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How Important Was Fiscal Stimulus in Terms of Overall Spending, Employment and Inflation

It is clear that the US economy is experiencing a dramatic job-market recovery and substantial inflationary pressures. In this article I will argue that fiscal policy was not a driving cause of this. Instead, the FED deserves all the credit and and all the blame for the exceptional strength in spending.

To make this case, I will first go over three ways fiscal policy can stimulate spending, ultimately creating more jobs in the short run and higher inflation in the long run. I will then cover how monetary policy-led asset price bubbles have done demonstrably more to induce spending than fiscal policy has.

Fiscal Policy Effects on Spending:

There are many different ways to stimulate the economy with fiscal policy. I am going to focus on the three most commonly cited ways: (1) direct government purchases, (2) running a deficit and (3) redistribution. I will explain why they should stimulate the economy and then explain why the government did not move those levers too much in response to the virus.

  1. Direct Government Purchases: If direct government purchases of goods and services increases, then demand for goods and services in the economy goes up.

The government didn’t really stimulate the economy that much through direct government expenditure during the crisis. From Q4 2019 to Q2 2021, inflation-adjusted direct government spending increased by a rate of 1.63 Log-% per year, and inflation-adjusted federal government direct spending went up by a rate of 2.83 Log-% per year.

Essentially, this rate of direct spending growth (while substantially higher in the first half of 2020) did not do much to stimulate the economy. The government as a whole essentially just grew it’s purchases at the same rate as the long-run growth rate of the economy. Meanwhile the Federal government’s direct spending did not grow that dramatically. To the extent that it did make an effort to stimulate economic activity, less direct spending on more local levels cancelled this out.

  1. Deficits: If the government runs a higher budget deficit by spending and distributing more and taxing less, somebody will end up with a higher income stream at first and then have more saved money later. Generally when people or firms get richer they tend to spend more.

The federal government did increase the debt substantially from Q4 2019 to Q2 2021. During that same time, the state and local governments decreased their debts. Overall, the table below shows that the combined effects of local saving and federal borrowing led to more wealth in the private sector.

Value of Government Debt in 2012 Inflation-Adjusted Dollars (Q4 2019 to Q2 2021):

Q4 2019

Q2 2021

Yearly Growth Rate


$16.545 Trillion

$20.209 Trillion

​13.33 Log-%

$3.663 Trillion

$4.306 Trillion

$3.335 Trillion

-17.03 Log-%

$-.971 Trillion

$20.851 Trillion

$23.544 Trillion

8.10 Log-%

$2.692 Trillion

I will come back to this when I show how much asset prices have increased. My point will be that the asset price increases have been a much more significant factor in increasing private wealth than the increases in government debt.

  1. Redistribution: If the government redistributes money from entities that tend to spend very little of their money on the margins to people who will spend all the extra money they get, the redistribution will increase spending in the economy. Hence inequality-reducing programs are stimulative to demand, all else being equal.

It’s hard to judge the effect of the government response to Covid on the economy. Obviously certain high-publicity programs like means-tested stimulus checks and the child tax credits tended to decrease inequality. However, other programs like the PPP lending program probably tended to increase inequality. At this point, wealth infusions into the hands of very poor people who can barely pay to make ends meet has likely been spent out already, while transfers to large corporations or very rich people may have been largely not spent so far. Essentially, it’s hard to work out logically how government spending policies should have impacted inequality by now.

There’s shockingly little reliable data on inequality available. The Bureau of Economic Analysis, for instance, has no direct data on the matter. The BLS provides wages for different sectors of the labor market. So, for instance, we know that employees in the leisure and hospitality sector or production and nonsupervisory employees are seeing their wages rise higher, on average, in relation to the private-sector workers overall. Yet, this might tell us more about what happens when an economy is over-stimulated than what the effects of all the government spending programs did.

Overall, it’s possible that government policies have reduced inequality substantially and this has substantially contributed to inflationary pressures and job growth.

Asset Price Appreciation:

Federal Reserve policy has a lot of mechanisms by which it stimulates spending. One mechanism is that lower interest rates lead to higher prices for financial assets like stocks, bonds and houses. It is because of FED policy that stock owners generally did better in the year following the outbreak than the year preceding it.

