It appears that sometime next week or shortly thereafter, Congress will pass and the president will sign, a new stimulus package. This will be in addition to the nearly $3 trillion already approved to be spent to stimulate the economy. Is this really needed?
In the first stimulus package, the government wanted to avoid a lengthy recession. Because nearly the entire economy was at least partially shut-down, GDP was falling rapidly. Even though January and February of this year were very strong, the shut-down in Mid-March resulted in a 5% decline in GDP for the first quarter.
Since the shutdown would last at least until the end of April, with May and June recovering slowly, the second-quarter GDP number could be as bad as -20%. That would be devastating. Tens of millions of people would be unemployed, with their state unemployment benefits paying only a fraction of their wages.
Millions of businesses were closed and would re-open slowly. That too is devasting since many businesses simply cannot afford many months with little or no revenue. Politicians, from both sides of the aisle, agreed stimulus was needed.
The packages passed gave $1,200 to virtually every adult who paid taxes last year or the year before. A family of four received $3,400. It didn’t matter if a person was negatively impacted economically or not. All taxpayers received the “free” money.
Unemployed people had $600 added to the weekly unemployment benefit received from the state. One study said that 68% of unemployed people were bringing in more money being unemployed than being employed.
Almost all small and medium-sized businesses could borrow money through a government-backed program. If the business promised to not lay-off any workers, the loan turned into a grant and did not have to be repaid.
That stimulus worked perfectly. The total shut-down ended on April 30. Retail sales in May jumped 18%. More than 2.5 million were created in May, easily the most ever in a single month. Total consumer spending jumped more than 8% the best since 1959. Industrial production reversed the slide and increased by 1.4%
But then, beginning in July, the coronavirus flared up and many states slowed down or reversed the opening process. Data will not be available for at least three or four weeks to determine the overall impact. As a result, another round of stimulus will likely be passed.
Do we need it? Can we afford it?
The short answer to both is no. We don’t need it and we definitely cannot afford it. From a purely economic view, most people have not been negatively impacted by the shut-down and many are actually better off. Once every business re-opens, consumers will spend.
In about three weeks we will start to see some data from July. Although there are shutdowns, mostly in the hospitality and leisure activity industries, industrial production is revving up. Other service businesses are continuing to re-open in most parts of the country.
The variables are how bad will this second wave be? And how long will it last? Although there are projections, we simply do not know. But if the therapeutics and/or vaccines get approved by September, which is possible, the economy can recover without more stimulus.
The real problem is the deficit. It was projected to be $1 trillion before the virus hit. The $3 trillion in stimulus already passed, plus the reduction in tax revenues due to the recession, will mean a deficit of $4.5 to $5 trillion. Added to the $23 trillion public debt, creates an unsustainable and problematic situation, especially considering our annual GDP will be just slightly above $20 trillion.
When the public debt exceeds one year’s GDP, most economists call that very problematic.
From an economic view, no more stimulus is needed at this time. It may be needed a bit later if the virus worsens, but not now.
Politically it is needed. Depending on the exact nature of the stimulus, pumping more money into consumer’s hands will definitely increase economic activity in the short term and speed up the recovery, unless a worsened virus closes things down again.
This is a presidential election year. Congress wants to campaign on helping the people. President Trump wants to campaign on quickly rebuilding the economy.
The new stimulus will help politicians politically. Economically we don’t need new stimulus.
Politics will win over economics.