The New Covid-19 Support Bill

The New Covid-19 assistance bill could add an additional 1.9 trillion dollars to support the fight against Covid-19.  In discussing the 2 trillion dollar CARES Act last April I wrote that: “The idea is that as the government has requested/mandated non-essential workers to stay home, and non-essential companies (restaurants, theaters, bars, hotels, etc.) have chosen to close temporarily or have been forced to by risk averse customers or government mandates, the government has an obligation to compensate them for their lost income. Above and beyond the requirements of fairness, such financial assistance should help prevent permanent damage to the economy from something that is meant to be a temporary interruption in its operation.”  “Econ 202-CARES Act-who pays for it?”  While I referred to the shutdowns as the result of “risk averse customers or government mandates”, it seems that the “blame” lies with sensibly risk-averse customers who stayed home and/or out of public gathering places by their own choice before the government required it. “Lockdowns-job losses”  A key point was that this was not a stimulus bill as output/income fell because its supply fell, not for lack of demand to buy it by consumers.

As total and partial shutdowns will continue for a few more months (or permanently for some unlucky firms) such support (properly targeted) should be continued for a while longer. But at what level and for how long? As I stressed in my April blog, the CARES Act payments to unemployed workers did not create income but rather transferred it out of a diminished pie from those who still had incomes (and could buy the government bonds that raised the money being transferred).  As I noted then and as is increasingly important now, the increased fiscal and monetary support that accompanied these government expenditures will need to be unwound carefully as the economy recovers. Equally important, the further increases in debt and money created by the currently proposed support should not exceed what is “truly” needed. U.S. national debt is already almost 28 trillion dollars, over 130% of GDP.

While CARES Act type support was needed and helpful, it was not always appropriately targeted. It is not the kind of emergency spending that is easy to get fully right.  As time goes on more and more evidence will be collected of abusive uses of these funds. Rather than choosing specific firms and classes of individuals to receive support, implementation of a Guaranteed Basic Income for everyone irrespective of income and situation would provide a better safety net for all situations. “Our social safety net”

In December President Trump signed a $900 billion Covid relief bill providing “a temporary $300 per week supplemental jobless benefit and a $600 direct stimulus payment to most Americans, along with a new round of subsidies for hard-hit businesses, restaurants and theaters and money for schools, health care providers and renters facing eviction.”

President Biden has proposed a new additional $1.9 trillion dollar package. Added to the $900 billion approved in December, this would be 13% of GDP, a VERY large amount.  Ten Republicans have proposed a narrower package of $618 trillion. They would exclude measure not directly relevant to the impact of the pandemic such as raising the minimum wage to $15 per hour (a measure that would be damaging to inexperienced, new job entrance). The Congressional Budget Office has just “estimated that raising the minimum wage to $15 an hour would cost 1.4 million jobs by 2025 and increase the deficit by $54 billion over ten years.” “Minimum wage hike to $15 an hour by 2025 would result 14 million unemployed”

The Democrats’ package would provide $1,400 per person direct cash payments across the board in addition to the $600 provided by the December bill. The Republican proposal would lower the thresholds for receiving assistance to individuals making $50,000 or $100,000 for couples and would provide checks of $1,000 per person.  They were expecting to negotiate a compromise package, which now, unfortunately, seems unlikely, though as this is written discussions continue. There are many individual provisions in the proposed bill. I have not reviewed them. My focus here is on the overall financial size of the proposal.

In an interesting oped in the Washington Post, Larry Summers, former Secretary of the Treasury during the Clinton administration, gently warned that the democrats’ package was excessive and risked rekindling inflation.  He wrote that:

“A comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.

“In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.

“In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large….  [Given] the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.” “Larry Summers-Biden-covid stimulus”

The U.S. national debt was $22.7 trillion at the end of 2019 and skyrocketed to $26.9 trillion at the end of 2020. On February 7 it stood at $27.88 trillion or $84,198 per person and $222,191 per taxpayer. This is 130.8% of GDP. This is a very big number. Much of this debt has been purchased by the Federal Reserve resulting in an explosion of its balance sheet and the public’s holdings of money. At the end of 2019 the Federal Reserve assets (the counterpart of which is largely base money–currency held by the public and bank deposits with the Federal Reserve) $4.17 trillion and grew to $7.36 trillion by the end of 2020. In other words, the Federal Reserve bought $3.19 trillion of the $4.2 trillion increase in the national debt. This is a bit of an overstatement because the Fed also bought a modest amount of other debt.  Much of the rest was purchased by foreigners as “the U.S. trade deficit rose 17.7% to $678.7 billion and hit the highest level since 2008.” “The US trade deficit rose in 2020 to a 12 year high”

Because the Federal Reserve now pays banks interest to keep large amounts of their deposits with the Fed in excess of required amounts (excess reserves), the money supply measured as currency in circulation and demand deposits with banks (M1) grew somewhat less than the Fed’s purchases of US debt. In 2020 M1 grew $2.5 trillion, a year in which GDP ended a bit lower than it started.` In part, the public is not spending this money at the rates they normally would because the theaters and restaurants, etc. are closed. A seriously inflated stock market and cryptocurrency values seem to be temporary beneficiaries.

According to Wells Fargo: “We estimate consumers are sitting on $1.5 trillion in excess savings compared to the saving rate’s pre-COVID trend….  After a year of limiting trips, eating at home and putting off doctor appointments, we expect consumers will be eager to engage in many of the in-person services forgone during the pandemic, and spend on gas to get there and clothes to look good doing it. The ample means and eagerness to spend could potentially set off a bout of demand-driven inflation that has not been experienced in decades.”  “Wells Fargo–Poking the Inflation Bear”

As I noted last April, unwinding these monetary and fiscal injections, as is necessary to avoid a significant increase in inflation, will be challenging. And now we are even deeper into debt. As inflation increases nominal interest rates will increase as well and the cost of our huge debt financing with it. While managing the short run impact of the pandemic, the government’s eyes should be on the longer run picture as well.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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3 Responses to The New Covid-19 Support Bill

  1. Jim Roumasset says:

    Isn’t this infusion plus accommodative monetary policy similar to an (only slightly selective) helicopter drop? It doesn’t do much for the “scarring” problem (as Mohamed El-Erian calls it). Your small business doesn’t bounce back after you lose your lease, the human capital of your employees, and the network capital of your organization.

  2. Jim Roumasset says:

    Summers’s main point is that the proposed stimulus is too big and too late. “Scarring” adds another dimension–targeting those businesses about to go under. Something akin to a helicopter drop of money is not well suited to that (difficult) task.

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