Before the COVID-19 pandemic, the United States economy had the unemployment rate at a 50-year low and inflation rate below the Fed’s target of 2% (see Appendix 1). But, the pandemic caused substantial alterations to the economy’s most vital sectors, such as manufacturing, due to shutdowns, restrictions to resource mobility, and work-from-home mandates. According to Baker et al. (2020), in the second quarter of 2020, output in the country fell about 9 percent relative to 2019, shown by the massive decline in real GDP per capita immediately after the outbreak (see Appendix 2). At the same time, the unemployment rate fell to 3.5% in February 2020, equaling its lowest in the past 67 years. Shortly afterward, almost ten million Americans filed for unemployment benefits in two weeks in April 2020. Since then, the economy has increasingly responded positively – in some aspects, negatively – to the fiscal and monetary policies intended to return normalcy. This paper aims to discuss the macro-effects of the COVID-19 pandemic on the economy, the fiscal and monetary policies, and their short and long-term effects.
COVID-19 pandemic hit the American labor market massively, to levels beyond those recorded in any economic downturn experienced in over six decades (Baker et al., 2020). The employment losses of low- and semi-skilled workers were higher than during the Great Recession. According to Moffitt and Ziliak (2020), the median earnings of both men and women were stagnant in real terms for over two decades, except for the last two years leading to the pandemic. They also note that household median incomes were flat until 2015. Companies had to cut their workforce, causing many employees to get laid off or their job responsibilities cut significantly. Although the new applications for unemployment benefits have gone down since restrictions got relaxed, jobless claims have been decreasing sluggishly.
Notably, the pandemic had considerable effects on the minority, elderly, and women workers. For over four decades, the unemployment rate among African Americans in the United States has been twice that of whites, with an average unemployment rate of 11.7 percent for blacks versus 5.4 percent for whites (Fairlie et al., 2020). At the onset of the pandemic, blacks had a somewhat favorable industry distribution that partially protected them from job losses relative to whites. According to Fairlie et al., most Latinx had lower skills and unfavorable occupational distribution that might have contributed to higher unemployment rates than whites. Similarly, they note that occupational and educational differences contributed to high job losses among the blacks in the early stages of the pandemic. Also, in April 2020, the 13.7 percent unemployment rate for Asians was below the unemployment rate recorded by Latinx (18.2 percent) and African-Americans (16.6 percent). Yet, a significant number of people were excluded from the labor force because among job-seekers in April 2020, a sizeable number of them had not actively looked for one in the previous four weeks.
The pandemic represented a threat to women, the old, and disabled workers. Many studies had predicted that the difference between previous recessions and the pandemic recession would lie in its impact on women’s employment. According to Alon et al. (2021), recent pandemics have been “mancessions” in which men lost more jobs than men, but this pandemic was mainly “shecession.” The current pandemic had its sizeable impact on sectors dominated by women, such as hospitality and tourism. Alon et al. also note that the pandemic contributed to school and daycare closures that substantially raised parents’ childcare needs (women offer a larger share of the childcare needs than fathers). For the older and disabled workers, the effects of the pandemic worsened due to the twin threats of long-term health impacts from the virus and shut down policies that reduced demand and supply (Goda et al., 2021). The pandemic has also caused a lot of the older working generation to leave the labor force. According to Goda et al., recessions occurring near the retirement age increase the likelihood of older workers leaving the labor force and collecting Social Security sooner.
The pandemic caused a massive decline in consumer spending globally partly because of the high unemployment rates and the increased uncertainty. For instance, using data from one of the largest bankcard acquiring and professional service providers in China, a study found that spending on goods and services decreased by 33 percent at the onset of the pandemic (Coibion et al., 2020). At the same time, another study used transaction-level customer data from the largest bank in Denmark and found that overall spending dropped by 25 percent, with takeaway food and travel seeing the highest decrease with more than 60 percent and 80 percent, respectively. Coibion et al. also note that another 2020 study found that 30%-40% of Americans were concerned about the corona crisis and most postponed and delayed purchases of large ticket items. Following the economic changes, households reduced their spending on transportation, travel, recreation, entertainment, clothing, and housing-related expenses. There was also a smaller decrease in medical costs, utilities, education costs, and food expenses. Notably, low consumer spending results in massive shifts in demand and supply curves both at macro and micro levels.
