Trump’s $2,000 Stimulus Checks Are a Big Mistake
(Bloomberg Opinion) - The attack I made on Bloomberg Television on the idea of universal checks worth $ 2,000 as a Covid-19 response lit the Twittersphere. I think it is worth making clear what I am arguing.
Of course I am not against incentives or austerity measures. For years I have advocated a more expansionary fiscal policy amid secular stagnation, and I've noticed many times in recent months that “it's not like wearing no mask to a large indoor gathering - an insane risk.” And both In the short and long term, I am in favor of strengthening the social safety net through measures such as expanded benefits from the Supplemental Nutrition Assistance Program or an expanded tax credit for earned income or a tax credit for children.
There can be no argument that the stimulus package passed by Congress should be implemented immediately, even though it is too late and too little. As I have found, it does not help states and communities try to reinstate teachers and health workers. It is too little to expedite the availability of the tests needed to put Covid-19 in the rearview mirror. The extension of the eviction moratorium by one month and the extension of unemployment insurance by eleven weeks are clearly far too short-term.
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The question is, does it make economic sense to spend about $ 600 billion on a one-time tax credit that would be worth $ 8,000 for a family of four and reach more than 85 percent of taxpayers. Victims of Covid-19 disorder, like the poor, can and should receive generous targeted assistance.
When assessing general tax breaks, the question arises, what about the vast majority of families who are still working and whose incomes have not fallen or whose pension or social security benefits are not affected by Covid-19? For this group, the pandemic has reduced the ability to spend more than the ability to earn.
The dates are conspicuous. Total employee compensation is currently only about $ 30 billion per month behind the pre-Covid baseline. Measures in Congressional stimulus plan to bolster unemployment insurance and support business will increase household income by approximately $ 150 billion a month to make up for all of that loss.
The question is, is there any reason for another tax break of more than $ 200 billion per month in the next quarter? That would mean additional support equal to seven times the loss of household wages and salary income in the next quarter.
Some argue that while $ 2,000 checks are not the best support for the post-Covid economy, incentivizing from $ 600 to $ 2,000 is better than nothing. You have to wonder if they would prefer $ 5,000 or $ 10,000 or more. There has to be a limiting principle.
An obvious candidate is not to over-insure yourself. It goes without saying that the income of working families should be brought up to the benchmark level. Maybe it makes sense to bring them a little above the benchmark level. However, a further increase in profit when losses are replaced seven times seems difficult to justify - especially at a time when pent-up savings are $ 1.6 trillion and growing. If writing universal checks is a good idea, why not after household incomes return to normal?
This point is shown in the following figure. It shows that due to the legislation passed in 2020, total household income (which does not take into account the stock market) has more or less exceeded normal levels relative to economic potential since the beginning of the pandemic. Without fresh impetus, things would have normalized in 2021.
However, the existing economic stimulus plan is sufficient to raise household income relative to the potential of the economy to unusually high levels - unknown during an economic downturn. With President Donald Trump's add-on, we are in completely unknown territory. Household incomes are more than 15% above their normal level in relation to economic potential. We frankly don't have a solid basis on which to judge how much and how quickly this Cares Act savings and excess will be spent. There is a possibility of some overheating, especially if the potential supply of the economy remains constrained by Covid protection measures.
As my recent paper with Jason Furman points out, I am all in favor of a far more expansive approach to fiscal policy. However, this does not mean that at a time when household income losses are being fully replaced and account balances have been above pre-Covid levels (at least from October), universal freebies will be indiscriminately supported.
There is no good economic case for the $ 2,000 check, a policy that was only on the table after the President's casual statement last week. The Democrats who use this opportunity to pit the President and Senate Majority Leader Mitch McConnell against each other are fair and good politics - but if it gets carried out, it's a bad economy. Instead, Trump should immediately sign the bipartisan aid package, which took months to negotiate, and avoid a cut in unemployment insurance that will plunge millions of the most vulnerable Americans into poverty.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Lawrence H. Summers is a Harvard professor and former US Treasury Secretary.
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