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 Selsiki, 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: Selsiki, et al. (2020).

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

Source: Selsiki, 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).