Trump’s $2,000 Stimulus Checks Are a Big Mistake

Family incomes are not down much from Covid-19, and there is a risk of overheating the economy

By Lawrence H. Summers. Excerpts:

"The question in assessing universal tax rebates is, what about the vast majority of families who are still working, and whose incomes have not declined or whose pension or Social Security benefits have not been affected by Covid-19? For this group, the pandemic has reduced the ability to spend more than the ability to earn. 

The data are striking. Total employee compensation is now running only about $30 billion per month behind the pre-Covid baseline. Measures in the congressional stimulus bill to strengthen unemployment insurance and to support business will add about $150 billion a month to household income in order to replace all this loss. 

The question is whether there is a rationale for further tax rebate of more than $200 billion a month over the next quarter. This would represent additional support equal to an additional seven times the loss of household wage and salary income over the next quarter. 

This point is illustrated by the figure below. It shows that because of the legislation passed in 2020, total household income (which takes no account of the stock market) has exceeded normal levels relative to the economy’s potential more or less since the pandemic began. Without new stimulus, things would have normalized in 2021.

But the existing stimulus bill is sufficient to elevate household income relative to the economy’s potential to abnormally high levels — unheard of during an economic downturn. With President Donald Trump’s add-on, we are in completely uncharted territory, with household incomes more than 15% above their normal level relative to economic potential. We frankly have no confident basis for judging how much and how fast this excess, and the pre-existing backlog of saving from the Cares Act, will be spent. There is the possibility of some overheating, particularly if the economy’s potential supply remains constrained by Covid protection measures.

As my recent paper with Jason Furman argues, I am all for a far more expansive approach to fiscal policy. But that does not mean indiscriminate support for universal giveaways at a time when household income losses are being fully replaced and checking account balances (at least as of October) were above pre-Covid levels."