The Stimuli and the People

The Stimuli and the People

Given the intense political animus on display in Washington in recent weeks, it is hard to imagine any rational policy agenda emerging from the chaos. The optics of a new president being installed with thousands of federal troops standing by after a disputed election takes me back to my days working in various African countries.

At any rate, we expect and hope that sometime in the near future our esteemed but largely innumerate representatives will once again return to what they now almost jokingly call, “the people’s business”.

Top of the list is dealing with the pandemic and the economic damage caused by assorted government measures to protect the populace from the virus. The main tool is pushing stimulus cash out to the public. The hope is that the marginal propensity to consume is high and that spending the stimulus bonuses will trigger a cascade of economic activity. This is called the multiplier effect.

Although these stimuli play well in the press, historically these plans haven’t done well. Bush’s 2001, $300 tax rebate did not have any discernable impact as only 20% went into increased spending. Obama’s stimulus in 2009 included a lowered withholding from the payroll tax. This was relatively small and did not have the dramatic impact of a check in the mail. Hence, consumer behavior did not change and the economy remained in a funk for several years.

Given this experience, last year the government decided to go big, broad and direct. Thus, $1,200 checks were scattered far and wide to anyone with income under $75,000, plus an added $500 bonus for each child.

A study* by the National Bureau of Economic Research (NBER) examined the impact of the March one-time bonus of $1,200, included in the $2.2 trillion CARES Act. They found that only 15 percent of the estimated $106 billion was used for current consumption and the rest went into savings, investments and paying down debt. As we can see in the chart nearby, the savings rate jumped to an astounding 33.7 percent in April, and remains at very high levels today. The much debated “multiplier effect” was a number not much different from zero.

This response was the result of the interaction with other parts of the plan. The Payroll Protection component kept people off unemployment but, more importantly, the $2.9 trillion CARES Act provided for a $600 per week or $15 per hour unemployment supplement. The pernicious impact was apparent in California where the regular unemployment benefits reach up to $450 a week making the combined amount $4,200 per month. Not bad for being on the dole and, as it turned out, more than many people could earn actually working a job. With that income flowing in, it is no wonder that a good portion of the $1,200, bonus ended up in savings or the stock market.

Slightly wiser after the first stimulus failed, round two passed last month with a reduced $300 unemployment supplement and a more modest $600 bonus. Unlike the CARES Act, this bill does not have a catchy name perhaps because it includes all manner of spending that has nothing to do with the pandemic problems.

Some pundits had the temerity to question the inclusion of $10 million for Pakistani gender programs. We find this to be most ungenerous. We have no idea whether the Pakistanis have gender issues or not but, to be fair, $10 million is hardly a noticeable amount for our congress-people. For them, $10 million is the same as if I dropped a quarter on the street and it rolled down a storm drain.

For round three, the newly minted Biden administration is proposing more of the same adding $1.9 trillion for a grand total of $5.7 trillion in stimuli. As is often the case, a new administration has a certain amnesia about the experiential lessons of the prior administration. In addition to a $400 per week unemployment supplement through September and a $1,400 one-time bonus payment, there is $480 billion to support those with union jobs in the government or education.

There are two things we know with some certainty about the impact of this program. The added unemployment benefits will delay job growth similar to what happened under the Obama administration. Further, given recent experience, we expect that the lion’s share of the new $1,400 bonus to flow into savings, debt payments and eventually the stock market. Perhaps that is the reason the DJIA and the NASDAQ are dancing around all time highs.

With the product of the Warp-Speed project now entering the national blood stream, we can see the end of this disease. Consequently, there are many economists questioning the need for a massive round three stimulus other than the relatively modest amounts directly related to the vaccine rollout.

Moreover, as the data show, U.S. consumers have been squirreling away any spare cash they have. With all that cash, combined with the pent up demand from being locked down for months, consumers are like a coiled spring ready to leap forward in a spending spree on vacations, restaurants, bars and cars.

This will only happen when consumer confidence about the future returns. The very high savings rate is a risk mitigant and evidence of the uncertainty they feel about the future. We are not there yet. The consumer confidence index dropped to 76.9 after the election compared to 101 last February. Retail sales dropped 0.7% in December.

Unfortunately, as we discovered in the period from 2009 to 2012, more government cash in their pockets will not change consumer’s confidence or their spending behavior. The best solution is to create an environment for a robust jobs market with rising wages and a growing economy.

Where have we seen that before?

*Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments, Scott R. Baker, R.A. Farrokhnia, Steffen Meyer, Michaela Pagel & Constatine Yannelis, NBER August 2020.