The Pandemic, the Stimulus, and the Future Prospects for the US Economy

In this report, Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza analyze how the US economy was affected by the pandemic and its prospects for recovery. Their baseline simulation using the Institute's stock-flow macroeconometric model shows a significant pickup in the growth rate in 2021 as a result of the American Rescue Plan Act. The report includes two additional scenarios simulated on top of the baseline, finding that President Biden's infrastructure and families plans--whether paired with offsetting tax increases on high-earners or deficit financed--would have positive macroeconomic effects. Additionally, Papadimitriou, Nikiforos, and Zezza warn that if US policymakers do not prioritize decreasing the trade deficit, maintaining growth will require either continuous and very high government deficits or the private sector once again becoming a net borrower. Finally, they argue that concerns about a sharp increase in inflation spurred by the fiscal stimulus are unwarranted: the US economy was not close to full employment or full utilization of resources before the pandemic, and the propagation mechanisms that could lead to accelerating inflation are not in place.