Is the U.S. Government Doing Too Little or Too Much To Help The Economy During the Covid-19 Pandemic?

Yes, they are on both counts!

Nominal U.S. GDP reached it trough in Q2:2020 and was down $2.2T but in Q3:2020 it was down by just $580b, respectively from Q4:2019. Yet, in Dec. we passed a $935b stimulus relief bill and are now trying to pass another $1.9T dollar package. That is about $2.8T worth of economic relief to plug up a shortfall of $580b as of Q3:2020. This is on top of the $3.5T worth of additional stimulus (e.g., the CARES Act and several others) prior to the stimulus package signed in Dec. 2020. Interestingly, the economic shortfall from this pandemic is expected to narrow further in Q4:2020 as Real GDP is likely to grow by around 5.0%. To be sure, if much of the recent proposed economic stimulus legislation is approved by Congress and signed into law by the President --- U.S. real GDP in 2021 is likely to grow by 6.0% after contracting by about 3.5% in 2020.

However, before we conclude that this stimulus is way too excessive, we should not forget that in Dec. 2017, we passed another stimulus package, called the Tax Cut and Jobs Act that increased the deficit (according to the non-partisan Congressional Budget Office) by $2.3T over a 10-year time frame when the U.S. Unemployment rate stood at 4.1% compared to an Unemployment rate of 6.7% today.

Today, we have 10.7m that are unemployed compared to 6.6m people that were unemployed in Dec. 2017. Interestingly, even the number of people unemployed may underestimate the severity in U.S. labor market conditions because since Jan. 2020, the U.S. labor force has dropped by 3.9m people which means that the number of people that have lost their jobs during this pandemic is even larger than the reported number of unemployed individuals given that if a person drops out of the labor force, they are not counted as being unemployed. Not surprisingly, the U.S. Census Bureau has also reported that 1 in 8 individuals living in the United States is facing hunger.

Yet, the argument that the amount of U.S. economic stimulus is greater than is needed -- still holds, and is revealed by the fact that reasonable estimates suggest that U.S. Households are sitting on $1.6T of excess savings compared to figures observed pre-Covid-19.

The bottom line is that to solve our current economic problem in more efficient manner --- we would need to spend more of our stimulus money solely on individuals that have lost their jobs and on those that are facing hunger. Of course, we must do this in a way that helps these individuals get back on their feet without creating any economic disincentives. Such a targeted strategy may take a considerable amount of time to execute which explains why policy makes opted for a less targeted approach.

We also know that economic stimulus to combat the Global Financial Crisis in 2008 was only a fraction of what we have spent to deal with our current health crisis and explains why it took almost a decade to recover from that prior economic crisis. Today, we are striving to go big as Janet Yellen hinted in her Jan. 19, 2021, confirmation hearings in an attempt to minimize the longevity of economic discomfort experienced as a result of our health care crisis.

Of course, the level of spending that we are undertaking has led many to speculate that we will soon suffer a melt up in inflation from overheating the U.S. economy. And while that is possible, I believe there is also a good chance that many U.S. Households will once again increase their precautionary savings as they receive their economic stimulus checks while those that badly need it will use such funds to cover their basic needs.

Assuming that consumers continue to behave as they did in 2019, inflation could rise just modestly above the Federal Reserve’s targeted levels in 2020 and not pose a real threat since inflation has consistently come in below such targets in recent years. The Fed’s new FAIT (Flexible Average Inflation Targeting) provides some flexibility for inflation rates to rise above their targeted growth rates given that they have hovered below such targets in prior years.

Conclusion

While the bottom line suggests that the amount of economic stimulus may at first glance appear to be disproportionate to the level of output loss in the U.S. as a result of our current health crisis --- the level of economic discomfort has been quite serious for some Americans and for a considerable proportion of the U.S. service sector (e.g., Leisure & Hospitality). And given the challenges of distributing economic stimulus in a more targeted fashion it is hard to fault either Republicans or Democrats for having opted so far to go big (with less targeted stimulus) in the hope of minimizing the economic fallout from our current health crisis.