Fiscal Policy Efficacy in Times of Covid

Just in time for the module on fiscal policy in my macro policy course, multipliers in a time of Covid-19. From a CBO working paper by Seliski, Betz, Chen, Demirel, Lee, and Nelson, “Key Methods That CBO Used to Estimate the Effects of Pandemic-Related Legislation on Output”.

Table 2 reports the ranges for a period of economic slack (empirical evidence in support of recounted in this New Palgrave survey article on multipliers), and then the adjustments made for social distancing.

Source: Seliski, et al. (2020).

The “direct effect” varies by measure (purchases of goods and services vs. unemployment insurance enhancement vs. PPP).

Source: Seliski, et al. (2020).

Noteworthy is the fact that the demand multiplier for the Paycheck Protection Program is quite small; however, if we are interested in preventing the scarring effect due to massive bankruptcies of small and medium sized firms, we might still view this measure as a net positive.

These estimates underpin the no-Covid legislation counterfactual described in this post from exactly one month ago.

Figure 1: GDP as reported (black bold), CBO July 2020 projection (blue), CBO counterfactual of no pandemic related recovery legislation (red), all in billions Ch.2012$, SAAR. Source: CBOThe Effects of Pandemic-Related Legislation on Output (September 18, 2020), and author’s calculations.

Without the quick and substantial measures undertaken in the spring, we would be in a much deeper hole.

A prospective analysis of different spending packages — using a similar methodology — is provided by Wendy Edelberg and Louise Sheiner at Brookings here. The key graph depicts the impact on real GDP, for each $400 billion dollar package.

Source: Edelberg and Sheiner (2020).







36 thoughts on “Fiscal Policy Efficacy in Times of Covid

  1. pgl

    I look forward to reading this timely paper but a couple of comments about the header for table 2.

    Yes interest rates are incredibly low so maybe the FED’s responses are limited. But the ECB has managed to generate negative interest rates on even long-term government bonds. And yes real GDP is really low but how does one define potential during a pandemic?

  2. Not Trampis

    Can’t help but believe if Trump loses then Republicans will talk all about the debt and deficit disaster that mysteriously only became a problem after the election

    1. Willie

      Of course they will. That’s as predictable as sunrise. What’s also predictable is that they will howl like a stepped on cat if the new administration raises taxes on wealthy people to close the gap.

    2. Moses Herzog

      Just try to remember or check the archives of the web after both of the Bush’s left office. You’re apt to find a good list of candidates of false rationalizations. Manufactured recollections of private remonstrances they gave president trump. Etc. Etc……

      What some bored professor of political science or professor of public administration needs to do, is do some kind of scan on right wing websites and check how often they complain about stimulative monetary policy (QE) and stimulative fiscal policy when a Republican is in the White House vs when a Democrat is in the White House, and see how much less that occurs when a Republican is in the White House. Just for starters, remember how many lunches “W” Bush had with Greenspan and how many times donald trump used social media to press for the Fed to lower rates. How many times were either of those two flunkies attacked for cajoling and bullying the FOMC?? Yet you’d think by all the complaining on FOX, in the WSJ, ZeroHedge, and our a.m. conservative radio mud-pigs that Obama and Clinton took the then residing Fed Chairmen out back of the shed every other day with a paddle drilled with holes.

      I guess all Republicans turn into socialists when a Republican is in the White House. Kind of like Melania trump becoming pro-masks when her hubby is losing in purple states.

      1. Willie

        Melania has up and vanished lately. So have Jared and Ivanka. I suspect Melania is suffering from COVID a bit more than fits the narrative and is being kept out of sight, lest anybody notice that she’s actually really sick. And Jared and Ivanka are doing their usual disappearance when the going gets tough. They are probably on their way to Belarus for a nice retirement right now.

    3. 2slugbaits

      Yep. CoRev will have to rummage around the attic to find his old tri-cornered Tea Party hat. I can already see those old Tea Party rallies on the Capitol grounds. I liked the one in 2010 where one Tea Party Congress Critter announced that he was going to read the Constitution and started reading the Declaration of Independence…and not a single person in the crowd appeared to know the difference.

    4. The Rage

      That simply doesn’t matter and the Republicans are irrelevant. This is not 2008’s prime lending debt bust. The economy is going to recover and deficits plunge. That is the bottomline. The Feds allowing a surge in debt is the bigger problem years down the line. Short run, it will boost growth.

