Government social spending dramatically reduced poverty, hunger, and inequality and led to increased wages, showing why we need more of such spending, not less.
Last year, Kentucky ended something known as SNAP emergency allotments, an increase in food stamp benefits that had been implemented nationwide at the start of the COVID pandemic. For many seniors, benefits went down to $22 from close to $300. Food pantries throughout Kentucky picked up the slack, servicing a 20 percent increase in need. One struggling Kentuckian senior, reflecting on his reaction in the wake of the state government’s decision to scrap the emergency allotments, told the Washington Post, “I thought, ‘Wow, the government is trying to kill us now. They are going to starve us out.’”
The story of the last several years is one of long-awaited, commonsense reforms followed by a reversal of those reforms despite their success. For the first time in decades, the U.S. government committed itself to a distinctly progressive response to an economic downturn, with major expansions to the safety net not only shielding those at the bottom but in many cases improving their standards of living. In a succession of three main rounds of legislation from March 2020 through March 2021, the federal government intervened to protect the population and stimulate the economy in a fashion unprecedented in recent history.
Then came the backslide. By mid-2021, the U.S. had begun to experience a rise in inflation above target levels. The timing made it easy to cast blame on the influx of government money into the economy, which Republicans and even some Democrats happily did. Speaker of the House Kevin McCarthy, for instance, declared last year that “Democrats’ radical policies created the worst inflation in a generation, and the problem continues to spread into more and more of the economy.” A top Democratic economist, Larry Summers, had earlier pronounced the American Rescue Plan of March 2021 “the least responsible macroeconomic policy we’ve had in the last 40 years.”
The available evidence would not seem to suggest that government stimulus was the fundamental problem sparking rapid price increases.1 Nevertheless, ever since the passage of the final major pandemic relief bill, the government has embarked on a gradual dismantling of the pandemic welfare state, a sort of sacrifice at the altar of the inflation gods. By the summer of 2022, the Build Back Better Act, which in 2021 represented the lofty ambitions of the Biden administration for transforming the American safety net, had morphed into a paean to fiscal responsibility under the title of the Inflation Reduction Act and included almost no expansions to social programs. Significant expansions enacted early in the pandemic, such as the increase in food stamp benefits that helped keep the Kentuckian senior afloat, have since been unceremoniously gutted.
We are now in danger of learning precisely the wrong lesson from the pandemic years: that the government did too much to protect those at the bottom, and that the inevitable result was unsustainable inflation. The proper way of looking at this period is, instead, to consider the alternative. What would have happened if the government had not acted swiftly and decisively to blunt the impact of the 2020 recession? Inflation would still have risen, but less. And lower-income people would still have suffered, but more.
What we miss in the midst of the ongoing obsession with inflation is the remarkable success of the enhanced safety net that was rapidly constructed following the onset of the pandemic. This is the same safety net that cut child poverty by almost 30 percent, kept hunger stable instead of allowing it to spike like it did during the Great Recession, reduced the percentage of U.S. residents lacking health insurance to an all-time low, and held poverty much lower than it would have otherwise been in the midst of an economic and public health crisis.
Maybe the most impressive achievement of the pandemic welfare state, though, was a historic reduction in income inequality.2 From 1980 through the eve of the pandemic, the top 0.1 percent saw inflation-adjusted gains in average disposable income of nearly $4 million, while the bottom 50 percent saw gains of around $7,000. Had the entirety of the top 0.1 percent’s gains over these years instead gone to the bottom 50 percent, each member of that group would have experienced, on average, an increase in disposable income more than twice as large as they did in reality.
This graph shows what happened to the average disposable income of the bottom 50 percent from January 1980 through January 2020 and what would have happened had all the income gains that went to the top 0.1 percent over this period instead gone to the bottom 50 percent. The blue bar shows what the bottom 50 percent received, on average, in January 1980. The red bar represents growth in the 40 years following that. As we can see, growth would have been much higher if the top 0.1 percent’s gains were redistributed to the bottom 50 percent. Specifically, disposable income would have grown by $15,822 with redistribution, far above the $7,331 it grew in reality. That would have made average disposable income for the bottom 50 percent $32,837 in January 2020 rather than $24,346. Source: realtimeinequality.org. Author’s calculations.
