The document summarizes the economic impact of the COVID-19 pandemic and policy response in the United States. It shows that: 1) The pandemic devastated the US economy, causing unprecedented job losses, but the policy response through COVID relief legislation was aggressive and supported an economic recovery. 2) However, the relief was clearly too large and boosted income and consumption substantially above pre-pandemic trends, leading to overheating of the economy and high inflation rates not seen in decades. 3) Inflation remains elevated and risks persisting due to various factors like wage-price spirals, so the Federal Reserve plans to aggressively raise interest rates to combat inflation though achieving a "soft landing" will be difficult.

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2. CRFB.org
COVID Devastated the American Economy
Unemployment Level, millions of jobs
Source: Bureau of Labor Statistics.
159 million
133 million
120
125
130
135
140
145
150
155
160
165
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21

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But Our Response Was Aggressive

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Our Response Supported the Economic Recovery
Sources: Congressional Budget Office, CRFB Calculations
Without COVID Relief
(Legislation Only)
$16,000
$17,000
$18,000
$19,000
$20,000
$21,000
$22,000
2018 2019 2020 2021 2022 2023 2024
Billions

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$950
$1,900
$2,850
$1,530
$1,860
2021 Output Gap*
2-Year Output Gap
3-Year Output Gap
200% of 3-year Output Gap
300% of 3-Year Output Gap
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
0.5x Multiplier 1.0x Multiplier 1.5x Multiplier Brookings
Estimates
Revised Brookings
Estimates^
* Assumes policy begins in March and covers the final three quarters of 2021.
^ Based on prior multipliers used by the authors not reduced to account for higher inflation, greater savings, or
supply constraints.
Sources: Congressional Budget Office, CRFB Calculations.
But It Was Clearly Too Large
Effect of American Rescue Plan on Output, Billions

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We Boosted Income Way Above Trend
$14.1T
$14.8T
$15.6T
$16.2T
$17.4T
$18.5T
$10T
$11T
$12T
$13T
$14T
$15T
$16T
$17T
$18T
$19T
2016 2017 2018 2019 2020 2021
Base Disposable Personal Income
Base Unemployment
Other COVID Relief
Recovery Rebates
Expanded Unemployment
Paycheck Protection Program
COVID
Relief
$1.1T
Note: Base Disposable Income includes market income, minus taxes, and regular
transfers including Social Security, Medicare, & Medicaid.
Sources: Committee for a Responsible Federal Budget, Bureau of Economic Analysis.
Annual Personal Disposable Income, Current Dollars
COVID
Relief
$1T

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Leading to Economic Overheating
Jason Furman
$12,000
$12,500
$13,000
$13,500
$14,000
$14,500
$15,000
$15,500
$16,000
$16,500
$17,000
Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Feb-21 Aug-21 Feb-22
Nominal Personal Consumption Expenditures (PCE) in billions
Sources: Congressional Budget Office, CRFB Calculations.

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0%
1%
2%
3%
4%
5%
6%
7%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2021
PCE Price Index
Consumer Price Index (CPI)
Fed 2% Flexible Average Inflation Target
5.5%
6.7%
4.0%
3.4%
2.6%
3.3%
Sources: Committee for a Responsible Federal Budget, Bureau of Economic Analysis, Bureau of Labor Statistics.
2021 Inflation Was the Highest in 40 Years
Percent Change, Q4/Q4

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0.4%
1.2%
0.3%
0.3%
0.9%
8.3%
6.3%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22
Monthly CPI Growth
Monthly PCE Growth
And Inflation Has Risen Further Still
Sources: Committee for a Responsible Federal Budget, Bureau of Labor Statistics.
Percent Change

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0.6% 0.6% 0.8%
1.2%
0.3%
9.3%
3.7%
5.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Dec-21
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
No Inflation
CPI-U inflation from Q4 of 2021 through Q4 of 2022 under different scenarios
Note: No Inflation assumes CPI remains at April levels, Target Inflation assumes 0.2 percent monthly inflation
growth, and Trend Inflation assumes growth continues at the average rate of all months this year.
Sources: Committee for a Responsible Federal Budget, Bureau of Labor Statistics.
Inflation Will Remain High in 2022

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Note: No Inflation assumes PCE remains at March levels, Target Inflation assumes 0.2 percent monthly
inflation growth, and Trend Inflation assumes growth continues at the average rate of the last three months.
Sources: Committee for a Responsible Federal Budget, Bureau of Labor Statistics
PCE inflation from Q4 of 2021 through Q4 of 2022 under different scenarios
Inflation Will Remain High in 2022
0.5% 0.5% 0.5%
0.9%
7.8%
2.5%
3.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Dec-21
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
No Inflation

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Will High Inflation Persist?
Yes
 Low real interest rates
 Delayed inflation (rent, M’care)
 $2.3T of excess savings
 $8T more housing wealth
 Tight labor markets
 Strong state & local finances
 New supply shocks (Ukraine)
 Wage-price spirals
 De-anchoring expectations
 Interest Rate-price spirals
No
 Aggressive rate hikes & QT
 Transitory deflation (cars, oil)
 Shrinking balance sheets
 Disappearing stock gains
 Growing labor supply
 ~$2T drop in federal deficits
 Supply chain fixes
 Shift from goods to services
 Anchored LT expectations
 Strong reaction to Fed
forward guidance

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Deficits Are Falling as COVID Relief Expires
984
3,132
2,775
1,036 984
1,056
1,318 1,364 1,409
1,725
1,651
1,912
2,067
2,253
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Source: Congressional Budget Office
Billions

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3-Month
Treasury
10-Year
Treasury
1.1%
2.3%
2.8%
3.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Interest Rates Are Rising as Fed Tightens
HISTORIC PROJECTED
Sources: Federal Reserve, Congressional Budget Office

