The Risks of Too Much ‘Stimulus’

Disposable real per capita income rose 5.5% in 2020, the highest rate since 1984, due largely to transfer payments

By Phil Gramm and Mike Solon. Excerpts:

"total employee compensation in the second and third quarters of 2020 was down by $215 billion compared with the first quarter. Yet government personal transfers were up $893 billion—four times the compensation lost. In the second quarter alone, real per capita disposable income was up 10.5% compared with the first quarter—25 times as fast as the average quarterly income growth in the prior two years. 

This surge in personal income was driven by government stimulus equal to $2.6 trillion, more than all the private wages and salaries paid in the first quarter of 2020. While preliminary fourth-quarter figures show that personal income declined from the previous quarter, real per capita disposable income in 2020 grew 5.5%"

"All of this occurred before the $900 billion December stimulus took effect."

"Quarterly savings rose by almost $800 billion. The historical savings rate of 7% to 8% of income reached an astonishing 26% in the second quarter. Preliminary data for 2020 show total savings for 2020 was $1.6 trillion higher than in 2019. And that was before the $900 billion stimulus."

"President Biden now wants another $1.9 trillion bill, which would further swell potential purchasing power and impede production by more than doubling the minimum wage and paying more than half of unemployed people more than they make working. Assuming this new spending occurs by September, when the vaccination process should be largely complete and the economy largely open, the Biden plan and the December stimulus would add another $311 billion a month in purchasing power into the fall."

"M2 money supply is still up by 28.3% over the past 12 months. And that’s before the Fed monetizes the next wave of stimulus. For comparison, money-supply growth peaked at 13.8% in the high-inflation era of the 1970s."

"What about Treasury Secretary Janet Yellen’s claim that a new stimulus is needed to “help families at risk of going hungry or losing the roof over their heads”? Last year the average household in the bottom quintile of earners received more than $45,000 of government transfer payments from any combination of more than 100 programs and credits, and 22.6 million households received food stamps. The evidence of hunger comes from the advocacy group Feeding America, which defines respondents as “at risk of hunger” if they say they’ve worried about food security on at least one day of the preceding year.

Researchers from Harvard’s School of Public Health have found that concerns about food security expressed in surveys don’t decline when food aid increases. As for losing a roof over their heads—with income and savings up, most people who chose not to pay their rent or mortgage did so because government eliminated the consequences of not paying. In the process it ripped off retirees who own many of the nation’s rental properties and finance countless mortgage loans through their pension funds and insurance policies."