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As the economy shut down in March of last year due to the pandemic, the Federal Reserve flooded the system with liquidity. At the same time, Congress passed a massive fiscal stimulus bill that extended Unemployment Benefits by $600 per week and sent $1200 checks directly to households.
In December, Congress passed another $900 stimulus bill extending unemployment benefits at a reduced amount of $300 per week, plus sending $600 checks to households once again.
Now, the latest iteration of Government largesse comes in a solely Democrat supported $1.9 trillion “spend-fest.” Out of the total, only about $900 billion goes to consumers in the form of $400 extended unemployment benefits and $1400 checks directly to households. The remaining $1.1 trillion will have little economic value as bailing out municipalities and funding pet projects doesn’t boost consumption.
Economists estimate the latest stimulus bill could add nearly $1 trillion to nominal growth (before inflation) during 2021. While such a surge in growth would be welcome, it represents just $0.50 of growth for each dollar of new debt.
Such a high growth estimate also assumes that individuals will quickly spend their checks in the economy. The hope is that as vaccines become available, individuals will unleash their “pent-up” demand from the last year.
While that could indeed be the case, there are also other facts to consider.
The late Everett Dirksen, a long-serving Minority Leader of the Republicans in the U.S. Senate, is famously quoted as saying a billion here, a billion there, and soon we’re talking real money. That was back in 1969. At the time, a billion dollars was about one-tenth of 1 percent of GDP.
What about today?
During 2020, the federal government provided a total of $3.2 trillion of Covid relief, starting with a mere $8.3 billion, then adding $104 billion, then adding $2.2 trillion, and finishing off the year with another $900 billion.
We’re now three months into 2021, and the federal government has provided yet another $1.9 trillion in Covid relief; and, the Biden administration has just asked for $2 trillion for infrastructure.
To put these amounts into perspective: A trillion dollars is today about 4 percent of GDP.
Back in 1969, Ol’ Everett was being funny when he referred to a billion dollars. Back then, a billion dollars was already real money. In 1969, the newest nuclear-powered aircraft carrier, the USS Enterprise, cost $451 million, not even $1 billion. The cost of the Apollo 11 mission to put the first man on the moon wast $335 million, not even $1 billion. Only two companies made more than $1 billion in profits (General Motors $1.7 and Exxon Mobil $1.3). A billion dollars, representing one-tenth of 1 percent of GDP, was a fantastic amount of money. Ol’ Everett’s statement that a billion here and a billion there and soon we’re talking real money was a wild understatement.
And, now, we’ve gone from thinking of spending money at a clip of one-tenth of 1 percent of GDP to thinking of spending money at a clip of 4 percent of GDP, as though 4 percent of GDP isn’t already real money.
An estimated 150 million slipped down the economic ladder in 2020, the first pullback in almost three decades.
One of the most economically significant trends of the past few decades has been the emergence of a global middle class. The expectation that this cohort of consumers would continue to grow relentlessly, as rising incomes in developing countries lifted millions out of poverty each year, has been a central assumption in multinationals’ business plans and the portfolio strategies of professional investors.
You can now add that to the list of economic truths that have been upended by this pandemic. For the first time since the 1990s, the global middle class shrank last year, according to a recent Pew Research Center estimate. About 150 million people—a number equal to the populations of the U.K. and Germany combined—tumbled down the socioeconomic ladder in 2020, with South Asia and sub-Saharan Africa seeing the biggest declines.
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Mike’s Editorial
on Saturday, 10 April 2021 10:40
If you like paying taxes, you’ll love what’s coming. Of course it’s already started with the increase in payroll taxes, carbon taxes and liquor taxes that have already kicked in.