These three big numbers explain the stimulus debate

As President Biden tries to negotiate a bipartisan compromise on his promised stimulus bill—which he wants Congress to deliver by mid-March—the main battlefield will be how narrowly to target the payments.

A consensus is coalescing around the notion that his original proposal was too broad, sending at least partial payments to married couples earning over $300,000 a year. Now Biden has stepped back from that position, saying at a press conference on Feb. 5 that the stimulus should be structured so “folks making $300,000 don’t get any windfall.”

It isn’t just that millions of taxpayers would be furious over the Treasury’s sending checks to households that earned more than 96% of the country. The larger problem is that such broadly distributed checks would do almost nothing to stimulate the economy. 

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To see why, look at this snapshot of the U.S. economy today, after some $3 trillion of stimulus.

Pre-pandemic, the U.S. economy had been growing steadily for over a decade, and consumers’ disposable personal income was the highest it had ever been. The first stimulus checks and enhanced unemployment benefits then sent that income rocketing. The monthly totals have since subsided from their peak, but consumers’ disposable personal income in December—when few of the recent $600 stimulus checks had reached recipients—was still a half-trillion dollars greater than it was last February, as the column on the left in the graphic above shows.

Consumers’ savings deposits were also at an all-time high before the pandemic, and they also roared upward after the first stimulus checks went out. Consumers’ savings today are $1.4 trillion greater than they were pre-pandemic (see the graphic’s center column).

Think of those two columns together as a picture of consumer spending power; never in U.S. history has it been anywhere near this great. Now look at the third column: consumer spending.

Spending was at an all-time high just before the pandemic. It plunged in March and April, and by December it still hadn’t recovered. It was almost $400 billion less than it was last February.

Direct government payments to individuals serve two purposes: a humanitarian purpose of supporting people who’ve lost their incomes through no fault of their own, and a more general purpose of stimulating consumer spending—two-thirds of the U.S. economy—to keep businesses running and workers employed. As the charts show, the second purpose is pretty well maxed out. Flooding the economy with unprecedented spending power doesn’t necessarily make consumers spend if they’re afraid to leave home.

Much of the money disbursed in the previous payments was saved rather than spent, and new research from Wharton estimates that 73% of Biden’s original proposal for $1,400 checks would be saved; high-income households are least likely to need the money and most likely to save it. The researchers’ conclusion: “The broad distribution of relief payments in the Biden administration’s proposed plan will flow largely into household savings and will produce only small stimulative effects.”

That’s why attention is shifting toward the first purpose of direct payments, the humanitarian purpose. “If the next round of stimulus checks goes out, they should be targeted to those who need it,” Joe Manchin of West Virginia, the most conservative Democratic U.S. senator, said recently. Biden is committed to $1,400 checks, but congressional Democrats are reportedly studying sharp reductions of the income thresholds for recipients, perhaps $100,000 for full payments to married couples. That’s not much more than what some Republican senators have proposed.

Beyond that, the unemployed are the most obvious candidates for help; the final bill will likely include enhanced benefits for them. Children could also be a focus. Congressional Democrats and Republican Sen. Mitt Romney of Utah favor sending some households thousands of dollars a year, indefinitely, for each child under 18.

Both parties now seem to accept the reality that mere dollars from the Treasury can’t juice the economy much; only taming COVID-19 can do that. The next stimulus bill will be more narrowly targeted than previous ones, and the next few weeks will see an intense negotiation over exactly who gets exactly how much.

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