Jan 28, 2022 - Economy & Business

Decline in government spending could hurt many in 2022

Reproduced from a Josh Bivens/EPI analysis of BEA data; Chart: Axios Visuals

This year might be a bit of a drag, technically speaking. The explosive economic growth that we saw in 2021 won't likely continue into 2022 because of "fiscal drag," where there's less money from the federal government going out to regular folks.

Why it matters: Less fiscal stimulus could mean less inflation, as Fed chair Jerome Powell said Wednesday.

  • But in human terms? Government spending was a safety net for folks who couldn't work because of the pandemic or faced COVID-era challenges.

State of play: As much as 22% of Americans' personal income last year came from government benefits, including Social Security, stimulus checks, enhanced unemployment insurance, and the child tax credits (CTCs) that ended in December.

  • The federal government sent out more than $93 billion to families in the second half of the year through CTCs.

Go deeper: Parents used the money for food, gasoline and housing.

  • "It was a blessing," Jasmin Roberts, a 35-year-old mother of two in New Jersey, tells Axios. The money helped her put a deposit down on an apartment and avoid public transportation when COVID risk was high.

Worth noting: Pandemic challenges aren't over, and the Omicron variant sent a lot of workers home sick.

  • 15% of low-wage earners experienced a loss of income in January, according to new polling by Morning Consult. That's the highest it's been in the monthly survey since May 2021.

Zoom out: The U.S. economy boomed last year. The Commerce Department said yesterday that Q4 2021 GDP grew at a 6.9% annualized rate, the highest since 1984. The consensus expectation for 2022 is 3.9%.

Yes, but: Some, like Brookings economist Wendy Edelberg, expect slower growth. She predicts GDP growth of about 2.5% in 2022, in line with Goldman Sachs' 2.4% forecast.

  • The overall economy will be fine — and is improving — but "really abrupt cutoffs in benefits is never great policy," Edelberg says.
  • And if you top off the cutback in fiscal spending with aggressive rate increases from the Fed, we could cut short a promising recovery, says Josh Bivens, director of research at the progressive Economic Policy Institute.

What we're watching: Child poverty numbers are expected to spike this month, according to forecasts from the Columbia University Center on Poverty and Social Policy.

  • On the other hand, wages are up and the job market is healthy. Folks still have savings from last year and when they file taxes they can claim more child tax credit money.

The bottom line: The fiscal drag doesn't have to be such a drag — but a lot is riding on the pandemic subsiding.

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