Skip Navigation

Keep the Cash Flowing

Original illustration by Kyla Dang '24, an Industrial Design major at RISD

In the spring of 2020, following the outbreak of the Covid-19 pandemic, United States policymakers were confronted with an economic challenge unlike anything they had ever seen before. Unemployment spiked to 14.8 percent, its highest level since the Great Depression. GDP declined at an annualized rate of 19.2 percent, marking the steepest economic contraction on record. More than six million Americans filed jobless claims within one week, shattering the previous record of 695,000 set in 1982. The crisis was progressing at a speed and scale unprecedented in modern times.

Legislators met this historic challenge with a truly historic response, crossing party lines to implement the most expansive fiscal stimulus the nation has ever seen. Now, three years later, their bet appears to have paid off. US GDP has recovered to its pre-pandemic trend, unemployment rates have reached new record lows, and inflation-adjusted wages are up across the income spectrum, with the lowest earners seeing the largest gains. Americans have this bold fiscal stimulus to thank for the economy’s fastest, strongest, and most equitable recovery ever. The success of Congress’ post-pandemic relief policy should produce a reckoning among economists and policymakers about the risks and rewards of large fiscal programs, informing the way the government responds to recessions of all kinds in the future.

When the Covid-19 lockdowns were put into place in early 2020, the economic impact was instantaneous. Businesses shuttered, workers lost their jobs, and spending and investment swiftly dried up across the country. As money stopped flowing through the economy, policymakers saw dangers ahead: The dropoff in spending might have a compounding effect, as depressed demand could cause more businesses to fail and more jobs to be lost, resulting in even less spending as consumers and businesses alike tightened their belts. The necessary response was clear—an injection of liquidity into both the demand and supply sides of the economy through significant fiscal stimulus, supplementing lost incomes to keep money flowing and preventing the contraction from becoming a full-on recession.

The federal Covid-19 economic response did just that, amounting to a combined $5 trillion in stimulus spread across the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the 2021 Consolidated Appropriations Act, and the American Rescue Plan. Funds flowed to individuals, businesses, and state and local governments through a variety of relief programs, tax credits, and direct payments. And it worked: Researchers from Moody’s Analytics found that without the relief measures, real GDP would have fallen by 11 percent, more than three times its actual decline, and the economy would have suffered what analysts called a “double-dip” recession—a second, more drawn-out depression following the initial contraction.

The most controversial aspect of the response was probably the stimulus checks— the three rounds of direct payments to consumers that rankled many Republicans for their size alone. But the checks turned out to be a critical part of the recovery, both initially and in the long term. As Brookings economist Louise Sheiner explains, “What the money did was to basically make sure that when we could reopen, people had money to spend, their credit rating wasn’t ruined, they weren’t evicted and kids weren’t going hungry.” Critics of the checks have pointed out that not all of the money was spent in the way policymakers intended, with some households saving the cash or paying down existing debt. But even those other forms of spending helped stave off collapse: Debt reduction and savings shored up household balance sheets, helping consumer spending bounce back even amid recession fears in the years following the pandemic.

That said, despite all of its benefits, the stimulus came with an undeniable cost: The biggest single-year rise in prices since the 1980s. Though much of 2022’s inflation has been attributed to geopolitical shocks and slack from the global economy’s reopening, economists at the Federal Reserve have estimated that almost one-third of the excess 7 percent inflation was a result of the stimulus. In other words, inflation would have peaked closer to 6.5 percent without the generous relief—lower than the realized 9 percent, but still significant nonetheless.

So, was the relief worth it? The evidence suggests that it was. History shows that a smaller stimulus package would likely have drawn out the recovery. After the Great Financial Crisis of 2008, policymakers implemented a far more limited stimulus package and it took more than six years for the unemployment rate to recover to its pre-crisis level. After Covid-19, it took less than two, despite reaching a far higher peak—14.8 percent—compared to 10 percent at the height of the 2008 recession. Of course, no two downturns are the same, and these two crises have undeniable differences: The 2008 recession reflected systemic weaknesses in the financial sector and household balance sheets, while the Covid-19 shock was a uniform collapse in economic activity. But despite their different causes, the resulting economic problem—inadequate demand—was the same in both cases. The recovery after Covid-19 was so much faster than that after 2008 precisely because this problem was addressed by sufficient fiscal stimulus, allowing demand to recover in a fraction of the time.

Comparing the US recovery since 2020 to that of other developed economies is a further vindication of the American strategy. The US response was one of the most generous in the world, and as a result, the US economy has fared far better than any of its developed peers: GDP growth is the highest of any G7 country, and inflation has subsided faster in the US than in any other major advanced economy. In the UK, where the government response stood at only about $500 billion, the economy has since tipped back into recession, confirming fears that spending too little may cause economic malaise. 

Outside of the traditional stimulus, other post-pandemic policies contained in the relief measures took aim at problems far beyond the context of the downturn, and with great success: The expanded Child Tax Credit cut child poverty nearly in half, and more generous unemployment insurance gave workers the freedom to pursue new opportunities, which caused a mass labor market reshuffling that powered worker satisfaction to new heights. These gains are rarely part of the story when evaluating the Covid-19 stimulus strategy, but have no doubt played a role in the strength of the economic recovery since.

The stimulus enacted during the Covid-19 pandemic marked a seismic shift in the role the federal government plays in the economy during downturns, and the result has been the most resilient recovery in modern US history. The Covid-19 response serves as further evidence that neglecting to spend enough, rather than spending too much, may be the bigger danger in economic policymaking. This is a lesson with the potential to change the way the US will respond to recessions for decades, fundamentally altering the government’s relationship with the economy for the better.