The on-again, off-again nature of economic stimulus negotiations may provide a useful brake to evaluate the proposals on the table more carefully. The economic effects they will have depend heavily on economic issues that the big-government coalition of House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin is seemingly unaware of. If they get what they want, the economy will be slowed down further, and relief will not be focused on those who need it the most. The White House needs to understand the economic impact of their proposals better, or they will be disappointed when reality departs from their economic or political intentions.
Before continuing to subsidize unemployment further, it is critical to know whether a reduction in labor supply or labor demand is responsible for the slowdown in the recovery. It is by now well understood that most of the unemployed earned more on unemployment insurance than in their previous job under the boosted benefits provided by the CARES Act. The current proposed range cuts the $600 per week back to between $300-400 per week, but that still means most of the unemployed will earn more than they would have in their prior job.
Some economists have recently and radically claimed that having government benefits that exceed wages (i.e., more than a 100% implicit tax on earnings) does not matter for labor supply. In that fantasy world, firms could go on ZipRecruiter and post jobs that asked workers to pay to work, as opposed to getting paid, and get a lot of applicants. Those making the radical claim fixate on a single study, which actually acknowledges the opposite finding that “the workers with the largest changes in [unemployment benefit] generosity experience the largest declines in employment relative to the January baseline” but goes on to make assertions as to how the timing was wrong.
The less quantitatively inclined will remind us that losing a job is terribly painful. We agree with that red herring, but incentives still matter even to people who are suffering, and again, that does not mean you can hire people and charge them for it.
They will also assert that no jobs are available — that is, that employment is taking a hit due to a lack of demand rather than supply. Although there are segments of the economy such as air travel and performing arts where consumers are not willing to pay for what workers would do, the overall labor market data invalidates these arguments for the rest of the economy.
If the unemployed have been fighting over nonexistent jobs this summer due to a lack of labor demand, why did average hourly earnings increase in both July and August? Demand outpacing supply raises prices, even in labor markets. This wage growth is particularly indicative of a strong demand because this recovery, like many before it, involves bringing back lower-wage workers whose employment drags down the national average wage.
In addition, data on job openings show that employers are looking for workers as much as they were in December 2019, when the economy was booming with a historically low unemployment rate. July had almost 7 million job openings, which exceeds even the peak months during the George W. Bush and Barack Obama presidencies.
Proponents of more stimulus also claim that the CARES Act propped up the economy by raising aggregate demand for consumption and investment goods. Consumer spending would collapse, they said, when about $50 billion worth of unemployment bonuses were gone in August. As the missing government support multiplies through the economy, Nobel Laureate Paul Krugman teaches us, the drop in consumer spending could be just as bad as the virus-induced drop in March and April, which was in the hundreds of billions.
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 magically increase total economic activity and jobs — and may actually decrease them.
For the CARES Act, it is even unclear whether those receiving the money raised their consumption.
It was, therefore, interesting to see the latest August retail spending report as it occurred after the government checks expired at the end of July. It did not show the beginning of another historic drop but instead was about $3 billion above July, which is quite a normal monthly change.
Rather than arguing for more of the same, it’s time to face up to the fact that the federal government overdid its stimulus and failed to target it where there is genuine need, which there indeed is.
The most striking evidence of the missed opportunity to target funds is what happened to disposable personal incomes, roughly defined as private income plus net government transfers. It skyrocketed in the second quarter at an all-time record with an annualized increase of 45% — government liquidity exploded relative to private income losses.
Every previous recession had declines in disposable income growth, but the record-setting COVID-19 recession had about four times the income growth of an economic expansion. Yet, there are people hurting, and so, one can only imagine how much a better-targeted fiscal response could have lowered their suffering.
It’s not too late for President Trump to turn away from any deal in Congress that would impede a so-far impressive recovery by continuing to hurt labor supply. The simple-minded Keynesian rhetoric that passes for economic analysis in Washington, D.C., has been disproven over and over with data, and this is just the most recent example.
Casey B. Mulligan and Tomas J. Philipson are both economists at the University of Chicago and served on the White House Council of Economic Advisers, with Mulligan as the chief economist from 2018 to 2019 and Philipson as a member and acting chairman from 2017 to 2020. Mulligan’s new book You're Hired! Untold Successes and Failures of a Populist President details Trump’s quest to cut federal regulation.