As expected, the new administration has hit the ground running. In his first two days in office, President Biden issued executive orders which rescinded a number of previous directives or were aimed at ending the pandemic and easing the pandemic’s economic impact. For investors, the bigger issue seems to be the prospects for further fiscal support. Biden has proposed a $1.9 trillion package. That’s on top of the $900 billion passed at the end of last year. Passage of a bill this size will be an uphill battle, as the Democrat’s advantage in the House and Senate are as narrow as they can get. Still, it’s worth taking a step back and looking at fiscal policy over the last decade and what lies ahead after the pandemic has passed.

Monetary policy refers (mostly) to the setting of interest rates (we can also throw in asset purchases) to achieve the Fed’s goals of price stability and maximum sustainable employment. More on this in a minute. Fiscal policy refers to taxes and government spending. The broad consensus among economists is that balancing growth should be largely left to monetary policy, except in recessions, when fiscal policy typically becomes more effective than monetary policy.

Federal budget deficits can reflect developments in the economy or active policy changes, and it’s often difficult to isolate these two effects. For example, tax receipts fall in periods of economic weakness, widening the deficit. When we talk about active fiscal policy, we’re talking about a wider deficit beyond any direct recessionary impact. The aftermath of the 2008 financial crisis had a significant short-term impact on the deficit, as tax revenues sank and recession-related spending (unemployment insurance benefits, food stamps, etc.) increased. The deficit in FY09 hit $1.4 trillion, nearly 10% of nominal GDP. By FY15, the deficit had fallen to $439 billion, or 2.4% of GDP. In response to the pandemic, the deficit exceeded $3.1 trillion, about 16% of GDP in FY20. As with the large deficit following the financial crisis, this latest surge in the deficit in not worth losing sleep over. The deficit will fall as the pandemic fades. After the pandemic, lawmakers should work to get the federal budget on a sustainable path – but there’s no need to rush.