      1. macroduck

        Once again, you are asserting a future while offering no basis for it. You got nothin’. You don’t even bother to try.

  3. Moses Herzog

    With the occasional exception of when I’m imbibing and near to the bottom of the bottle, it’s pretty hard for me to work up tears on most things. Can someone bring me my Smart Mini Crocodile Tears i-Generator 13 please??

    Damn it, still no tears. I knew it was a mistake to get this refurbished crocodile tears i-Generator. Not to mentioned getting a discount because the verklempt key is broken really wasn’t worth it. I knew when CEO Timmy shook hands with donald trump and sat next to the donald blushing boyishly like it was his first date with Carson Kressley that the company was going downhill.

  4. Bruce Hall

    State policies need to be more targeted. There has been a severe over-reaction regarding schools. Businesses continue to be crippled by onerous regulations or forced closures. The real threat from the virus is to the retired/65+ demographic… and the only policy that required changing was the one pushing infected people back into nursing homes which have less than 1% of the population but account for about 38% or more of the deaths (which is an undercount since some states report the deaths, but don’t report them as nursing home deaths).

    Cases continue to escalate; deaths do not; hospitalizations are basically level. The hyperbole around cases is unfortunate because infections are not categorized for action since asymptomatic to severe are lumped together. There is enough information for people to be responsible and understand their risks (except college students who are basically large 3-year olds).

    Treatments have improved and the “second wave” appears to be much less lethal than the New York experience. The elderly still account for most of the serious and deadly outcomes.

    1. Moses Herzog

      @ Babkes Bruce Hall
      Babkes Bruce says:
      ” hospitalizations are basically level.”

      I don’t suppose you’d like to guess what this orange bar chart represents for the “red state” of Oklahoma, would you Babkes Bruce??

      Babkes Bruce continues:
      “There has been a severe over-reaction regarding schools.”

      Babkes Bruce, do you know what statistic usually rises very soon after hospitalizations rise?? DEATHS. So guess how many deaths we had today, Tuesday October 20,, in a “red state” widely regarded as a “rurally” populated state?? 18 deaths for one day Bruce. 18 dead people in a single day. <<—-Oklahoma's Republican Governor, playing a movie role that comes very naturally to him.

        1. Moses Herzog

          @ pgl
          19 deaths for our state today (Weds 21), one more than yesterday. That makes 37 deaths in two days, with 870 hospitalizations today, when up until very recently we had never broached above 800. Drastic percentage increases inside of the last 2 weeks. Although treatment is improving, it’s hard to see how 7 day moving average deaths don’t peak again here very soon.

    2. Moses Herzog

      I think Babkes Bruce and others on this blog have long argued that death counts are “exaggerated”. They might find the comments in this thread, two of which are from two of the better journalists in the entire state (admittedly that’s not saying much in Oklahoma, nevertheless…..)

      This twitter thread I linked to just above verifies what I have long suspected. That when you have numbers like Friday–15 deaths, Saturday 11 deaths, Sunday 2 deaths, Monday 3 deaths, Tuesday 18 deaths and the state health department and Republican Governor refuse to publicly document the time of death then “something is very rotten in the state of Denmark”.

      1. pgl

        Excess deaths have it 300 thousand people. But of course Bruce Hall does not think anyone over age 60 counts. So all is good!

    3. pgl

      “State policies need to be more targeted.”

      Kelly Anne keeps sending you the dumbest rants ever written. In NYC we have micro targeting and you wrote that opening line? Bruce – for once in your worthless existence – could you email Kelly Anne back and ask her to tell her stupid boss to do something right at the national level.

      Oh wait – she would fire you if you did. Can’t have you starve to death in your basement bunker.

    4. pgl

      “Cases continue to escalate; deaths do not”.

      Of course everyone knows there is a lag. Everyone except Kelly Anne’s favorite stooge. BTW you keep saying deaths will be going down. Your own graph says otherwise.

      Of course you are consistent about one thing – your disdain for the elderly who have died.

    5. 2slugbaits

      Bruce Hall We’ve been over this before. Many times. States did not push infected people into nursing homes. You keep repeating this rightwing talking point. The factcheckers have rated those stories as false. Got it? And please try and remember it so we don’t have to correct you again…and again…and again. It’s like your brain is stuck in a loop and you can’t help yourself.