Instead, over at least the first 30 years of this period, life expectancy for the poor actually declined. Inequality meant that the rich got richer and the poor died younger. It also meant lower economic growth, with the economy suffering from too-low spending by poor Americans whose wages stagnated. In the wake of COVID, however, with a gush of social spending coursing through the economy, inequality fell precipitously and proceeded to remain substantially below pre-pandemic levels despite the rollback of government programs, largely due to these programs’ boost to workers’ bargaining power.
One way of telling the story of the decline in inequality over the pandemic years is to consider what happened to income with government relief included during this period. Income before relief tends to fall during recessions, so the question is to what extent the government will step in to offset that drop. Will it throw a few bucks into the crowd or will it bring out the money cannon?
In the wake of COVID, the government opted for the latter approach. A study published last December by government researchers found that, when government relief is included, the bottom 20 percent of workers saw an increase in real median earnings of 66 percent in 2020 from a year earlier, with real median earnings remaining at 62 percent above 2019 levels in 2021 as well. This two-year increase in real median earnings blew all other two-year increases going back to 1999 out of the water. It also put policy responses to previous recessions to shame.
This figure shows what happened to the median inflation-adjusted earnings of the bottom 20 percent of workers during the previous three recessions, both with and without government relief included. It shows the dramatic impact of relief on workers’ incomes during and following the latest recession, when median real earnings shot to the moon for the bottom quintile (bottom twenty percent). This group had suffered a much worse fate in the 2001 and 2008 recessions, with their earnings declining substantially over a three-year period in each case. Highlighting the importance of government relief, real median earnings for the bottom 20 percent of workers would have shrunk by 26 percent from 2019 through 2021 without government support.
Another study from last year, “Real Time Inequality,” told a similar story. It reported, “Average disposable income for the bottom 50 percent was nearly 20 percent higher in 2021 than in 2019.” The result was a noticeable drop in inequality. After falling for years, the bottom 50 percent’s share of total disposable income shot up in the midst of the pandemic. During the brief period encompassing the COVID recession, the group shaved off over four-fifths of the decline in its share of total income since the start of 1980. This was despite the fact that the bottom 50 percent’s share of total income before government relief fell by 1.5 percent over the course of the recession.
This graph shows the share of total disposable income going to the bottom 50 percent of Americans from January 1980 through April 2020, the final month of the COVID recession. Up until early 2020, there was a steady downward trend in the share of income going to this group. But in April 2020, the share jumps to 21.6 percent from 17.1 percent two months before. This brought the bottom 50 percent’s share one percentage point below where it had been in January 1980, shaving off 82 percent of the decline in the group’s share of total income since 1980 in the span of two months.
The key programs driving this decline in inequality were the stimulus checks and enhanced unemployment insurance. The checks were sent out in three rounds corresponding to each major piece of relief legislation from March 2020 through March 2021. The unemployment benefits were boosted by $600 from March through July of 2020, then by $300 for six weeks, and then again by $300 from December 2020 through September 2021, though some states ended this final boost early. From the spring of 2020 through the spring of 2021, these two programs accounted for the vast majority of the boost to the bottom 50 percent’s disposable income levels.
The human impact of these expansions was incredible. Interviews with the American Voices Project revealed that government support helped people catch up on basic needs. One disabled woman reported that she was finally able to upgrade from having to rent a laundry machine to being able to own one:
I was renting [a washer and dryer] like for $100 and change, per month…. But then the stimulus money, that helped me to find something…. So now, I got me a used one, nice and clean…. I don’t have that monthly expenses on that.
People interviewed by Vox about the $600 increase to unemployment benefits related similarly positive effects. One young woman who had been working for $10 per hour and had her hours capped by her employer to prevent her from receiving workplace benefits described the freedom offered by enhanced unemployment checks:
The $600 extra was insane to me. I had never made that much on a paycheck before. It felt weird and unreal. I could actually pay all my bills for a change. I was paying off old debt that I could never make large payments on.
Another woman explained how she went from “never ha[ving] a comfortable amount of money in my bank account” and being “exhausted all the time and just barely making rent” before the pandemic to “for the first time in my life, [having] money in my savings” after starting to receive enhanced unemployment benefits during COVID.
