KEY FINDINGS
- Although pandemic-related spending has been high, this is not the first time the federal government has used spending to jump-start the economy.
- President Franklin D. Roosevelt’s New Deal is an excellent example of using broad fiscal support to stimulate economic growth.
- As a percentage of annual GDP, pandemic-related spending has been less than the amount spent on the New Deal. But it could rival the New Deal in relative size if recent proposals hold.
Although pandemic-related tax policies have garnered a lot of attention in recent months, the federal government has spent large sums before in an effort to help boost the US economy and bolster the nation’s public infrastructure.
Notable examples include the American Recovery and Reinvestment Act of 2009, passed in response to the Great Recession, and the Federal Aid Highway Act of 1956. But given changes in the US economy. The program was the New Deal, President Franklin D. Roosevelt’s response to the Great Depression. It consisted mainly of a series of public works programs beginning in 1933.
This article compares the size of the New Deal to recently enacted and proposed tax actions in the US.
Biden Administration Actions
President Joe Biden signed the American Rescue Plan goes into effect on March 11, 2021, at a total budget cost of $1.9 trillion. A series of programs continued introduced by the Coronavirus Aid, Relief, and Economic Security of 2020 (CARES) Act of 2020such as extended and expanded unemployment insurance benefits and direct payments to means-tested individuals. He also established a fund to help state, local and tribal governments address revenue losses caused by the pandemic.
On March 31, Biden proposed the American Jobs Plan, whose initial cost was 2.3 billion dollars. At the time of writing this article, negotiations between the political parties were cutting this amount. The main components that remained included financing for electricity, water, and broadband infrastructure and improvements to highways and public transportation. Other originally proposed components, including money to improve US supply chains and support seniors and people with disabilities, are likely to disappear by the time this article is published.
Finally, on April 28, Biden proposed the $1.8 trillion American Families Plan. It would include funds for pre-K and community college; government paid and subsidized family and medical leave; and expanded health insurance coverage through the Affordable Care Act. At the time of this writing, negotiations on the American Families Plan had not yet begun.
To be as specific as possible in my calculations, I included the initially proposed price tags of the last two plans, acknowledging that the Jobs Plan and the Families Plan could end up having very different dollar figures or potentially not becoming law. That being said, the total cost of all three plans is $6 trillion.
Tax relief actions under the Trump administration
In March and April 2020, at the start of the COVID-19 pandemic in the US, then-President Donald Trump signed into law four tax relief packages totaling $2.4 trillion. The biggest of these was the CARES Act.
Several Major Components of the CARES Act included direct federal stimulus payments to households, the Small Business Paycheck Protection Program, increased unemployment payments for individuals, funding for state and local governments to cover COVID-19-related expenses, and financial assistance to states for Medicaid. An additional $900 billion was authorized for a December 2020 assignment. Thus, the authorized COVID-19 relief during 2020 totaled $3.3 trillion.
To limit the number of calculations below, I combined the totals for Biden and Trump to come up with a grand sum of $9.3 trillion.
Cost comparison with the New Deal
In 1933, FDR began providing financial aid through an “alphabet soup” of New Deal programs to combat the Great Depression. These included the Agricultural Adjustment Administration (AAA), which paid farmers to slaughter some of their livestock and reduce agricultural production to help raise prices for basic products, and the Works Progress Administration (WPA), which it hired millions of unemployed workers to build infrastructure, including public buildings and roads.
Total New Deal federal spending was $41.7 billion in current dollars, according to a 2015 study by Price Fishback and Valentina Kachanovskaya. That translates to $793 billion today.
At first glance, the New Deal seems much smaller than the most recent fiscal interventions; however, over the past 90 years, prices and the American population have increased substantially. So I adjusted the gross dollar totals for these two changes. On a per capita basis, the combined cost of the Biden and Trump interventions would amount to $28,184, far more than the $6,280 per capita cost of the New Deal in today’s dollars.
Another way that the United States has changed is that the economy has become much larger thanks to advances in productivity and capital accumulation. This has boosted the output of the US economy and the standard of living of households. We can explain this change by comparing the fiscal programs with the gross domestic product (GDP) of the economy during the relevant period.
Cost as a percentage of national production
GDP measures the total monetary value of finished goods and services manufactured within a nation during a given period. The cost of the New Deal was 40.1% of GDP in 1929. For comparison, existing and proposed tax actions by both administrations are 43.2% of 2019 GDP.
The following figure shows these two percentages, as well as a few others:
- The Recovery and Reinvestment Act of 2009 as a percentage of 2006 GDP
- Existing fiscal measures of both administrations as a percentage of 2019 GDP
- Biden’s three plans as a percentage of 2021 GDP
SOURCES: Bureau of Economic Analysis, Congressional Budget Office, “The multiplier of federal spending in states during the Great Depression” by Fishback and Kachanovskaya, White House and author’s calculations.
NOTES: The respective periods used in these calculations are 1929 for the New Deal, 2006 for the Recovery and Reinvestment Act, and 2019 for the remaining calculations. The fiscal costs of the proposals that have not yet passed (i.e., the American Jobs Plan and the American Families Plan) are those initially proposed by the Biden administration.
Note that while total fiscal spending in both cases is spent over multiple years (ie, the numerator), we use one year’s GDP in the denominator. For example, the New Deal lasted approximately six years. While much of the recent federal spending will have taken place in 2020 and 2021, Biden’s last two plans (if approved) are likely to stretch out over about 10 years. That’s worth keeping in mind when examining these numbers.
Although the New Deal and existing and proposed tax actions are similar when measured as a fraction of output, the US economy in the respective business cycles of the two periods was at very different points.
In the early 1930s, the general price level fell 30% and the unemployment rate reached 25%. The COVID-19 induced recession has, thus far, seen relatively stable prices and, after a temporary spike in unemployment of 14.8% in April 2020, a relatively quick labor market recovery. Time will tell how these differences in initial conditions impact the economy’s response to fiscal actions.
Iris Arbogast, a Bank Research Associate, provided research assistance.
