During World War II, government spending boosted household income, while government supply restrictions limited the consumption of consumer goods. Consequently, personal saving soared. After the war, pent-up demand for consumer goods funded by excess wartime savings caused the economy to boom.
Our current economic situation is analogous. The government spending and transfer payments included in four different stimulus packages passed last year have boosted household income, while government supply restrictions have limited the consumption of in-person services. The result has been a surge in personal saving. Indeed, the personal-saving rate rose from 7.3 percent in the fourth quarter of 2019 to a peak of 26 percent in the second quarter of 2020 before trailing off to a still historically high 13.4 percent in the fourth quarter of 2020. Personal saving rose by 134 percent from $1.2 trillion in 2019 to $2.9 trillion in 2020.
Even with this massive accumulation of savings, most of which would otherwise have been spent, GDP has weathered the pandemic recession as well as anyone could have expected. The Atlanta Fed’s GDPNOW estimate currently expects first-quarter GDP to grow at an annual rate of 8.4 percent, one of the highest-growth quarters on record. Once government restrictions on sports, live entertainment, cinemas, museums, and restaurants can be safely relaxed, pent-up demand funded by excess savings will cause these industries to roar back to life, restoring the jobs that have been lost, and taking that positive momentum and turning it into an avalanche. Without the Democrat stimulus, the Congressional Budget Office (CBO) forecasts that real GDP will reach its pre-pandemic level by the third quarter of this year, that the size of the labor force will return to its pre-pandemic level in 2022, and that employment will reach its pre-pandemic level by 2024.
At a time when Dr. Seuss is being canceled, it might seem as if nothing could be more ridiculous. But consider this: The economy is currently growing at an annual rate of 8.4 percent, and Democrats have decided, nevertheless, that it is time for a massive stimulus. Never has such a massive policy come at a time that is more inconsistent with economic reason.
Why the rush to have a stimulus when none is needed? You guessed it. Democrats won the election and are engaged in an effort, in the false name of stimulus, to transfer a massive pile of taxpayer cash to their pet projects and constituencies. Indeed, the American Rescue Plan Act of 2021 is loaded with more than $700 billion in payoffs to such causes, completely unrelated to the pandemic. Claiming that any of this wasteful spending is stimulative is laughable.
The bill would provide $350 billion to state, district, territorial, tribal, and local governments. Despite the COVID-19 recession, state and local tax revenues were down only 0.7 percent, or $7.6 billion, comparing the first nine months of 2020 with the first nine months of 2019. State and local tax revenues have fallen less than in previous recessions because (1) job losses have been concentrated among low-wage workers who pay less in state income taxes, (2) stock and housing prices have increased, boosting state income tax revenues from capital gains, and (3) the CARES Act maintained consumption, which supported income and sales-tax revenues. Last year, the federal government provided state, district, territorial, tribal, and local governments with $535 billion. While a few states and localities face severe financial challenges, most do not. Combined, the idea is to send state government almost a trillion dollars, even though their shortfall was virtually nonexistent.
The bill would provide another $170 billion to schools, colleges, and universities on top of the $113 billion that Congress has already provided. This is not stimulus — less than 8 percent would be spent during this fiscal year — but rather, a payoff to teacher unions. The bill would provide $86 billion for bailing out a CBO-estimated 185 “critical and declining” union-negotiated multi-employer pension plans that have more than 1.5 million participants. Without requiring any reforms to make these pension plans sound, Democrats are simply shoveling cash so that these plans, including the 18 plans that have suspended paying benefits, can pay full benefits for the next 30 years. Since most of these plans are in the entertainment, manufacturing, mining, and trucking industries, unions such as the American Federation of Musicians, the Bakery and Confectionary Union, the United Mine Workers, and the Teamsters would benefit from this Democratic generosity.
The bill would provide $41 billion for transportation, including $1.5 million for a study for a new bridge in New York State, the home of Senate majority leader Schumer. Spending on transportation infrastructure, however beneficial, occurs over years. It is not short-term stimulus and should go through the regular process to avoid waste. And don’t forget Obamacare. The Democrats provided an additional $42 billion to expand the Affordable Care Act, divided roughly in half between (1) higher-premium tax credits for purchasing health insurance through the exchanges by lowering the cap on premiums as a percentage of income in 2021 and removing the income cap of 400 percent of the federal poverty income in 2021 and 2022, and (2) a temporary 5-percentage-point increase in Medicaid’s share of the cost of expanding coverage to adults at between 100 percent and 133 percent of the federal poverty level to entice states that have not previously expanded their coverage to do so. This is consistent with Democratic strategy to increase public reliance on government-provided health insurance over time.
Last year, President Trump led a bipartisan effort to pass successive targeted stimulus plans to ensure that the pandemic recession did not turn into a depression. The approach worked and, given that GDP last year ended up about flat, was about the correct size. It is beyond ironic that President Biden has failed at bipartisanship where Trump succeeded, and has decided to use the pandemic to achieve extreme partisan objectives.