The Corner

The Economy

Stimulus Overkill

The Capitol building at sunrise in Washington, D.C., January 11, 2021 (Erin Scott/Reuters)

It was the right thing to help those who lost their jobs due to the pandemic or the lockdown. It couldn’t have been stimulative, since the economy was shut down. And sure enough, the Congressional Budget Office (CBO) found that the multiplier for the CARES Act was 0.58, meaning that for every dollar spent by Uncle Sam, the economy grew by 58 cents.

This is in part due to the fact that when people received money from the government, they saved a lot of it. So the money was not stimulative, but it was a way to alleviate pain. That’s if you ignore the over-the-top size of the relief and all the cronyism in the CARES Act — such as the airline bailout — and the many non-COVID-related items.

The size of the COVID-relief bill is another issue. In this morning’s WSJ, Phil Gramm and Mike Solon note that:

Commerce Department data show total employee compensation in the second and third quarters of 2020 was down by $215 billion compared with the first quarter. Yet government personal transfers were up $893 billion — four times the compensation lost. In the second quarter alone, real per capita disposable income was up 10.5% compared with the first quarter — 25 times as fast as the average quarterly income growth in the prior two years.

This surge in personal income was driven by government stimulus equal to $2.6 trillion, more than all the private wages and salaries paid in the first quarter of 2020. While preliminary fourth-quarter figures show that personal income declined from the previous quarter, real per capita disposable income in 2020 grew 5.5% — the highest growth rate since 1984, the peak of the Reagan recovery. All of this occurred before the $900 billion December stimulus took effect . . .

Quarterly savings rose by almost $800 billion. The historical savings rate of 7% to 8% of income reached an astonishing 26% in the second quarter. Preliminary data for 2020 show total savings for 2020 was $1.6 trillion higher than in 2019.

Congress passed another $900 billion in December 2020. That was unwise, but it was not as bad as trying to ram through another $1.9 trillion progressive COVID-relief bill with many barriers to employment — such as the $15 dollar minimum wage the Dems are doing right now.

New data show that the added $400 bonus desired by President Biden means that 62 percent of the recipients will be again be making more money unemployed than working. That number was 48 percent with a $300 bonus passed in December. In addition to the way this may slow down the recovery, what about the impact of continuing to pay people more than they make when working? Am I the only one worried about this?

Here is another point to observe with the latest $380 billion output-gap estimate, in light of proposed ($1.9 trillion) “stimulus” spending.

If the case for more stimulus is to close the output gap (return to pre-pandemic economic fundamentals), then a $1.9 trillion stimulus to close the gap would imply a fiscal multiplier of 0.2. But progressives have been telling us for years that the spending multiplier is 1.3, 1.5, or higher (which would imply the need for just $250 billion). With the CBO’s multiplier estimate of 0.58 for the CARES Act, stimulus totaling $600 billion (as proposed by the GOP) would close the gap fully in 2021. Which one is it? You can’t have it both ways.

At this point, I still think zero dollars is the correct amount of stimulus. Based on past experiences, we close the gap by encouraging growth in the private economy, not encouraging growth of government.

I will end with this from Gramm and Solon:

Policy makers are acting as if running up the national debt and printing money doesn’t matter. Yet all the factors are present to generate rising prices and eventually higher interest rates: excess fiscal stimulus, excessive money-supply growth, impaired domestic production capacity, and impaired international production and transportation capacity. To this volatile mix, Mr. Biden is promising to add regulatory assaults on energy, finance, small businesses, labor and health care.

Perhaps the resulting impairment of economic capacity will prove manageable, but given that such action is occurring at the very moment of excessive fiscal stimulus on top of a tinderbox of monetary expansion, it is putting the nation at risk.


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