Symposium | The Middle-Out Moment Is Here

The Fruits of the American Rescue Plan

By Bharat Ramamurti

Tagged Biden AdministrationMiddle Out Economics

America is in the midst of an economic boom that few predicted. After the crushing COVID-19 recession of 2020, the job market regained its pre-pandemic strength years faster than experts projected. Rather than the certain and imminent recession that economists were forecasting in 2022, the American economy has continued to grow and blow away its leading international competitors. And despite fears that this recovery would leave the most financially vulnerable people behind—as many past recoveries have done—low- and middle-income households have actually fared even better than their wealthier counterparts.

How did America defy these gloomy projections and author an unprecedented economic turnaround? The key driver was the American Rescue Plan (ARP): the comprehensive recovery legislation that President Biden and Democrats in Congress passed over unanimous Republican opposition in March 2021. The ARP jolted America’s economy back on track by offering financial support directly to working-class Americans. Without the ARP, the United States would likely be enduring the kind of sluggish recovery that many other advanced economies are facing—with serious, long-lasting harms to American workers and businesses alike.

Despite that, many have argued that the ARP did more harm than good because it supposedly generated the high inflation America has experienced in recent years. But inflation in 2021 and 2022 was a global phenomenon driven by global events like international supply chain disruptions and Russia’s invasion of Ukraine. Countries that did not provide nearly as much fiscal support to their residents as the United States did faced inflation just as high, or even higher. While the ARP likely had a marginal additional impact on inflation in the United States, it was a price well worth paying for the world-beating recovery it helped deliver. Now, with inflation approaching the Federal Reserve’s 2 percent target and the economy continuing to power forward, the ARP stands as one of the most effective pieces of economic recovery legislation in the last 50 years.

To fully understand the success of the ARP, consider the situation facing President Biden when he took office in January 2021. The unemployment rate was over 6 percent. The economy was still nearly nine million jobs short of where it had been before the pandemic struck, and the pace of job growth had slowed to the point that the country was on track to take three more years just to recover those lost jobs. Only 5 percent of Americans had been vaccinated against COVID. Schools and businesses across the country were still mostly shut down.

America was in a deep hole, and the future was highly uncertain. How quickly could the Administration stand up an effective vaccination campaign and stem the public health emergency? What types of COVID variants might develop that could extend the public health crisis? When would people start to feel comfortable going back to the office, taking public transportation, and traveling for work and pleasure? How would other countries approach COVID reopening, and how would that affect the availability of items American consumers and businesses needed?

Against that backdrop, the President and his economic advisers had to design a legislative package to accelerate the pace of America’s economic recovery. (As a member of the economic transition team for the incoming Biden-Harris Administration in late 2020, and later as deputy director of the White House National Economic Council, I played a role in this effort.) Early on, the President made two key determinations. First, he wanted to drive the recovery from the bottom up and middle out, rather than from the top down. What that meant in practice was offering direct and immediate support to working-class people to stabilize their finances and avoid the kinds of painful disruptions—evictions, foreclosures, defaults, and delinquencies—that typically flow from a grinding economic recovery. Whereas some past recovery bills had provided financial incentives to corporations or the wealthy in the hopes of inducing more economic activity, this bill would prioritize the well-being of the engine of the economy: the typical American consumer.

Second, the President decided that it was better to err on the side of providing too much support rather than too little. The President had a strong sense of approximately how much additional support was needed, but he (along with Democrats in Congress) wanted to aim for the higher end of that range to ensure that Americans had enough financial cushion to get through whatever ups and downs were to come. That was because they knew the consequences of doing too little would be severe: A slower recovery could condemn millions more to long-term unemployment, which typically results in significantly lower pay and other negative outcomes over the course of one’s career. It would also prolong a weak job market—one in which employers felt little pressure to compete hard to attract and retain workers—driving wages down for workers across the income spectrum. And it would mean lower consumer demand at a time when American businesses needed the assurance that there would be people able to buy the products and services they produced.

There was another key factor in deciding to err on the side of more support rather than less. If the initial bill fell short, the President could not count on Congress to offer more help. History taught that passing a second recovery bill would be tough, even with the President’s party in charge of Congress. But if the bill happened to be too large, and the economy began to overheat, the Federal Reserve had the capacity to tap the brakes by raising interest rates—which were near zero percent at the time.

The President proposed his package shortly before entering office, and deliberations with Congress resulted in his original plan passing largely unchanged. The final bill provided roughly $1.5 trillion in direct relief to individuals and state and local governments. (While the total cost of the ARP was closer to $1.9 trillion, the remaining funds went to COVID vaccine distribution, K-12 school reopening, and other important efforts apart from financial stabilization.) State and local governments received hundreds of billions of dollars to fill budget holes and avoid painful cuts to payrolls or to badly needed housing and nutrition programs. Working-class adults and their children each received $1,400 stabilization checks. The unemployed got $300 in enhanced weekly benefits, which bought them additional time and financial flexibility to find a good job as businesses reopened. An expanded child tax credit provided parents with young children with as much as $1,600 more per child. Billions of dollars for lower-income homeowners and renters helped keep people in their homes even as foreclosure and eviction moratoria expired.

The President’s decision to plan for uncertainty quickly proved prescient. Shortly after the ARP passed, serious economic headwinds emerged. Two separate COVID variants—Delta in the summer of 2021 and Omicron that winter—led to spikes in infection rates and deaths, deterred people from returning to work, and set back reopening efforts. Russia’s invasion of Ukraine in early 2022 disrupted global markets for oil, wheat, and other commodities, and intensified supply chain disruptions. Yet through it all, the ARP kept pushing America’s recovery forward, even as other leading economies sagged under the weight of these global events.