The pandemic caused demand and supply shocks in many sectors. The demand for education decreased substantially. For instance, public school enrollment declined massively in the fall of 2020. In Michigan, enrollment among K-12 students and kindergarteners dropped by 3 percent and 10 percent, respectively (Musaddiq et al., 2021). Consequently, homeschooling increased substantially in the same period. According to Musaddiq et al., in February 2020, 4.5 percent of American families with school-aged children reported that at least one child homeschooled, a number that skyrocketed to 7.3 percent in the fall of 2020.
Other sectors were affected in different ways. For instance, the demand for liquidity, especially in banks located near areas with significant outbreaks, experienced faster loan growth. However, because of the massive increase in deposits in the crisis weeks, banks met this demand. In the agricultural sector, individual firms experienced the steepest demand increase from the pandemic, with sales rising to the tune of 8.9 percent per additional confirmed coronavirus case (Chang & Meyerhoefer, 2020). Lockdown measures impacted the economy’s capacity to produce goods and services. At the same time, consumers became less able to purchase goods and services in the market because of high unemployment and fear of infection. Industrial production saw the steepest fall not seen over the last several decades, causing a decrease in the supply of essential and non-essential goods (see Appendix 3).
The pandemic caused a massive impact on the global supply chain. As layoffs remained high and many industries reported a high percentage of income loss, the global demand for goods and services weakened. Additionally, restrictions on movement as well as physical distancing measures affected transportation, travel, and tourism. In the U.S., many sectors failed to deliver primary products, such as food, beverages, household products, and medical supplies, due to inflation. During the pandemic, most companies with a diversified production to provide essential products did not benefit from higher profits. These changes reduced exports relative to the pre-pandemic, affecting the balance of trade significantly. In the first five months of 2020, U.S. exports and imports fell by US$ 141.5 billion or 13.6% and US$ 173.1 billion or 13.3%, respectively, relative to the same period in the previous year (CEPAL, 2020). These changes caused the economy’s trade deficit to decline.
The impacts of the pandemic on households and firms, and the associated uncertainty, have contributed considerably to the financial market disruptions, hard-hit by the pandemic that caused a severe and instant shock (Goldstein et al., 2021). During the pandemic, equity markets posted their highest loss since the 2008 financial crisis. The most significant impact was in March 2020. Between Mid-February 2020 and March 12th global stock prices fell 30 percent (Davis et al., 2021). Davis et al. also note that over the following 11 days, stocks fell another ten percentage points as mobility declined by 40 percent. Baker et al. (2020) present data to argue that no other infectious disease outbreak in the previous 120 years has affected the U.S. stock market as the COVID-19 to date. This observation suggests that it was reasonable for stock market investors to anticipate some economic impact of the pandemic on asset prices and economic activity as early as February 2020. The economy continues to recover under the various supportive economic policies by the states, Federal Reserve, and congress.
During recessions, fiscal and monetary policies help expand an economy and prevent dire consequences, such as hyperinflation. An application of fiscal policy in response to the effects of COVID-19 on the U.S economy came March 2020 by the passing of the $2.3 trillion Coronavirus AID, Relief, and Economic Security (CARES) Act by congress (Moos 422). It included unemployment benefits to individuals and forgivable loans to small businesses. Additional stimulus packages followed in 2020 and 2021. The Federal Reserve, too, responded with monetary policies. For instance, it lowered the target range for the federal funds rate to near zero. The federal funds rate is usually the benchmark for other short-term rates. It has a significant impact on longer-term rates. The intention was to reduce the cost of borrowing on mortgages, home equity loans, and other loans.
More specifically, the U.S. policy response to the pandemic happened much slower than during the Great Recession. However, its programs have been more generous, at least in the short term. For instance, congress gave a little more support for most means-tested and social insurance programs. The federal share of Medicaid expenditures increased by a mere 6%, the same percentage rate increase in support for rental assistance through the housing vouchers (Moffitt & Ziliak, 2020). The CARES Act deployed nearly $2 trillion across a range of programs for households and businesses. A one-time payment directed to the families consisted of $1,200 per adult and an additional $500 per child under 17 years (Baker et al., 2020). These amounts are significantly higher than the 2001 and 2008 stimulus programs. Consequently, there was a sharp and immediate increase in spending following this stimulus package.
