Key Methods That CBO Used to Estimate the Effects of Pandemic-Related Legislation on Output: Working Paper 2020-07

Working Paper Series

Congressional Budget Office

Washington, D.C.

Key Methods That CBO Used to Estimate the

Effects of Pandemic-Related Legislation on Output

John Seliski	Aaron Betz
Congressional Budget Office	Congressional Budget Office
[e-mail]	[e-mail]
Yiqun Gloria Chen	U. Devrim Demirel
Congressional Budget Office	Congressional Budget Office
[e-mail]	[e-mail]
Junghoon Lee	Jaeger Nelson
Congressional Budget Office	Congressional Budget Office
[e-mail]	[e-mail]

Working Paper 2020-07

October 2020

To enhance the transparency of the work of the Congressional Budget Office and to encourage external review of that work, CBO's working paper series includes papers that provide technical descriptions of official CBO analyses as well as papers that represent independent research by CBO's analysts. Papers in that series are available at http://go.usa.gov/ULE.

For helpful comments and suggestions, the authors thank Christina Hawley Anthony, Robert Arnold, William Carrington, Mark Doms, Sebastien Gay, John Kitchen, Jeffrey Kling, John McClelland, Dan Ready, Chad Shirley, Phillip Swagel, and Jeffrey Werling. In addition, CBO consulted with many outside experts, including members of its Panel of Economic Advisers. Although those experts provided considerable assistance, they are not responsible for the contents of this paper. James Otterson created the tables, and Erin Deal fact-checked the paper. Christine Bogusz and Gabe Waggoner were the editors.

www.cbo.gov/publication/56612

Abstract

This paper describes key methods that the Congressional Budget Office used to estimate the effects on economic output of the laws enacted in response to the 2020 coronavirus pandemic. To quantify the short-term effects that those laws had on output by means of their influence on overall demand for goods and services, CBO used delayed and reduced estimates of the output multiplier to reflect the effects of social distancing. The agency combined estimates of the effects on overall demand with those on the supply of labor in the economy, when applicable, to examine the short-term effects of enhanced unemployment compensation, the Paycheck Protection Program and related provisions, the Federal Reserve's emergency lending facilities, and other provisions. To estimate the longer-term effects of pandemic-related legislation on output, CBO used its Solow-type growth model to quantify the effect of higher federal deficits on national saving and private investment.

Keywords: fiscal policy, pandemic, multiplier, labor supply, federal budget

JEL Classification: E2, E32, E62, E63, H2, H3, H5, H6, J64

Notes

Unless indicated otherwise, all years referred to in this paper are calendar years. Numbers in the text and tables may not add up to totals because of rounding.

Contents
Introduction.....................................................................................................................................	2
Short-Term Effects..........................................................................................................................	3
How Changes in Overall Demand for Goods and Services Affect Output.................................	3
How Enhanced Unemployment Compensation Affects Output .................................................	9
How the Paycheck Protection Program and Related Provisions Affect Output .......................	12
How the Federal Reserve's Emergency Lending Facilities Affect Output...............................	14
How Other Provisions Affect Output .......................................................................................	15
Longer-Term Effects.....................................................................................................................	17
How Increased Federal Borrowing Affects Output ..................................................................	18
The Transition Between the Short Term and the Longer Term................................................	19
Box 1. How CBO Estimates the Employment Effects of the Paycheck Protection Program.......	20
Tables............................................................................................................................................	23
Table 1. The Effects of Pandemic-Related Legislation on Real GDP......................................	23
Table 2. Changes in Output From One Dollar of Direct Effects on Overall Demand When
Output Is Well Below Potential and the Federal Reserve's Responses Are Limited ...............	24
Table 3. Direct Effects on Overall Demand From One Dollar of Budgetary Cost Incurred in
the Second Quarter of 2020 ......................................................................................................	25