Pandemic social programs were certainly not without shortcomings, as many interviewees pointed out. Unemployment benefits were difficult to access, and stimulus checks failed to reach or outright excluded millions of people, including many who have incomes too low to warrant filing taxes and are disproportionately likely to experience poverty. But the picture painted by these interviews is of broad celebration of increased social spending mixed with exasperation at the pre-pandemic safety net and the holes remaining in the pandemic one. In other words, people saw the success, and they wanted more.
The pandemic welfare state, however, did not last. As the authors of “Real Time Inequality” noted, while the welfare state expansions enacted during COVID brought about “unprecedented… improvements in living standards for the working class,” these improvements were “short-lived.” As they summarized, “disposable income fell in the beginning of 2022 and then flatlined, as the expansion of the welfare state enacted during the pandemic… was rolled back.” Remarkably, though, real disposable income for the bottom 50 percent remained about 10 percent above pre-pandemic levels even as safety net expansions evaporated due primarily to the historically large real wage gains that accrued to low-wage workers over the course of the pandemic.
Which brings us to another way of telling the story of the decline in inequality in the COVID era. This involves looking at income before relief is included, specifically focusing on wages. The difference between this story and the story just outlined is the difference between predistribution and redistribution. Predistribution focuses on how income is divvied up in the market—how much are employers paying their workers? Redistribution concerns itself with what happens after the government steps in to levy progressive taxes and carry out transfer payments—how much do people end up with after they pay taxes and get their Social Security payments and their stimulus checks? In reality, policies that seem to be redistributive in nature can have effects on the predistribution of income as well. And this is precisely what happened during the pandemic.
The two most important redistributive policies enacted in the wake of the COVID recession were the stimulus checks and enhanced unemployment insurance. These boosted disposable incomes substantially, but they also led to gains in pre-tax incomes by turning down the pressure on workers seeking to re-enter the job market. The American labor market depends crucially on coercion—for able-bodied, working-age adults, the deal is generally either you get a job or you might not have enough money to cover basic necessities like food and rent—and the government effectively sets the coercion level wherever it decides. By providing generous support and stimulating consumer spending, the government made the job search less urgent and gave workers much more power to say “no” to low-paying, exploitative jobs. Of course, workers weren’t given enough money to coast for the rest of their lives; they just weren’t as pressed to take the first job that called back.
Though the stimulus checks undoubtedly played a role here, the most impactful intervention was the boost to unemployment benefits. The $600 bump implemented in the spring of 2020 set an unprecedented floor on income for those who happened to get laid off. In and of itself, that $600 would provide the equivalent of a full-time salary at a $15-an-hour wage, and for workers making just above the federal minimum wage ($7.25 per hour), the enhanced benefit level translated into a more than doubling of their previous pay.
Republican politicians, along with employers, unsurprisingly lost their minds after the policy’s passage, complaining that people were no longer willing to work anymore. Senate Minority Leader Mitch McConnell fretted, “As Washington pays workers a bonus to stay unemployed, virtually everyone discussed very real concerns about their difficulties in finding workers. Almost every employer I spoke with specifically mentioned the extra-generous jobless benefits as a key force holding back our recovery.” Senator Marco Rubio tweeted, “I hear from #smallbusiness everyday that they can’t hire people because the government is paying them to not go back to work.”
These signs of a so-called labor shortage did not reflect some sort of widespread unwillingness to work among the population. Instead, they reflected an unwillingness to work for shitty pay and meager benefits. In fact, thanks to government stimulus and increased pressure on employers to provide better jobs, employment came roaring back following the COVID recession. The U.S. witnessed the quickest return to pre-recession employment levels for prime-age workers, those between 25 and 54 years of age, of any recessionary period in over three decades. While the recovery from the Great Recession was slow and grinding and left employment levels depressed for over a decade, the COVID era saw employment levels rebound in three years.