      State policies need to be more targeted.

      And if they were people like you who can’t remember what they had for breakfast would be complaining about how confusing it is to have different policies and regulations from county to county and town to town.

      There is enough information for people to be responsible and understand their risks (except college students who are basically large 3-year olds).

      You misunderstand the problem. No one cares what happens to you if you go and make stupid choices and catch the virus. That’s your problem and if you willfully misbehave, then as far as I’m concerned the world would be better off if you’re gone. The social and moral problem is that you cannot limit your irresponsibility to just yourself. College kids at parties and motorcyclists at gatherings and MAGA hatters at rallies cannot contain the spread to just themselves. They inevitably infect innocent bystanders. It’s like the problem of drunk driving. We don’t have special highways for drunk drivers. If we did, then no one would care if a drunk driver killed another drunk driver. Stupid is as stupid does. But drunk drivers don’t just kill other drunk drivers; they kill innocent drivers as well. And do you consider it responsible for a politician to tweet “LIBERATE MICHIGAN” at the peak of a deadly pandemic? Do you consider it responsible when Trump mocks Biden for wearing a mask? Do you consider it responsible to hold super spreader MAGA rallies? You seem to have a peculiar idea of what it means to be responsible.

      The elderly still account for most of the serious and deadly outcomes.

      Have you figured out a way to isolate the elderly from those who might be infected? I didn’t thinks so.

      Treatments have improved and the “second wave” appears to be much less lethal

      That’s true….if you have a Cadillac health insurance plan and if you don’t have an underlying condition and if you’re not poor and if you’re white and if you’re the President. Your comments simply reveal your parochial view of the world.

      Businesses continue to be crippled by onerous regulations or forced closures.

      Aside from bars there are very few crippling and onerous regulations that force closures. Your brain is still stuck in April and May. Check the calendar. And note the irony here. In one paragraph you’re complaining about businesses being crippled by what you believe are “onerous regulations”, but in the very next paragraph you worry about irresponsible actors like college kids. Did it ever occur to you that businesses are struggling not because of those nonexistent “onerous regulations” but because of the risks posed by irresponsible MAGA hatters at who won’t wear masks and then hit the bars and restaurants after the MAGA rally is over?

      1. pgl

        I’m a little surprised that clueless Bruce has not be hyping the Great Barrington Declaration. Of course even the extreme libertarian economic Tyler Cowen gets why this approach should be roundly rejected:

        I saw Tyler’s commentary over at Brad DeLong’s place where some have noted that Tyler never once talked about the extreme negative externalities of not taking appropriate precautions. And even then Tyler concludes that this approach is utter nonsense.

    6. macroduck

      At 38%, nursing home deaths are not the majority. Well over half of deaths are not from nursing homes. Enough of the same old debunked story.

      New York showed what a strict shutdown could accomplish. It worked. The accepted formula among epidemiologists is a sharp initial isolation to get transmission below 1 generally, followed by strict efforts to maintain transmission rates below zero as restrictions are eased. We did not do that nationwide.

      As a result only 9 states have transmission rates at 1 or below, meaning conditions are worsening in the vast majority of states. New, active and total Covid cases are all accelerating. The rise in deaths is roughly linear, but lag new infections, so may well be on the path toward acceleration. Your “not escalating” is a ridiculous standard. Your assertion that people have the information they need to make their own judgements is a statement of your own view, apparently adopted from you political masters. That view disregards the impact of one person’s action on other people’s health – the essence of bad public policy.

      Oh, and your boy is losing to Biden. You’ve sold your soul for nothing.

    7. Menzie Chinn Post author

      Bruce Hall: Fm WaPo:

      . But the CDC also found, surprisingly, that it has struck 25- to 44-year-olds very hard: Their “excess death” rate is up 26.5 percent over previous years, the largest change for any age group.

  5. Moses Herzog

    The current “president” of the USA bragging about extorting American corporations to fund his political campaign. Imagine these illiterate white trash like Bruce Hall, sammy, Ed Hanson, and CoRev in his MAGA crowd cheering if a Democrat said this?? It’s “pay to play” for private business. These Republicans are the same people that don’t like taxes, but are cheering a candidate publicly bragging about extorting American companies to pay his campaign bills. And people wonder why foreigners laugh at how DUMB Americans are when they cheer on their leaders as they admit they are in the sole business of racketeering??

