The Aggregate Effects of Fiscal Stimulus: Evidence from the COVID-19 Unemployment Supplement

Policymakers, faced with different options for replacing lost earnings, have had limited evidence to inform their decisions. The current economic crisis has highlighted the need for data that are local and timely so that different fiscal policy options on local economies can be more immediately evaluated. This paper provides a framework for evaluating real-time effects of fiscal policy on local economic activity using two new sources of near real-time data. The first data source is administrative records that provide universal, weekly, information on unemployment claimants. The second data source is transaction level data on economic activity that are available on a daily basis. We use shift-share approaches, combined with these two data sources and the novel cross-county variation in the incidence of the COVID-19 supplement to Unemployment Insurance to estimate the local impact of unemployment, earnings replacement, and their interaction on economic activity. We find that higher replacement rates lead to significantly more consumer spending – even with increases in the unemployment rate – consistent with the goal of the fiscal stimulus. Our estimates suggest that, based on the latest data, eliminating the Federal Pandemic Unemployment Compensation (FPUC) supplement would lead to a 44% decline in local spending. If the FPUC supplement is reduced to $200, resulting in a reduction of the replacement rate by 44%, spending would fall by 28%. Even if the FPUC supplement is reduced to $400, the replacement rate would fall by 29% and spending would fall by 12%. Because these data are available in every state, the approach can be used to inform decision making not just in this current crisis, but also in future recessions.