First Published in the Business NH Magazine, March 1, 2021
As vaccinations against COVID-19 continue, policymakers will be able to expand their focus from solely providing the still-needed relief for many residents to supporting the overall economic recovery from this crisis. Policies that support an equitable economic recovery in the long term will most effectively help people gain financial stability beyond the more immediate need for relief.
Best Returns on Investment
Economic modeling of federal policy options from the last recession provides some insight as to which policies provide the best return on investment in economic growth. Using the economy in early 2009 as a baseline, which was near to the nadir of the Great Recession, researchers at Moody’s Analytics developed estimates of the economic growth generated per each dollar spent by the government.
The highest return on investment came from temporarily increasing Supplemental Nutrition Assistance Program benefits, which provide resources for people with low incomes to purchase food. Increasing these benefits generated $1.74 in economic growth for every dollar invested. Federal financing of work-share programs generated $1.69 per dollar invested, and extending unemployment benefits generated $1.61, based on Moody’s modeling.
These modeled multiplier effects are reinforced by similar findings from the U.S. Congressional Budget Office (CBO) and the U.S. Department of Agriculture and are supported by economic theory. Consumer spending is approximately two-thirds of U.S. Gross Domestic Product, and people with limited resources are more likely to quickly spend the resources they have in the local economy, rather than saving them or using them in a less directly stimulative manner.
With U.S. Census Bureau data indicating that in mid-January more than one in four Granite State households found it somewhat or very difficult to pay for usual household expenses in the prior seven days, money directed at low-income individuals is likely to enter the economy quickly in this environment as well.
Infrastructure and Services
Infrastructure spending was deployed to help boost the economy during the recovery from the Great Recession, with significant federal dollars flowing to water, housing and highway infrastructure. Moody’s Analytics estimated infrastructure spending generated $1.57 per dollar invested.
Additionally, general aid to state governments from the federal government was estimated to generate $1.41 per dollar invested. This likely stems from maintaining services for residents in need and keeping state and local government workers employed. The CBO estimated multipliers for the aid provisions in the pandemic-related federal legislation passed in 2020, which were focused on relief rather than recovery. All multipliers were affected by public health restrictions in 2020. Among these estimates, direct assistance to state and local governments has the largest multiplier of the policies examined.
Tax Policy Changes
Reducing taxes appears to have a limited impact, based on Moody’s and CBO analysis. Targeted tax reductions for people with low incomes appears to be more stimulative, and Moody’s analysis of payroll tax holidays for employees ($1.27) and employers ($1.05) also appeared to have a net positive impact in the 2009 modeling.
However, a permanent cut in the corporate tax rate would only have generated an estimated 32 cents for each dollar appropriated. Making federal dividend and capital gains tax reductions permanent would have generated 39 cents per dollar invested. CBO analysis from 2015 also found that a temporary tax rate reduction for high-income earners generated between 10 and 60 cents of economic activity per dollar appropriated, and that reductions in business income taxes likely had a more limited effect on boosting employment than other policy options evaluated.
Boosting NH’s Economy
State policymakers can help build an equitable and sustainable economic recovery. Careful deployment of resources has the potential to maximize efficiency and effectiveness to achieve these goals. Support for Granite Staters with the fewest resources, especially those who have faced the most severe effects from this crisis, gets money flowing in local economies quickly.
– Phil Sletten, Senior Policy Analyst