CBO Projects Rapid Declines in Unemployment — Without Another $1.9 Trillion in Stimulus

On Monday, the nonpartisan Congressional Budget Office (CBO) released its latest economic projections, which cover the remainder of 2021 and the next decade. Those projections suggest that, even without further stimulus, the US unemployment rate will drop sharply over the coming year, reaching an average of 5.3 percent in the fourth quarter of 2021. 

Quarterly US Unemployment Rate

CBO’s projections are based on both current economic conditions and current federal law: “The forecast incorporates economic and other information available as of January 12, 2021, as well as estimates of the economic effects of all legislation (including pandemic-related legislation) enacted up to that date.” That includes the latest $900 billion stimulus law enacted in December, which the report notes “provided additional emergency funding for federal agencies to respond to the public health emergency created by the pandemic, and provided financial support to households, businesses, and nonfederal governments affected by the economic downturn, among other measures.” In sum, CBO “estimates that the pandemic-related provisions in that legislation will add $774 billion to the deficit in fiscal year 2021.”

That also means CBO’s forecast does not assume enactment of further economic stimulus legislation, such as President Biden’s $1.9 trillion “American Rescue Plan,” which is currently on a legislative fast track in the House and Senate. Indeed, CBO’s projections undermine the arguments made by the plan’s supporters — namely, that future labor market gains will be tepid at best without it. For example, Senate Democratic leader Chuck Schumer this week said that “‘big bold package’ is needed to avoid the long, drawn out recovery experienced in the aftermath of the 2008 Global Financial Crisis.”

In reality, CBO projects that unemployment is poised to continue dropping as it hasn’t in decades, even without further legislated stimulus. Consider the 1.5 percentage point drop in the unemployment rate CBO projects through the fourth quarter of 2021. You have to go back to 1983 to find a more rapid decline from the end of one year to the next, when unemployment dropped from 10.7 percent in the fourth quarter of 1982 to 8.5 percent in the fourth quarter of 1983. And this year’s projected decline would be even more impressive, coming on top of the large drops since unemployment peaked at 13.1 percent in the second quarter of 2020.

That also means CBO is projecting more rapid unemployment rate declines ahead than occurred following enactment of Democrats’ 2009 stimulus legislation, which supporters promised would create millions of “jobs, jobs, jobs” but fell significantly short of expectations. In fact, only after the extraordinary unemployment benefits provided under that and subsequent legislation finally expired at the end of 2013 did the US unemployment rate drop by over one percentage point across four consecutive quarters — and even then never matched the 1.5 percentage point drop CBO is forecasting for this year.

That experience should undermine confidence in the job-creation promises of Democrats’ latest stimulus plan, just as CBO’s projections call into question whether further massive stimulus is needed for significant further labor market progress to be made in the first place.