How Government Spending In Response To The Pandemic Affected The Overall Economy – And What Happens Now 

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During the darkest hours of the global coronavirus pandemic, the US government spent $3 trillion to help rescue the country’s — and, to some extent, the world’s — economy. The major surge in government spending on pandemic relief programs increased the government deficit from $1.37 trillion in 2019 to $3.21 trillion in 2020. Yet, paradoxically, the ostensibly frightening increase in government debt was accompanied by an even larger increase in household net worth. 

Affects Of The Increase In Government Spending

Following the accounting principle that income must equal expense, one entity’s expense is another entity’s income. When the government spends, the money doesn’t disappear. Instead, most of it ends up in the coffers of households.

And in fact, household net income went from $870 billion in 2019 to an astounding $2.52 trillion in 2020. It wasn’t a sudden burst of saving behavior by households. The unprecedented increase in government spending came hand in hand with an immense raise in income for households.

Payments to the US private sector, including direct payments to households such as the $1,200 and $1,400 pandemic relief checks that were sent to all US citizens and taxpayers comprised most of this increase in the government’s expenditures.

But even in cases where the government paid a vendor from the US non-financial business sector, a portion of that government spending ended up as employee salaries, and so eventually made its way to the household sector.  

Household wealth during the pandemic improved not just by the $3 trillion injected into the economy by the government, but by a whopping $14.5 trillion.  

This increase in government spending was what salvaged the US economy in the darkest hours of the pandemic. As Americans sequestered in their homes to avoid the disease, Gross Domestic Product (GDP) fell from $21.38 trillion in 2019 to $21.06 trillion in 2020.

However, COVID relief legislation and other policies enacted by the government created a flurry of activity and spending which boosted GDP to $23.32 trillion in 2021 — resulting in robust employment and taking GDP to essentially where it would have been had the pandemic never happened. 

Boost In Household Wealth

That same government spending boosted household wealth during the pandemic — not just by the $3 trillion injected into the economy by the government, but by a whopping $14.5 trillion.   

This was because not only did the spending of the government end up in household bank accounts, the flood of government support pushed up the value of household-owned stocks and ownership of non-corporate businesses, which together increased by $7.6 trillion, while the value of household-owned real estate increased by $3.3 trillion.

Why did stocks and real estate go up during this period at a time when government debt was rising? While real estate and stock values can often be volatile and can change dramatically, over the long term it is the increase in debt itself that tends to lift the value of both of these asset types. The flood of US government and Federal Reserve support during the pandemic primed the pump for a surge in stock and real estate prices.  

Now, as pandemic-related government spending abates, we’re likely to see a dollar-for-dollar reduction in GDP. That’s one of the key reasons for the predictions of an economic slowdown — or even a recession — over the medium term, although that will likely be at least partly offset by a pick up in private sector lending. 

Our post-pandemic economic challenge has been made all the more complicated by a painful bout of inflation, which reached 9 percent, caused primarily by the COVID-based decimation of supply chains and the impact of the Ukraine War on commodity prices.

Though it has a ways to go before it reattains the 2 percent level desired by the Fed, it never reached the excruciating 15 percent level of the 1970s, and has recently eased back down to 5 percent, with a reasonable hope that it will continue to improve over than next one to two years.  

So, fast, large-scale, and decisive action by our government meant that we avoided the sort of economic depression that could easily have resulted from one of the greatest crises our nation has yet faced, and that government action even boosted household wealth.

But the pullback of that government support now means that the most probable economic scenario over the immediate term is a combination of generally favorable employment, moderating growth, and inflation levels that remain below the recent 9 percent peak.