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Who wins the stimulus contest?

Guest Post by Ned Davis Research

Recently, U.S. Congress passed a long-awaited $900 billion COVID relief bill, which includes much-needed extended unemployment compensation, checks to households, and support for small businesses. This is in addition to over $2.5 trillion of aid enacted earlier in the year (according to the IMF). That brings the grand total to an unprecedented 17.2% of GDP, around triple the share implemented in response to the Global Financial Crisis.

How does the U.S. stimulus compare?

As seen in the chart below, at first glance, the U.S. is still far behind some major developed economies. Notably, Germany’s figure exceeds 30% of GDP, while Japan, which introduced another package in December, is over 50% of GDP.

COVID fiscal stimulus has far outpaced GFC

What’s not evident in the figures is that not all stimulus is the same. In Germany, for example, the majority of the stimulus (about a quarter of GDP) has been loan guarantees. These loan guarantees also make up a large chunk of support in France and Italy. Compared to the U.S., small- and medium-sized enterprises encompass a larger share of their economies, increasing the importance of this kind of stimulus.

While many European countries such as Germany did extend unemployment support via its short-term work subsidies, a greater amount of existing automatic stabilizers and social protections ensure more built in support. In 2019, public social spending in France and Germany as a share of GDP was 31% and 26%, respectively, vs. a much smaller 19% in the U.S.

With fewer automatic stablizers, the U.S. has provided more direct aid, via augmented unemployment compensation, direct payments to households, and grants to small businesses.

Indeed, U.S. stimulus earlier this year led to a near-record annual surge in disposable income in Q2 2020, during the worst of the recession. Thanks to similar support, Canada and Australia also saw disposable incomes surge, while Japan’s continued to grow on a year-to-year basis. In the eurozone, however, disposable incomes slumped.

The U.S needed this type of relief partly because the economy is more dynamic and has less built-in support. This has its pros and cons. The dynamism allows the economy to adjust faster to change. But it also makes the economy more vulnerable to Congress’ discretion, whose lack of agreement on further stimulus has been a nail-biter for many of us throughout most of the year. We could see a repeat of this gridlock when some of the new relief measures expire at the end of March.

Moreover, in order to get the support out quickly, stimulus may not be as targeted and takes longer to get channeled to consumers.


In the end, not that different

Given these varying approaches to stimulus and the overall support attributable to automatic stabilizers, it’s hard to know which country spent the most to combat the crisis. But IMF government debt projections for 2020 suggest that most G7 countries provided similar amounts of support.

Most G7 countries are forecast to see their government debt to GDP ratios jump by around 20 to 25 percentage points. The one stand out is fiscally conservative Germany, which is expected to increase by a smaller, but still generous, 13 percentage points this year.

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