In a couple of days we will enter the last quarter of this the strange year of 2020. Hopefully, 2021 will be a more normal year, and we can look back at this year as a weird anomaly.
As part of the review, we can start taking inventory of one of the most controversial aspects of government policy this year, namely the Covid-19 stimulus spending. As I have mentioned on my podcast, the combination of irresponsible spending by Congress and irresponsible funding by the Federal Reserve has put us in a precarious economic situation as a country.
Today I can report more numbers that beg some serious questions about the alleged economic necessity – let alone soundness – of the so-called stimulus spending.
The core argument for the CARES Act, the Families First Act (which included the elements of a paid-leave program) and the bills that are now being discussed, has been that the measures would save household finances and bring the economy back from the artificial shutdown. Emerging data suggests that the entire argument for the stimulus outlays has been hyperbolic to the point of reckless.
Let us make one point clear, before we move on: when government forces businesses to close and people out of work, government has a moral obligation to remedy the fallout of its actions. In line with this, it is perfectly reasonable that Congress temporarily raised the unemployment benefits. What is not reasonable is the rest of the stimulus spending going toward household finances.
Here is why. According to the Bureau of Economic Analysis, in the second quarter of 2018 (two years ago) total personal income – in other words all the money earned by individuals in America – was $4,437.6 billion, counted on a quarterly basis. In Q2 0f 2019, a year ago, that same personal income amounted to $4,620.2 billion.
This represents an increase of a bit over 6.1 percent in current prices.
So what’s the number in Q2 of 2020? $4,365.9 billion. Again, this is an annualized number counted quarterly – the Bureau of Economic Analysis does not publish straight quarterly numbers – but this number excludes any money coming from the coronavirus stimulus and from “other” stimulus money, i.e., the checks that all households got in the spring.
Now, let’s add those numbers. Defined similarly (annualized by quarter), the unemployment money added in $278.1 billion, which took total personal income up to $4,664 billion. This number is about one percent above where personal income was a year earlier.
Adding the stimulus checks – amounting to $456.3 billion on the annualized quarterly basis – we end up with $5,100.4 billion in personal income.
We are now 10.4 percent above where personal income was a year ago.
It is important to keep in mind that these are seasonally adjusted numbers, i.e., annual rates counted without regard to normal variations in economic activity due to calendar days, the tides of seasonally dependent industries, and so on. Therefore, they do not present the whole picture of the timing of the stimulus and unemployment spending. However, they do give us one important piece of information: the stimulus checks may have been a vast over-reaction from Congress.
Again, if we subtract the stimulus spending that was not funneled through the unemployment benefits system, we still have a personal income that tracked well with where it was a year earlier.
Statistics nerds will point out that the annual-rate component in these numbers disguise a massive drop in personal income, especially in the private sector. This is a fair point, one that we cannot control directly since the BEA does not publish raw, non-adjusted quarterly numbers for personal income. They do, however, provide that very type of data on government revenue; since the federal government as well as most states and many local governments levy income taxes, we can test for the shutdown effect by looking at raw data on income-tax revenue for the second quarter.
If the personal-income data disguise a major disruption in personal income in the second quarter, then we should see it mirrored in major losses of revenue from personal income taxes.
Starting with the federal government, in Q2 of 2018 they collected $389.7 billion in personal income taxes. In Q2 of 2019 that number had increased to $412.7 billion, an increase by 5.9 percent.
In Q2 of 2020, smack in the heart of the Covid-19 shutdown, the federal government collected $387 billion in personal-income taxes. That is a mere 6.2-percent drop over 2019 and almost exactly the same as in 2018.
These numbers reinforce the impression that the stimulus checks were entirely unnecessary.
State and local government revenue data point in the same direction. In the second quarter, they collected
$113.9 billion in 2018,
$129.8 billion in 2019, and
$123.9 billion in 2020.
In other words, states and local governments collected 8.8 percent more from personal-income taxes this year than two years ago, and only 4.5 percent less than last year. Since these are raw numbers, not adjusted seasonally and not adjusted annually, they give us an accurate image of what happened to personal income – in other words household earnings – during the thick of the shutdown.
Given these numbers and given that the funding came fresh from the money printer at the Federal Reserve, those checks were simply not defensible.
Congress is currently considering more stimulus spending, with some suggesting another round of checks. That would be highly irresponsible, to the point of fiscal and macroeconomic recklessness.