More on the V-Shaped Recovery

Again: Never Bark at the Big Dog. The Big Dog Is Always Right.

There are some very important numbers on personal income in the data that the Bureau of Economic Analysis (BEA) released yesterday. These numbers confirm two points I made weeks ago:

  1. The crazy stimulus checks that Congress doled out in the spring and the summer were highly unnecessary. A compensation for forcefully lost income was perfectly reasonable, but not this cash bonanza.
  2. People respond to windfall income just as economic theory suggests. Therefore, we do not need crazy economic adventures like Steve Moore’s proposal to suspend the federal personal income tax for 2021 (only to return it to full force in 2022). It would do a lot of harm to, and not much good for the economy.

Before we get back to the see-I-told-you-so part of this article, here are the numbers on personal income for the third quarter this year. Saving the bad news for later, the good news is that work-based earnings are almost back to normal. In Q3, calculated at annualized rates, wages and salaries earned by American workers were only 0.3 percent below where they were in Q3 of 2019. They were only 2.5 percent below their Q1 2020 levels.*

The big concern is with transfer income, or entitlements. Or the extra money that Congress threw after households under the guise of its stimulus bills. If we look at the so-called “other” category under entitlements, we find an increase, in quarterly numbers, of $330 billion from Q1 to Q2 this year. During the same period of time households lost $170 billion worth of wages and salaries (again in quarterly numbers). If we assume – as is reasonable – that the $330 billion represent stimulus checks, then households got $194 from government for every $100 they lost because they could not work.

To add yet more perspective to this, the total increase in payouts of unemployment benefits vastly exceeded the loss of work-based income. In Q2, Americans received $260 billion more in unemployment benefits than they did in Q1. That increase is 52 percent larger than the $170 billion loss in wages and salaries.

All in all, the increase in tax-paid (or deficit-paid) transfers from government to households was 3.4 times higher than the wage-and-salary loss.

Absurdly, this enormous extra cash flow to U.S. households contributed to a 7.6-percent rise in personal income during the shutdown. Now that these payments are tapering off, it looks like personal income is in decline!

It is not, of course. As of Q3, total personal income is 6.8 percent higher than a year earlier and 4.8 percent above where it was in Q1 of this year. That, again, is almost entirely due to stimulus checks (some of which went out in the third quarter) and the absurd unemployment bonus. However, there has also been an uptick in equity-based income, primarily in the proprietor category. Farm-based income, which belongs under this headline, is up 7.3 percent in Q3 2020 over Q3 2019, and 12.1 percent over Q1 this year.

This income boost, which comes on the heels of a noticeable decline in Q2, reinforces my previously expressed inflation concerns. We could be looking at a food-based surge in prices, which in turn could spread throughout the economy.

It has been suggested that the artificial economic shutdown, with its disruptive effects on some supply chains, can be the origin of inflation. This is true only in theory: if we were to have permanent supply disruptions, such as in a centrally planned economy, there would be upward pressure on prices. At the same time, a centrally planned economy does not allow for market prices in the first place, so there is de facto no inflation there. Furthermore, the disruptive effects of the artificial economic shutdown in Q2 were almost entirely gone in Q3, suggesting that the rise in farmers’ earnings could be a sign of monetarily driven food-price inflation (transmitted by the aforementioned sharp rise in entitlement spending).

Again, I am not suggesting that we are witnessing monetarily driven inflation. However, I see enough hints that it could be underway to suggest that the next Congress will have to make de-monetization of the economy its highest domestic-policy priority.

Finally, it is time to get back to my gloating about where I have been right… In both my previous blog articles and my InsideSources piece on a federal tax holiday, I have referred to what economic theory says about windfall income: it goes toward savings. The stimulus spending we now have on record is a great experiment of precisely that kind. It helicoptered money into the economy, far more than was needed to cover paycheck losses, and people responded precisely as theory says:

–In Q2 of 2019 households saved 7.2 percent of their disposable income;

–In Q2 of 2020 they saved 25.7 percent of their disposable income.

In quarterly numbers, Americans increased their savings by $779 billion in Q2 compared to Q1. Now: if Americans could afford to stow away that kind of money in the midst of an economic disruption, what need was there – really – for all the stimulus checks and the unemployment bonuses?

Overall, the new numbers on personal income tell us that in general, households around the country have done comparatively well through this year. The numbers also confirm the recovery we saw in the GDP numbers, but even more so they confirm that Congress was downright reckless in its stimulus spending.

Let us not have any more experiments like this in the future; from now on, let us focus all our fiscal policy efforts on structural reforms to spending at all levels of government.


*) Normally, it is not recommendable to use annualized numbers in any economic analysis. They are not good for the analysis of longer trends, and they are not to be confused with annual numbers (an otherwise often-seen mistake). However, if the annualized figures are used with this caveat in mind, they can be informative in exceptional economic conditions such as the coronavirus shutdown.

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