The benefits of the ARP can be seen in nearly every economic measure. Economic growth soared. Moody’s, an independent economic analysis firm, estimated that inflation-adjusted (or “real”) U.S. economic growth in 2021 without the ARP would have been 3 percent. Instead, real U.S. economic growth nearly doubled that estimate, reaching 5.7 percent—one of the strongest years on record. In fact, out of all the world’s leading economies, the United States is the only country to have returned to its pre-pandemic growth trend. From an American growth perspective, it is as if the pandemic-induced recession never happened.

The ARP sharply accelerated job growth as well. Before the ARP, the United States was on pace to recover the jobs lost in the pandemic by mid-2024. Instead, America hit that milestone in mid-2022—and has added four million more jobs in the year and a half since then. Moody’s found that of the nearly seven million jobs created in 2021, four million were attributable to the passage of the ARP.

More jobs brought a steeper decline in the unemployment rate. When the ARP passed in March 2021, 4.2 million people had been unemployed for roughly six months or more. By July 2022, it was less than 1.2 million people—nearly the same number of long-term unemployed as in the month before the pandemic struck. That rapid turnaround was a sharp contrast with the recovery from the 2008 financial crisis, when it took eight years for the number of long-term unemployed to return to pre-crisis levels.

The drop in unemployment was also uniquely broad-based. Past recoveries had offered quick progress for white, well-educated workers but only sluggish progress for other groups. That was not the case with the post-ARP recovery: The unemployment rates for Black workers, Hispanic workers, and workers with disabilities all fell to the lowest levels on record—as did the gap between the Black and white unemployment rates. And the unemployment rate for workers with only high school degrees also dropped below 4 percent, near a record low.

Measures of financial distress markedly improved. Evictions—which typically shoot up during economic downturns—actually declined, even after moratoria on evictions expired. Individual bankruptcy filings dropped and ultimately settled at a lower level than before the pandemic began.

The financial stability that the ARP provided also helped support a burst of entrepreneurship. Most entrepreneurs start a new business with their own funds or funds from friends and family. During an economic downturn, people usually have less money to draw on to make this initial investment. During the Great Recession following the 2008 financial crisis, for example, new business applications declined for two straight years. But in 2021 and 2022, more Americans applied to start new businesses than over any two-year period on record. Once more, this upswing was broad-based, with business ownership rates for Black and Hispanic households shooting up sharply. By giving working-class people the financial wherewithal to take a risk and fund a new venture, the ARP helped lay the foundation for an unprecedented boom in entrepreneurship.

For ARP critics, the 2021 and 2022 surge in inflation was too steep a price to pay for all these extraordinary economic outcomes. That would be a questionable claim even if the ARP were solely responsible for the inflation America experienced during this recovery. But at most, the ARP played a partial role. Researchers at the Federal Reserve Bank of San Francisco—who acknowledge that their estimate is at the higher end of the range—assessed that the ARP, along with the trillions in additional fiscal support during the Trump Administration, contributed roughly 3 additional percentage points to inflation in 2021. Given that annual inflation peaked at more than 9 percent in June 2022, the United States still would have experienced historically high inflation in 2021 and 2022 even in the absence of the ARP.

The relevant counterfactual, therefore, is a world in which the ARP never passed and the United States had to contend with still-high inflation along with softer growth, higher unemployment, fewer small businesses, and lower wages than it has now. That is the scenario many other countries are currently experiencing. Each of them would happily trade places with us today, especially because the United States has been able to bring inflation back down near the Fed’s target without a sharp rise in unemployment.

Indeed, even accounting for the post-pandemic inflation that swept the globe, most Americans have come out ahead financially. Average real wages—that is, wages adjusted for inflation—are higher now than when the pandemic began. In fact, real wages between the end of 2019 and today have grown at the historically average rate despite the global inflation surge. And because wages have grown particularly quickly for lower-income workers, their real wages have risen even further.

The data on wealth gains is even more striking. Recall that a typical middle-class family received several thousand dollars in direct transfer payments from the government through the ARP. That, combined with real wage growth and gains in assets stemming from America’s economic resurgence, has led to a 37 percent increase in real net worth for the typical family since the pandemic began—the fastest wealth growth on record over any similar time period. While other countries have seen post-pandemic inflation negate wage and wealth growth, America has delivered powerful gains for the typical household thanks to its uniquely strong economic recovery.

The ARP was not perfect—no legislation exposed to the realities of the political process ever is—but its unequivocal success offers a roadmap for future policymakers facing economic downturns. Provide cash directly to low- and middle-income people to stabilize their finances and support continued consumer spending. Increase unemployment insurance payments so that people who lose their jobs have the time and flexibility to find good job matches. Channel funds to renters and homeowners to avoid a spike in evictions and foreclosures. Offer support to state and local governments so they do not need to slash jobs or cut critical safety net programs to meet balanced budget requirements. And when facing uncertainty, err on the side of ensuring that Americans have what they need to endure unexpected turbulence.

The ARP also reflects the wisdom of President Biden’s focus on growing the economy from the bottom up and the middle out. Stabilizing the finances of working-class American families was not just morally necessary—it was economically savvy. For decades, Republicans have described CEOs and other business leaders as “job creators,” as if catering to the needs of those select few was the secret to producing more good jobs for everyone else. But the ultimate job creator is—and always has been—the average American consumer. When the typical person has more money to spend, businesses have more incentive to invest, to grow, and to hire. The legacy of the ARP is not only America’s strongest and most equitable economic recovery in decades, but a guide for avoiding extended recessions in the decades to come.

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Bharat Ramamurti is the former Deputy Director of the White House National Economic Council and Advisor for Strategic Economic Communications in the Biden-Harris Administration. He served from January 2021 through September 2023.

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