The jobs that didn’t bounce back so strongly were the ones that paid the worst. Workers moved en masse to jobs with higher pay, and low-wage employers raised their pay to attract employees. As a new study, “The Unexpected Compression,” has detailed, the pandemic witnessed a reduction in employer power that spurred “rapid relative wage growth among young non-college workers who disproportionately moved from lower-paying to higher-paying and potentially more-productive jobs.” Even after accounting for inflation, the pandemic years brought massive wage gains to low-wage workers, who saw faster real wage growth at the start of this business cycle than they did at the start of the previous four business cycles going back to 1979. From 2019 through 2022, workers at the 10th percentile saw whopping real wage gains of 9 percent. During the first three years of each of the previous four business cycles, this group of workers had seen real wage gains of, on average, nearly 11 percentage points less (yes, on average they experienced declines in inflation-adjusted wages). COVID, by contrast, brought a historic wage surge. The impact on inequality was stunning—the pandemic years wiped out about a quarter of the rise in wage inequality between the 90th and 10th percentile since 1980.
This graph shows the unexpected compression at work. During the pandemic years, low-wage workers saw the steepest increase in wages. In fact, they were the only one of the groups included on the graph to see real wage increases. Inflation actually eroded wages for mid- and high-wage workers. It’s important to note that this wage erosion didn’t extend to the highest wage workers, who enjoyed sizable gains of their own. According to EPI, “between 2019 and 2021, annual earnings of the top 1 percent and top 0.1 percent rose 16.1 percent and 29.2 percent.”
The COVID recovery, moreover, led to a robust recovery for workers of all races, a far cry from the highly unequal recovery that followed the Great Recession. Pre-tax incomes for white, Black, and Hispanic Americans all recovered at a similar pace following the downturn in early 2020 and at a much quicker pace than during the previous recovery. All three groups had recovered their pre-pandemic levels by early 2021, with white incomes actually showing the weakest recovery of the three.
By April 2023, jobs numbers for Black Americans were nearing or clearing record levels. Black unemployment sat at a record low of 4.7 percent, and the Black-white unemployment ratio neared a record low, coming in at 1.5, significantly below the average over the past twenty years, when Black unemployment habitually doubled white unemployment. Moreover, as the Wall Street Journal reported in a recent article, “The gap between the unemployment rate for white Americans… and the higher rate for Black Americans was 1.6 percentage points in April, the narrowest on record.”
This historically tight job market has transformed Black workers’ prospects, allowing many to move “into occupations that pay more, demand more skills and offer better long-term stability.” The Journal profiled one such worker, Henry Gage, who was able to move up from a $15-an-hour job at Target before the pandemic to a $65,000-a-year job at an IT company at the end of 2022. He told the paper, “The job has given me the opportunity to be able to live on my own. In the next five years, I’ll be able to take care of my parents comfortably.”
These graphs compare the recovery of pretax income for white, Black, and Hispanic Americans during the two most recent recessionary periods. They reveal a wide gulf between the weak recovery to the Great Recession and the strong recovery to the COVID recession. Within a year of the COVID recession, each group had recovered its pre-pandemic level of pretax income. Following the onset of the Great Recession, by contrast, Black Americans suffered a four-year decline before average pretax income resumed an upward trend. According to “Real Time Inequality,” “In the third quarter of 2011, [average Black income] was 8% lower than on the eve of the Great Recession, while average income for white working-age adults had already fully recovered.” Two years out from the start of the COVID recession, average Black income had not only recovered its pre-pandemic level but had outpaced the recovery of average white income.
Though imperfect, the results of the U.S.’s economic response to COVID have been stunning. A historically rapid recovery was accompanied by astronomical spikes in income during 2020 and 2021, and, even in the face of the highest inflation in decades, there have been clear indications of resilient gains at the bottom as a result of pandemic relief spending:
- Poverty sat at 14.3 percent in December 2022 (the latest month for which data is available), still more than a percentage point below its January 2020 level. This after it had plummeted over six percentage points from January 2020 through March 2021.
- Low-wage workers’ average real labor income, which includes wages and benefits, was up 8.6 percent in March 2023 from its level in January 2020. This represents more than double the growth experienced by mid- and high-wage workers. (In the case of the Great Recession, the low-wage group didn’t even start experiencing growth above its pre-recession level for almost a decade.)
