Proponents of a large COVID stimulus package stress that their main goal is to provide needed liquidity for struggling workers still locked out of work due to no fault of their own. But the math behind their proposed $2 trillion package does not add up.
As of the end of October, the United States had roughly 10 million fewer workers than there were in February. A $2 trillion package therefore comes to more than $200,000 per worker who still has not gotten back to work since then. That amounts to replacing an $800,000 salary for a quarter of liquidity. In addition, unemployment programs have about 20 million people on the rolls even though only 10 million jobs were lost since the start of the year. This means many who were not employed then are on the rolls now.
The workers still left out of the economy due to COVID-19 are largely in low-wage service industries for which group consumption and group production became too risky with the disease. A University of Chicago report found that the bottom fifth of wage earners—those earning less than $13 an hour—accounted for 36 percent of recent job losses, while workers in the top fifth—making more than $32 per hour—accounted for only 10 percent of losses. Data from the Bureau of Labor Statistics indicate that most jobs lost were in the leisure and hospitality industry, which pay annual salaries between $34,000 and $40,000. Liquidity to fully replace such earnings for three months for 10 million workers would cost around $100 billion. Partially replacing income, using replacement rates of past recessions with similar unemployment rates, would cost about $50 billion. The roughly $2 trillion package that bounced between Speaker Pelosi and the White House before the election is thus 40 times the cost of three months of standard replacement for the low-wage workers currently stranded.
The current spending package’s untargeted response would repeat the mistakes made in the CARES Act. Though acting quickly was prudent at the time, we have since learned how poorly the Act targeted those in need. A bigger bang for the taxpayers’ buck helping the needy could have been achieved, and there is no excuse to make the same mistake again.
The most striking evidence of the missed opportunity of targeting is what happened to disposable personal incomes, roughly defined as private income plus net government transfers. In the second quarter, this measure skyrocketed to an all-time high, with an annualized increase of 45 percent. Because of the CARES Act, government liquidity exploded relative to private income losses for the average person. And, at the same time, many workers who were hit hard saw sharp reductions in their disposable income, suggesting the offsetting growth was even higher than 45 percent for those who kept their jobs. This wild, unprecedented boost to personal incomes screams out the need for better targeting in any additional stimulus package.
Indeed, every previous recession brought declines in disposable income growth, but the record-setting COVID-19 recession had about four times the income growth of a good economic expansion. Yet, many are still hurting, and a better-targeted fiscal response could have lowered their suffering at a lower cost to taxpayers.
Proponents of a large stimulus note that there are about 20 million more people on unemployment programs than before the pandemic. This number shows how such programs have bloated far beyond the 10 million people whose jobs were lost since February. Many of the people enrolled in the programs would not be working even without a pandemic. This should be no surprise given that many did not qualify for their state programs, which do not enroll people with little work history, or who quit, or who are not looking for a new job.
But won’t the stimulus package be valuable to stimulate the economy? Sadly, reshuffling money across the population will not generate economic growth. On the contrary, many economists outside the Beltway believe that taking money from some (buyers of government Treasury bonds) and giving it to others (“stimulus” recipients) does not increase total investment and consumption activity. Indeed, it seems that a major effect of the CARES Act, which dramatically raised savings of recipients through the sharp rise in disposable incomes, was to merely reallocate savings from buyers of Treasuries to those recipients.
In fact, the labor market and the economy rebounded very quickly after April despite the CARES Act—not because of it. The unemployment insurance (UI) provisions it provided stunted the labor supply about 20 times more than the similar UI add-ons that partly contributed to the painfully slow Great Recession recovery under President Obama. Put simply, if a recruiter posted a job offering workers to pay rather than to get paid the posting would get no replies. The implicit tax on work through the CARES Act’s expanded UI amounted to the same deal for nearly three-quarters of the labor force.
Ultimately, the debt generated by these untargeted fiscal responses to COVID will be paid by the young. Indeed, the government’s overall COVID response amounts to an enormous intergenerational transfer from the young to the old. The young, who will not only pay for the deficit-financed fiscal overreaction, are also the ones mostly paying the price of disease prevention from restrictions on both economic activity and education. That’s a cost that the older, often retired, Americans whose health the young protect do not bear. Existing evidence suggests that the cost of prevention makes up the majority of the total economic loss due to COVID so far in the U.S., the remainder being lives lost. The debt and preventive costs imposed on the young have translated into marginally extending the lives of the old.
These mistakes—fiscal overreaction, untargeted aid and a raw deal for the young—should not be repeated in any future fiscal responses given what we have learned from CARES. With proposed packages around 40 times larger than the cost of traditional recession support for the unemployed, a much bigger bang for our buck could be achieved helping those in need.
Tomas J. Philipson is a professor of public policy at the University of Chicago. He served as a member of White House Council of Economic Advisers from 2017 to 2020, and its acting chairman from 2019 to 2020.
The views expressed in this article are the writer’s own.