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Personal
Saving Rate
Mar. 2018 to Feb. 2020 Average
0%
5%
10%
15%
20%
25%
30%
35%
2019 2020 2021 2022
But People Still Have Plenty to Spend
$2.3 trillion excess savings
(Mar. 2020 to Mar. 2022)
Sources: Jason Furman based on Bureau of Economic Analysis, Macrobond.
Excess Savings as Measured by Increase in Savings Above Normal

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And Wage-Price Spirals Can Prolong Inflation
Higher
Nominal
Demand
Higher
Nominal
Wages
High
Inflation
More money to spend
Higher Inflation
Expectations;
Lower Real
Interest Rates
*Inflation lowers real wages, Increasing quantity of labor
demanded. This boosts hiring, wages, job switching, etc.
Higher
labor
costs
Higher
Input
Costs
Price
increases

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The Federal Reserve Is Supposed to Fight Inflation
Economists prefer monetary policy over fiscal policy for
managing inflation and fighting recessions
Furman & Elmendorf (2008) explain why for recessions:
Monetary policy can adjust much more quickly
Monetary policy can best judge timing and magnitude
of needed intervention (economists > politicians)
Fiscal policy is more likely to do long-term harm
Similar arguments apply for inflation – we want interest
rate hikes, not tax hikes and spending cuts, to be the
main tool for fighting inflation

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So What Is the Federal Reserve’s Plan?
The Plan:
1. Steadily raise interest rates to ~neutral rate (2.5-3.0)
2. Allow balance sheet to shrink by attrition
3. If #1 and #2 don’t work, raise rates further
The Problem:
 Raise rates too little, inflation persists
 Raise rates too much, recession emerges
 Raise rates just right, you might get both (stagflation)

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0%
5%
10%
15%
20%
25%
1960 1970 1980 1990 2000 2010 2020
Red to indicate hard landing recession after interest rate rise
Blue to indicate soft landing after interest rate rise
Sources: Committee for a Responsible Federal Budget, Federal Reserve.
Soft Landings Are Hard to Navigate
Federal Funds Rate

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Should Fiscal Policy Get Involved?
Economists recognize role for fiscal policy in recessions
Furman & Elmendorf (2008) explain why for recessions:
Fiscal policy can reduce uncertainty of total thrust
provided to the economy
Fiscal policy is helpful when interest rates are
constrained by the zero lower bound or policymakers
want to support employment at a higher rate
Fiscal policy has shorter outside lag – can work faster
Fiscal policy may be needed when monetary policy is
proving ineffective

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Should Fiscal Policy Get Involved?
We should recognize role for fiscal policy in inflation
When it comes to fighting inflation, we argue:
Fiscal policy can reduce uncertainty of total thrust
provided to the economy, anchoring expectations
Fiscal policy is helpful when trying to avoid raising
interest rates well above the neutral rate
Fiscal policy and monetary policy together can spread
and thus limit the “pain” from inflation fighting
Fiscal policy can cut the cost of higher interest rates
Fiscal policy should assist, not replace, Fed policy

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 Do No Harm – End COVID relief, offset new legislation
 Lower Health Care Costs to Reduce Prices – Reduce excessive
Medicare payments, lower drug costs
 Cut Deficits to Reduce Demand – raise taxes, cut and cap
spending, impose user fees, increase premiums
 Promote Work to Boost Supply – repeal earnings test, improve
work requirements, EITC for older workers, vocational rehab, etc.
 Support Savings – Savers’ match, “inflation bonds”
 Enact Other Anti-Inflation Reforms – energy, trade, government
procurement, regulations, etc.
How Fiscal Policy Can Help Fight Inflation

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49
37
18
14
68
51
25
19
0
10
20
30
40
50
60
70
80
Without Fed Response With Fed Response Without Fed Response With Fed Response
90% Price Pass Through 33% Price Pass Through
Do No Harm
Source: Committee for a Responsible Federal Budget.
Projected increase in prices from one year of ongoing student debt forbearance, sequester relief,
and enhanced FMAP payments, in basis points

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Lower Health Care Costs
Enact Drug Pricing Reforms
Reduce Provider Payments (Site-Neutral, Post-Acute)
End Excess Medicare Advantage Payments
Reform Cost-Sharing Rules
Raise Premiums (Means-Tested?)
Restore “Cost-Sharing Reduction” Payments
Restrict Medicaid Provider Tax Loopholes
Limit Health Care Tax Preferences

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Do Whatever Else You Can
Cap discretionary spending, cut mandatory spending
Raise revenue, especially from upper middle class
Pursue mechanical price reductions – lower
procurement/infrastructure costs, cut tariffs
Boost supply where you can, don’t expect much
Support savings where you can, don’t expect much
Don’t worry (too much) about multipliers, we need the
deficit reduction regardless

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122%
110%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
The National Debt is Headed to Record Levels
Percent of GDP
Note: “Current Policy Alternative Interest” assumes extension of individual tax cuts in the TCJA, extension of expiring
tax credits in the ARP, extension of various tax extenders, and discretionary spending growing at the rate of GDP.
Sources: Congressional Budget Office and Committee for a Responsible Federal Budget.

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And Inflation is Higher Here than in Europe
Graph from Jason Furman

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Illustrating a Wage-Price Spiral
Higher
Nominal
Demand
Higher
Nominal
Wages
High
Inflation
Higher
Input Costs
Price
Hikes
More money to spend
Fiscal &
Monetary
Stimulus
Higher costs
Lower Real
Wages
Higher
demand
for labor
Lower Real
Interest Rates,
Higher Inflation
Expectations
Monetary
Stimulus
Labor needed to produce goods & services