Did D.C. Save they Day?

Since March, politicians and the media have been telling us that emergency government spending averted a far worse economic crisis than we’ve had.

This is a pure Keynesian argument, made by both parties.

There is also a non-Keynesian argument that the spending was necessary because it kept people from working in situations where they could contract COVID-19, and generally kept the circular flow moving with a bunch of people not working in it.

These two are often conflated.

Scott Sumner writing at EconLib notes that he’s OK with both of those … except that the first one has an accepted theoretical transmission mechanism that’s explained in most texts. Most of you know this: fiscal policy is supposed to put more money in the hands of those who can and will spend it, and this makes the economy improve.

Here’s the catch. How much shopping did you do these past 6 months? Yeah … I thought so. Your behavior sounds contractionary to me, not expansionary.

When we look at the aggregate data for 2020 II, instead, what we see is RGDP went down by a lot, but the less noticed NGDP went down by even more. Those are consistent with massive deflation, which makes sense given what you’ve probably seen with prices of non-essential items. But disposable income went through the roof. That’s the stimulus from D.C.

Plausibly, if everyone was working less, RGDP would go down. But if everyone had more disposable income to chase after those fewer real goods, prices should have gone through the roof. They didn’t.

To Sumner, this implies that the stimulus was just throwing money at people who didn’t have much to spend it on, or interest in spending.

Personally, I know in my household, we’re still working, and still getting paid the same amount. Our overall purchases are down a bit … and the stimulus check went to paying off outstanding bills for things we’d already consumed (like fixing and rehabing a broken arm that was on a payment plan, or paying off the rent to get out of the lease for the kid who fled SLC when the U shut down). Those keep the economic wheels turning, but they are not stimulating.