Impact of Large Fiscal Expansion During Catastrophic Macroeconomic Shocks: Lessons from U.S. Paycheck Protection Program

Abstract

In response to the catastrophic COVID-19 pandemic and accompanying economy-wide shutdown, the U.S. government engaged in a massive spending program to save small and medium-sized businesses and jobs. This expansion in government spending is one of the largest in the recorded history of the United States. Despite the size of the appropriation and the speed of its implementation, the true impact of this massive spending program remains modest at best and highly questionable at worst. An emerging body of evidence suggests that the number of saved jobs and businesses were small and came at a staggering cost to the treasury. Furthermore, unequal distribution of capital ownership contributed towards increased levels of inequality as a sizable fraction of additional spending ended up with wealthy business owners and other shareholders. Furthermore, a lack of precise targeting might have directed scarce resources to businesses that did not need any help and would have survived without an additional cash infusion. The size of the program, coupled with other measures of social safety net like the state-level unemployment benefits, contributed to a substantial increase in monetary savings and cash holdings, increasing the inflationary pressures on the economy and rising asset prices in many regions. Rapid disbursement of funds through traditional banking channels and usual financial intermediation might have weakened the correlation between the inter-regional spread of the pandemic and the extent of fund availability. That exacerbated pressure on national supply chains and further increased inflationary tendencies. This chapter provides a broad overview of the emerging research in this area while reviewing the impact of such significant government expansions on the labor market. Collating data from the money supply, interest rates, inflation, and government finances, this chapter documents the fiscal and monetary disruptions that followed the large infusion of cash in the U.S. economy resulting in high inflation and escalating interest rates. The chapter also discusses policy implications for future macroeconomic shocks.