To stimulate or not to stimulate. Europe unleashed another $600 billion round of stimulus on Thursday. But Congress has been hung up on that question for months now. That’s unfortunate, because the need is great and the help provided by previous packages undeniable. Here are the numbers, and they are eye-opening.
Put simply, the economy would be in far worse shape today were it not for this spring’s massive infusion of government money to support consumer spending. Similarly, federal help has spared government from deep cutbacks. But that money has run out and a quick look at household and public-sector balance sheets tells you why more is needed.
Consumption drives the economy. Income drives consumption, You can give businesses all the money in the world to pay their employees, but if consumer demand falters, growth will falter too.
The CARES Act and other programs provided that financial support.
Consider disposable, or after-tax, income. It includes all types of income, including money from government social programs.
In March, when shutdowns began, employee compensation fell at a $340 billion annualized pace. In April, the decline accelerated to almost an $826 billion rate. In other words, wages and benefits collapsed.
Yet that fall did not lead to a collapse in disposable income. Yes, incomes declined sharply in March. But once the stimulus payments started flowing, that drop was reversed. In April, at the peak of the restrictions, disposable personal income surged at a $2.5 trillion pace.
Let’s understand what happened. Despite the loss of nearly 21 million jobs and an unemployment rate of nearly 15%, household income swelled.
How was that possible? Simple. Government social-benefit programs, which included expanded unemployment compensation and other pandemic-relief programs, added income at a $3.3 trillion annual pace.
As for consumption, it faltered in March and April, before the checks arrived. But by May, as the funds flowed to more and more households, consumer spending surged. That kept many businesses in business.
Households were smart. They didn’t run out and spend everything. The savings rate surged to the highest on record — 33.7%! People stashed cash away, uncertain about what the future would bring.
Good thing they did. As businesses reopened and employees were called back, government unemployment payments started to drop. Wages and salaries did not come close to offsetting the fall in government support. By May, disposable income began declining again.
Households offset the fall in income by dipping into their savings and moderating spending. A recent Wallet Hub study indicated that for the first time since 2009, households will pay down credit card debt. Shop ‘till you drop? Nope.
The reality is that it was the stimulus funds that supported the rapid and solid consumption rebound. Gains in pay could not — and will not until the economy is better healed — offset the loss of government support.
What about state and local governments? Why should we support them, too?
Because of the pandemic, almost every government entity, other than the federal government, is facing major budget deficit problems. While the federal government can and usually does run shortfalls, states, cities, school districts, and other government entities must balance their budgets, one way or another.
The Brookings Institution, a nonpartisan research organization, estimates that “state and local government revenues will decline $155 billion in 2020, $167 billion in 2021, and $145 billion in 2022 — about 5.5 percent, 5.7 percent, and 4.7 percent, respectively.”
The stimulus bills offset much of that loss, though not all of it. Since there has been no additional funding forthcoming, state and local government are likely to experience the deep declines the Brookings researchers forecast.
Consider the City of Philadelphia. PICA, the City’s financial oversight organization, reported that through November of this fiscal year, Philadelphia’s tax revenue was down from fiscal year 2020 by 7.4%.
And the outlook for the city is troubling. As I wrote in my July 2020 column, the pandemic will likely drive a loss of high-density Center City employment and that will restrict economic and tax revenue going forward.
What does that mean for the economy? At all levels, including the federal government where deficits have reached historic levels, the ability to fund critical programs, ranging from roads to schools, will be limited.
And as revenues remain depressed and growth slows, the only options will be to cut programs and workers or raise taxes.
Governments need more stimulus funds. But some say no to government aid but yes to funds for companies, regardless of their size or type of business.
Is it really OK to lose decently paying positions in the public sector while funding lower paid private sector jobs without benefits? Is the social value of a waiter, clerk, or salesman really greater than a teacher or police officer? Some politicians seem to believe that is the case.
And then there is the simple reality that a job is a job, and that the income and spending that gets generated from any type of work is what drives the economy forward.
The Brookings piece said that the Great Recession showed cutbacks by state and local government constrained recovery. The lesson, it said, was that funding to them had to be vigorous enough that recovery was “as robust as possible.”
Another big stimulus bill is needed to sustain the current economic recovery as well as ensure that future growth will be strong.
That means we need both additional subsidies to shore up household income, as well as funds to help state and local governments provide critical services.
Joel L. Naroff is the president and founder of Naroff Economics, a strategic economic consulting firm in Bucks County. He can be contacted at firstname.lastname@example.org