The pandemic relief bills do seem to have contributed to higher inflation, which picked up in 2021, peaked in the summer of 2022, and has been descending ever since. But their contribution has been wildly exaggerated. Going by calculations published by the Federal Reserve Bank of San Francisco, inflation would still have been 4.9 percent in April of 2022 even if we stripped out the effect of demand factors on elevated inflation. In other words, had these bills been significantly smaller, the likely outcome would have been higher unemployment, lower worker bargaining power, lower wages, less government support, and elevated inflation. Not exactly the best deal.
At the end of the day, the government’s response to the COVID recession has been a remarkable success. It was not long ago that the government completely whiffed on a response to a downturn, with a weak stimulus bill in 2009 precipitating a sluggish recovery from the Great Recession. The COVID response hammers home what an abysmal policy failure that 2009 bill was. The dramatic decline in inequality we witnessed in the midst of the pandemic, not to mention the drop in poverty and hunger, should be celebrated. And the pandemic welfare state should be built on, not discarded and forgotten. To the extent that this historic recovery has been accompanied by price increases that have strained incomes at the bottom, the response should not be less spending on the worst off but more. Maybe this is a radical idea in Washington, but what if, instead of running from success, we ran with it?
The reasoning behind the rhetoric used by people like McCarthy and Summers makes intuitive sense: you give people too much money, they start spending like crazy, and rapidly increasing prices are the logical result. And that does appear to describe part of the inflation problem in the U.S. But we have to remember that some other critical events occurred in the past few years other than Uncle Sam bringing out a money cannon. COVID and lockdowns massively disrupted supply chains and led to a shift from spending on services (remember all those people fucking up their hair because barbershops and salons were closed down?) to goods, with the inordinate purchases of one particular good leading an Amazon worker to remind people, “Dildos are not essential items.” The Russian invasion of Ukraine added on to the existing disruptions, most prominently by helping jack up gas prices to an all-time high of over $5 by the summer of 2022.
An honest appraisal of the inflation situation would have to address both sides of the issue: the effect of juiced-up demand resulting from government spending and the effect of supply-side issues ranging from increased difficulty of obtaining key materials due to COVID restrictions to a spike in gasoline prices following Russia’s invasion of Ukraine. A mid-2022 paper from the Federal Reserve Bank of San Francisco did precisely that. Weighing supply factors and demand factors against each other in terms of their contribution to elevated inflation in the spring of 2022, it found that the former were nearly twice as important as the latter, with supply-driven inflation contributing 2.5 points more than it was prior to COVID and demand-driven inflation contributing 1.4 points more than beforehand. The paper came down firmly on the side of supply issues as the main driver of inflation.
A thorough December 2022 analysis by the Roosevelt Institute likewise observed that, when we look at overall demand in the economy over the pandemic years, it does not appear to be a serious issue in and of itself. It in fact only briefly outstripped the Congressional Budget Office’s estimate for the ceiling for demand, beyond which any increase in demand would cause inflation, and did so in late 2021/early 2022, when inflation had already taken firm root in the economy. As the study authors put it, “The evidence is overwhelming: Were there no supply problems, aggregate demand would not be excessive.” Instead, they argued, “Globally shared supply shocks are driving inflation.” The fact that inflation is not only an American problem but is common in Europe as well, where countries opted for less stimulus, suggests as much. Though U.S. inflation has been higher than the European average, this is not simply a result of larger government stimulus. Notably, the most obvious difference between U.S. and European inflation has been in transportation, where semiconductor shortages and a COVID-related shift in demand pushed up car prices and the Ukraine war pushed up fuel costs. ↩
Wealth inequality has also declined significantly over the past several years, with the top 10 percent’s share of total wealth down by 1.2 percent since February 2020 and the bottom 50 percent’s share up by 0.6 percent. As the Intercept observed late last year, “The wealth of America’s bottom 50 percent has doubled during the pandemic years.” This was partially a reflection of pandemic social spending, but much of it was due to home ownership. As Jon Schwarz wrote, “Perhaps half the increase in wealth is due to an increase in housing equity—thanks both to the run-up in home prices and inflation reducing the value of fixed-rate mortgages.” The income inequality story thus shows the effects of the pandemic welfare state much more clearly than the wealth inequality story does. ↩