The congressional policy also included a $600 per week supplement, a 13-week extension of federally funded benefits, and an extension of eligibility (Bitler et al., 2020). The number of participants in the program reached a record high of 34.5 million total continuing claims by July 2020. In the short term, these payments are helping alleviate hardship, such as reducing good insecurity among unemployed workers. In general, an expansionary fiscal policy employed by the government stimulates employment and lowers unemployment. Most of the labor-force non-participants and hence ineligible for unemployment benefits started looking for jobs after the announcement of the stimulus package to increase their chances of benefiting.
The Paycheck Protection Program (PPP) was first established in March 2020 by the Coronavirus Aid, Relief, and Economic Security Act. It gave firms substantially affected by the pandemic government-guaranteed uncollateralized loans. This program was not as successful as many expected. For instance, many banks were turning away large numbers of PPP applications from minority-owned businesses. According to Howell et al. (2021), small banks had a low lending rate to African-American businesses among conventional lenders. At the same time, the program had minimal effect on local economic outcomes (Hubbard & Strain, 2020). Most small businesses were less aware of the program, less likely to apply, and faced longer processing times. However, the program increased business’ survival expectations and had a positive impact on employment. It could be too early to conclude on the effectiveness of the PPP, but Hubbard and Strain note that the short-term benefits are visible. These include supporting employment and replacing worker wages, improving consumer spending, and preventing the shutdown of most small businesses across the country. Potential long-term effects could include preventing a wave of bankruptcies after full economic recovery.
On the monetary policy front, interest rates decreased to zero following the outbreak. Additionally, the Central Bank launched a large-scale quantitative easing (QE) program signaling that interest rates would remain near zero at least until the economy had fully recovered. The Fed also announced that it would tolerate overshooting the 2 percent inflation target for economic recovery. According to Elenev et al. (2021), the fiscal and monetary policies, both conventional and unconventional, have helped the economy significantly. Quantitative easing, a relaxation of bank capital requirements, and a higher inflation target during the crisis contribute to the minor increase in the debt/GDP ratio. Quantitative easing has caused a rapid increase in the money supply. At the same time, the pandemic has caused consumer hoarding and disruptions in supply chains contributing to sharp rises in the prices of affected goods. Quantitative easing is feared to cause asset price bubbles, a scenario that has led to the rapid increase in housing prices and certain other assets in 2020. Quantitative easing could cause inefficiently high demand for residential housing, more than demand for the other capital investment goods.
Forward guidance was employed in the 2007-2009 financial crisis but got phased out as monetary policy returned to normal in the most recent years. This policy is being used again during the pandemic. For instance, in March 2020, the Fed reduced short-term rates to zero by announcing that the rates would remain effective until maximum employment and price stability goals were met (Rebucci et al., 2020). The policy has become more specific during this crisis. However, the policy is a ‘mere talk’ that is hardly binding in the future or backed by market transactions. Although it is known to cause a decrease in long-term interest rates by providing a credible pledge that the Fed will retain low-interest rates, it can cause market participants to change their views on future policy. The policy might be ineffective due to the less credibility of the Fed in following its pledges, evident during the 2007-2009 financial crisis. If effective, the policy may cause a substantial positive effect on aggregate demand, increasing output and investment.
In response to the COVID-19 pandemic crisis, the Fed swiftly lowered the Federal Funds Rate to zero. Consequently, it re-instituted dollar swap agreements with foreign central banks, encouraged financial institutions in the country to take advantage of the discount window, and revived the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility (Sims & Wu, 2020). Studies show that an aggressive federal funds rate cut could mitigate the massive rise in unemployment. However, there is a possible limitation of this policy. If there are additional decreases, even if economic conditions warrant further stimulus, interest rate cuts will no longer be an option because they cannot go below the lower bound.
COVID-19 pandemic brought about unprecedented changes in the global economy that has affected countries differently. In some parts of the world, the stay-at-home mandates reduced productivity, causing a substantial decline in the supply of goods and services. Most schools were closed, as many children adopted homeschooling, reducing enrollments in public schools after restrictions were relaxed. Consumer spending changed as a result of job losses and economic uncertainty. Therefore, many governments turned to fiscal and monetary policies to save their economies from an imminent collapse. Some of these policies included the decrease in the federal funds rate and stimulus packages directed to the affected households and firms. Remarkably, these changes have improved the U.S. economy since the CARES Act came into effect in 2020 March. But, there is still a significant gap between the current and the pre-pandemic economic states that has caused the current administration to propose a colossal fiscal stimulus package.
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