Essentially, I’m going to argue that the growth in housing and stock prices were much more significant contributors to higher personal wealth, and therefore higher consumer spending than increases in Government Debt.

The only strong evidence that fiscal policy has gotten demonstrably more stimulative is that government debt has gone up. However, household and non-profit wealth has gone up by a lot more than government wealth has, as the lower table shows.

Changes in Private Wealth in 2012 Dollars From Q4 2019 to Q2 2021 Compared to Changes in Government Debt

Q4 2019

Q2 2021

Yearly Growth Rate


$103.411 trillion

$120.657 trillion

10.28 Log-%

$17.246 trillion

$20.851 trillion

$23.544 trillion

8.10 Log-%

$2.692 trillion

Home Prices:

During that same time, the price of houses grew by 8.02 Log-% per year and inflation-adjusted private wealth in real estate grew by 7.08 Log-%. The wealth in real estate might be growing slower than the price of houses because joint stock corporations have recently gotten involved in buying large swathes of existing suburban real estate to then earn rental income. This would transfer existing household wealth on government balance sheets from real estate wealth to corporate equity (if this is financed by stock issuance) or loan/bond wealth (if this is financed by corporate borrowing).

Furthermore, the size of directly owned home equity is larger than the level of overall government debt, so an 8% increase in home prices is more significant than an 8% increase in overall government debt.

Stock Prices:

From Q4 2019 to Q2 2021, the S&P 500 (an indicator of overall US stock prices) grew by 20.36 Log-% per year. Most of this growth happened after an early drop in stock values directly after the outbreak became widely known and started to impact the economy. Simultaneously, household and non-profit wealth in corporate equity and mutual funds grew at an annual inflation-adjusted rate of 19 Log-% per year. This measure of stock market wealth does not include stocks that people own indirectly through things like retirement pensions. Arguably, some of the growth in stock market wealth could be attributable to the corporate sector issuing more stock or buying back less stock in order to have more money available to buy government debt, but I don’t think this is a big explanatory factor for the growth in stock market wealth.

Furthermore, the size of corporate equity and mutual fund wealth directly held by households and nonprofits is larger than overall government borrowing, so even if the level of stock market wealth was increasing just as much as the level of government borrowing, the effect from stock market wealth would be larger.

It is hard to disaggregate the effects of fast-paced growth in either government debt, stock market wealth or housing market wealth from the effects of growth at baseline. This is because it is hard to come up with a baseline growth rate. However, I will adopt an assumption to do this. I will assume that there is some long-term economic growth-rate which is at least 0 and at most 4 log-% per year and the baseline growth level for direct housing wealth, direct stock wealth and overall government borrowing is at that level.

The plot below uses that assumption. It shows how much a certain thing has contributed to higher household and non-profit wealth in trillions of 2012 dollars on the y-axis as a function of what long-term growth rate the economy might be at which is given in terms of log-% per year on the x-axis. The red line shows how much higher government borrowing should have added to private wealth. The blue line shows how much higher direct housing wealth should have added to private wealth. The green line shows how much higher stock wealth should have added to private wealth. Of course, some of the private wealth created by government borrowing might show up as directly held real estate or stock wealth if companies issued stock or sold real estate to afford to buy government debt. Nonetheless, it’s pretty clear most of the wealth gains in the stock and real estate market result from FED-induced bubble conditions. It is furthermore clear that the wealth created this way by the FED swamps the wealth created by more government borrowing.


The most significant way that fiscal policy contributes to higher employment and inflation (higher direct spending) was essentially not employed on net by the government overall in response to Covid. The second most significant way fiscal policy contributes to higher employment and inflation (increasing private wealth) was not nearly as significant as the growth in asset values associated with ultra-low interest rates. The third most significant way fiscal policy contributes to higher employment and inflation (redistribution) has not been directly measured with any degree of reliability.

In conclusion, ensuring everyone gets enough income to support themselves might not really impact macroeconomic variables like GDP or inflation all that much. This argues in favor of such welfare-promoting programs as they are therefore likely without significant cost.

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