The economic hardship caused by COVID-19 pandemic spurred unprecedented policy actions, including stimulus payments and expansions to government programs including unemployment insurance, the Child Tax Credit, and SNAP. While there is a well-developed literature that examines changes in poverty over time and compares patterns for income- and consumption-based measures of poverty, it is particularly useful to examine these patterns and differences when there are dramatic policy changes.
In this paper, the authors examine how the economic well-being of the poor changed before and after the pandemic. They document these patterns using data covering income, expenditures, assets, and measures of hardship. The authors also measure the effects of major policy changes on poverty by constructing counterfactual scenarios: hypothetical scenarios used in analysis to understand what would have happened if a certain event or intervention had not occurred, helping to isolate the impact of specific policies where the policies were not implemented or discontinued policies were extended. They find the following:
- After following consistent trends before the pandemic and in 2020, disposable income poverty: a measure of poverty where a household’s income, including after-tax earnings, non-cash benefits, and tax credits falls below a designated poverty threshold, with deductions for state and federal taxes declined more sharply than consumption poverty: a measure of poverty where a household’s consumption expenditures, reflecting actual living standards, fall below a specified poverty threshold in 2021, while consumption poverty dropped more modestly. By 2022, income poverty spiked significantly, even as consumption poverty continued to decline. Additionally, reports of hardship also rose in 2022 for both families with and without children. These patterns suggest that families saved portions of the transitory payments they received during the pandemic, and, following the pandemic, began dissaving: spending more than current income to maintain their consumption, which may have delayed the impact of rising income poverty but did not prevent increased hardship.
- The authors also examine the relative impact of major policy changes on poverty by estimating income poverty under counterfactual policy scenarios that exclude the enacted programs or the extension of discontinued programs. They find that while the expanded Child Tax Credit led to a significant decline in poverty, other policies including the stimulus payments and unemployment benefits played a similar or even larger role. These results challenge the notion that income poverty changes were due primarily to changes in the Child Tax Credit.
Understanding the short-run impact of these COVID era policies is critical for informing current debates about whether to re-enact these policies. The availability of a child allowance and the design of the Child Tax Credit are major policy issues that have been recently debated and are likely to continue to be. More broadly, the rise in hardship during periods when consumption poverty is falling is consistent with recent research documenting a disconnect between economic conditions and consumer sentiment as consumers became increasingly concerned with high borrowing costs and inflation.