Government Spending Needed

Ira Kawaller
2 min readMay 6, 2020



How should we get the economy moving?

First, some background and terminology: We measure macroeconomic activity adding four spending categories —

1. Consumption — i.e., spending by households and individuals

2. Business spending, which economists call Investment

3. Government spending

4. Net exports

These four components sum to aggregate demand, or the gross domestic product (GDP).

Consumption and investment spending are the two components of GDP that were hardest hit by the coronavirus, and they aren’t going to return to pre-pandemic levels until stay-at-home orders fade into history. And even after those restrictions are lifted, if we continue to practice social distancing, losses in productivity will further retard the come-back. The effect on net exports is more ambiguous, as the stay- at-home orders probably dampened both imports and exports.

What about government spending? In fact, the stay-at-home restrictions probably didn’t have much of an effect on the level of spending by this sector — despite the CARES Act. It should be understood that allocations under the CARES legislation are largely in the form of transfer payments, which are moneys that are granted to recipients for which there’s no exchange of goods or services. These grants or loans have their effect on GDP indirectly, because they encourage incremental effects in the other spending categories.

It’s reasonable to expect a high proportion of the funds that the CARES Act directs to households to be spent (as opposed to saved), quickly. These allocations will surely support consumption, but they’ll only partially offset the declines that we’ve posted so far. (Be prepared to hear critics say this program didn’t work, because it wasn’t sufficiently generous to offset the entirety of the reduction in consumption.)

In contrast to the support for consumers, a higher portion of the CARES Act payments to businesses will likely be kept in reserve. Put another way, businesses will hold off making expenditures to the extent possible, until they see a more promising reception for their goods and services. Thus, these CARES Act funds will likely be spent over a much longer horizon than would be the case for consumers.

Direct government spending is needed now. This spending would be the most efficient way to support GDP. It’s dollar-for-dollar. The fastest and easiest way to affect this category of spending would be via a transfer payment to state and local governments. Beyond that, we’ve got plenty of infrastructure that could benefit by improving or upgrading. If not now, when?

Congress is currently debating prospective distributions for another stage of the CARES Act, where the issue of allocation to states and municipalities is front and center. Without this support, state and local governments will literally run out of money, government spending levels will retreat from current levels, and a bad economy will get even worse.

To be clear: An injection of additional government spending won’t return us to the pre-virus status quo; but it will mitigate the effects of a recession that would otherwise be much more severe.



Ira Kawaller

Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.