenda alto- gether, but they did not. Consequently, the Consumer Price
Index rose by 7.9% year-over-year in February 2022, a 40-year high. Unlike the federal government,
states are faring well. Their balances (i.e., cash in both general funds and rainy day funds) reached an all-time high of 28.3% of general fund spend- ing at the end of fiscal year 2021. In March, the National Conference
of State Legislatures reported that “the fiscal situation in most states across the country is strong . . . 25 expect to exceed their forecasted revenues.” Consequently, many are looking to
cut taxes. In February, the Tax Foun- dation reported that 13 states were considering individual income tax reductions, nine states were consider- ing corporate income tax reductions, and five states were considering sales tax reductions. While taxpayers should welcome
state tax reductions, they should be aware that these fiscal surpluses are in part because of $1 trillion in federal transfers over the last two years. These transfers have helped boost
federal debt to a level not seen since 1946.
Robert P. O’Quinn is the former chief economist of the U.S. Department of Labor and was chief economist of the House Ways and Means Committee.
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