    These “American” white trash in the MAGA crowds have become so mentally retarded they think it’s patriotic to live their racketeering fantasies vicariously through a man who talks in the above YT video like he is a 3rd grader playing Darth Vader on the school playground.

    1. pgl

      Exxon was so furious that they had to go note they were not at all involved with what Trump suggested. After all – this would have been a rather serious felony.

  6. ltr

    October 19, 2020

    Why Biden Will Need to Spend Big
    The economic case for deficit spending is overwhelming.
    By Paul Krugman

    What should Joe Biden’s economic policy be if he wins (and Democrats take the Senate, so that he can actually pass legislation)? I’m pretty sure I know what his economists think he should do, but I’m not equally sure that everyone on his political team fully gets it, and I’m worried that the news media will experience sticker shock — that is, they may not be ready for the price tag on what he should and probably will propose.

    So here’s what everyone should understand: Given the current and likely future state of the U.S. economy, it’s time to (a) spend a lot of money on the future and (b) not worry about where the money is coming from. For now, and for at least the next few years, large-scale deficit spending isn’t just OK, it’s the only responsible thing to do.

    Today’s column will be about the economics; I’ll talk about the politics another day.

    First things first: If Biden is inaugurated in January, he will inherit a nation still devastated by the coronavirus. Trump keeps saying that we’re “rounding the corner,” but the reality is that cases and hospitalizations are surging (and anyone expecting a lame-duck Trump administration to take effective action against the surge is living in a dream world.) And we won’t be able to have a full economic recovery as long as the pandemic is still raging.

    What this means is that it will be crucial to provide another round of large-scale fiscal relief, especially aid to the unemployed and to cash-strapped state and local governments. The main purpose of this relief will be humanitarian — helping families pay the rent and keep food on the table, helping cities and towns avoid devastating cuts in essential services. But it will also help avoid a downward economic spiral, by heading off a potential collapse in consumer and local government spending.

    The need for big spending will not, however, end with the pandemic. We also need to invest in our future. After years of public underspending, America desperately needs to upgrade its infrastructure. In particular, we should be investing heavily in the transition to an environmentally sustainable economy. And we should also do much more to help children grow up to be healthy, productive adults; America spends shamefully little on aid to families compared with other wealthy countries.

    But how can we pay for all this investment? Bad question.

    You sometimes hear people saying that the government should be run like a business. That’s a poor analogy in many ways. But for what it’s worth, think of what smart businesses do when they face great investment opportunities and have access to cheap capital: they raise a lot of money.

    We’ve just seen that the U.S. government needs to invest large sums in the future. What about access to capital? The answer is that there’s a global savings glut — the sums individuals want to save persistently exceed the sums businesses are willing to invest. And this situation — private savings all dressed up with nowhere to go — translates into extremely low government borrowing costs. In February, before the coronavirus sent us into recession, the average interest rate on long-term inflation-protected U.S. bonds was minus 0.12 percent. Yes, it was less than zero.

    Under these conditions it would actually be irresponsible for the federal government not to engage in large-scale borrowing to invest in the future.

    But shouldn’t we be worrying about running up more government debt? No….

    1. pgl

      Pelosi and the Treas. Sec. are once again close to a deal assuming the Idiot in Chief does not derail it again. Of course Senator Turtle has decided it cannot be brought up on the Senate floor until next month – if at all.

    1. macroduck

      The one thing that Moscow Mitch wants is protection for businesses from Covid litigation. Pelosi has the power (presumably) to give it to him. If we get a fiscal sausage, it may be hard to swallow.

      1. pgl

        Pelosi has stated many times that if companies follow OSHA regulations – then they have the protection they need. Moscow Mitch wants to lift these sensible regulations. If workers die as a result – Moscow Mitch does not give a damn.

        1. macroduck

          From Moscow Mitch or some new iteration of Mitch sometime in the future: “We shielded employers from unreasonable worker lawsuits due to the coronavirus and that was the sensible thing to do. Now, we should shield businesses from lawsuits from (fill in the blank) as we did then. It’s the right thing to do.”

          Eroding worker safety is the work of a lifetime.

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