The Myth of Too Much Relief

Written by on December 28, 2020

Would adequate or generous relief during an economic disaster really “overheat” the economy?

the b|e note Dec 28


Publisher’s Riff


The $900 billion pandemic stimulus relief bill along with $1.4 trillion in federal government funding through September 2021 has now been signed by President Trump. For the moment, complete disaster averted – at least for the time being until new President Biden settles within a few weeks. But that didn’t happen without an enormous amount of wrangling on and off Capitol Hill, in public view, over whether or not struggling Americans victimized by pandemic meltdown were even worth the trouble of essential relief. Indeed, when Trump appeared to temporarily sabotage the stimulus bill after denouncing the compromise $600 individual payment as a “disgrace” in favor of a more robust $2,000, with arch-nemesis House Speaker Nancy Pelosi (D-CA) fully agreeing with him, annoyed Republicans as a whole, a few centrist Democrats and numerous economists snapped back in unified horror. For them, it seemed not so much that he was, at the eleventh hour, risking a full scale shutdown of the federal government and further meltdown from the expiration of a pandemic safety net that was already thin to begin with – it was the thought of placing $1,400 more on the check.

One standout performance rejection of the increased $2,000 payment was from former Clinton era Treasury Secretary and now Biden economic policy advisor Larry Summers. This caused quite a bit of uproar as Summers argued that too much spending vis-a-vis individual $2,000 checks would be a “pretty serious mistake” that could “overheat” the economy. Said Summers: “[I’m] not even sure I’m so enthusiastic about the $600 checks.”

Statements like this should be vigorously fact checked and deconstructed, rather than accepted as pure economic gospel simply because a former Treasury Secretary says it. Is it truly the case that an economy as large as the United States’ – the largest in the history of human civilization – would overheat? And: how much do we need an economist to answer that question?

We should definitely question the always sinister political motives of Trump and the timing of this proposal. But, let’s be honest: $2,000 would have been way better than $600. Which means we could still explore the statement Summers and others like him made by taking a look at certain facts before us.

Consumer Spending

First, why is it a mistake to prop up the U.S. economy as much as possible through consumer spending? Isn’t that what the economy runs on? As Clark University Professor Emerita Halina Szejnwald Brown puts it …

The American Dream has become synonymous with buying material goods such as cars, houses, furniture or electronics, distorting its original meaning. Today, the spending habits of American households make up 70 percent of the U.S. gross domestic product, a measurement that describes the size of the economy. U.S. companies spend about US$230 billion on advertising each year, half of all the money spent on advertising globally.

This explains the panicked rush, overt and subtle, by most policymakers to rush everyone back to work/school/restaurants/shopping malls “normal” living … in the middle of an advanced, highly contagious (and now mutating) coronavirus pandemic. The economy desperately needs its people to spend on it.

Would it Break the Bank?

Of course, trying to sustain emergency funding for the long term would eventually turn sideways and become unsustainable, considering that as the federal government has spent about $7 trillion in 2020 thus far, it’s only generated less than $4 trillion in revenue through taxes and other fees.

But, don’t let policymakers fool us into believing we can’t do anything ambitious for the relative short term as we better manage the pandemic. We’re still talking about an economy worth $21 trillion in value, even during pandemic, making up nearly a quarter of the overall global economy …

Estimates of economic recovery suggest a fairly rosy outlook in 2021 as we get into recovery, with the Conference Board, for example, already showing 2.8 percent growth in the last quarter of 2020 and banking on nearly 4 percent annual growth in 2021 …

How Many Checks Cut?

Stimulus checks Round 1, after passage of the CARES Act, were distributed to an estimated 153 million Americans at a total cost of $292 billion. These were the $1,200 direct payments to pretty much everyone, even the individuals and households who were still employed.

Stimulus checks Round 2, if sent to the same population of people, would cost somewhere around $92 billion. This would total $384 billion in direct stimulus payments to American households for all of 2020. Keep in mind that the $900 billion relief package just passed includes $429 billion of unused – yes, you heard that right – unused CARES Act funding. So, this isn’t really $900 billion being spent for new stimulus – it’s really $471 billion. So, why are former Treasury Secretaries and stingy (racist) Republicans crying over money that still hasn’t been spent for months, yet?

Prior to the $900 billion (more like $471 billion) approved as of Sunday evening, the federal government has spent nearly $3 trillion in emergency resources for pandemic relief …

Keep in mind, for those who forgot, there was little feet-dragging and complaining when the federal government swiftly injected over $1.5 trillion into the banking sector after it caused “The Great Recession” back in 2008. There were no warnings of an economic “overheat” if the Feds spent too much money or attempted to provide liquidity for the institutions directly responsible for that meltdown. So, why so much grumbling over $384 billion in two sets of direct stimulus payments?

And say we went ahead with a one-time $2,000 stimulus payment for all 153 million Americans who were a part of the last round? That would amount to $300 billion – put in context, that’s still less than the unused CARES Act funding, and less than the $1.5 trillion injected straight into the banks during the 2008 recession.

What if the federal government were to limit $2,000 stimulus payments just to those who are currently drawing unemployment benefits as a result of pandemic hit? That’s estimated at 20 million Americans at the moment. The price tag for that effort would amount to $40 billion, significantly less than if the Federal government was blanket cutting checks to every American taxpayer, even those who really don’t need it.

How much “overheat” would $40 billion – $384 billion in estimated direct one-time relief (from the conceptual to what’s been actually spent) to individual Americans create? The numbers above beg a conversation about context and an inquiry into who this eventual recovery (and the tools needed for recovery) matters for. What’s the use in “recovery” if policymakers and influencers of the national discourse are going to balk at the needs of those who need a recovery the most? Those making these decisions must eliminate the habit of forgetting that people are the central assets of the economy (versus the institutions that rely on them for consumer spending) and, thus, require occasional “bailouts,” too. There’s already a contradiction when those who run the economy correctly acknowledge that it’s in dire straits due to pandemic, but swiftly reverse that assessment when we start talking about direct relief checks or stimulus to individual struggling Americans.

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