Why Larry Summers is Wrong About $2,000 Stimulus Checks
by Benjamin Studebaker
Larry Summers, the former director of the National Economic Council under President Obama, has publicly spoken out against the $2,000 stimulus checks proposed by Bernie Sanders and President Trump. Summers’ argument is simple–the checks are projected to increase disposable personal income as a ratio of GDP to an unusually high level. For Summers, the fact that this figure would be elevated above normal levels is itself cause for concern. But the situation we are in is unprecedented, and it calls for an unprecedented response. Let’s run through some of the arguments.
Here’s the chart at the center of Summers’ argument:
We could pick at the chart a bit. Summers has chosen to use Q1 2019 as his benchmark, when output was highest in Q4 2019. The economy was about 1.5% larger in Q4 than in Q1. And what’s more, the economy was projected to grow a further 1.8% in 2020 prior to the arrival of coronavirus. If that had happened, US real GDP would have been around $19.6 trillion by the end of 2020, roughly 3.4% above the Q1 figure Summers uses. If we used these figures, the ratio of disposable income to GDP would not be nearly as elevated as it is in Summers’ chart.
But there are also larger issues. For one, despite Summers’ claim that consumer spending is already rapidly recovering, the overall economy still remains significantly smaller than it was in Q4 2019. The latest release put real GDP at about $18.6 trillion. That means we’re still almost 5% below the pre-crisis level. This is still a deeper hole than the hole we were in during the global economic crisis of 2008, when real GDP fell by just under 4%. While the economy did recover quickly during Q3 2020, even that record-breaking pace left us more depressed than we were at the bottom of the 2008 crash. If we treat the economy as having already recovered, we risk plateauing at a level still significantly below the pre-crisis level, let alone the level at which the economy would have been at in the absence of coronavirus. While we’re almost 5% below pre-crisis level, we’re a full trillion dollars below the $19.6 trillion projection. This is still a mammoth amount of ground to make up. The economy is not operating near capacity.
Even with the stimulus that we’ve done so far, the annual US inflation rate is just 1.2%, below the Federal Reserve’s 2% target, and well below the 4% target which was proposed after 2008 by mainstream liberal economists. There’s tons of room for additional stimulus, more room than there was in 2008, when Barack Obama passed a stimulus package that was comparable in size to the one congress recently passed. That stimulus proved to be too small to tackle a recession that is even now smaller than the one on our hands. Liberal economists like Paul Krugman argued that the 2009 American Recovery and Reinvestment Act was too small, and they were right! If it was too small to handle a 4% contraction, it’s definitely too small to handle 5%.
But that’s not all. The 2020 recession is bizarre in another respect–it’s K-shaped. Affluent Americans who can work from home were not hit as hard as poorer Americans whose jobs were furloughed or lost:
In this chart the problem is very visible–Americans earning more than $60,000 per year have seen employment gains over the course of the year, while those earning less than $27,000 have only seen a partial recovery. Low wage jobs remain depressed by 20% from the pre-coronavirus level, and in recent months there has been no further movement. Poor Americans are stuck on a plateau, deeply depressed below pre-crisis figures.
For an American who previously earned $27,000 per year, a $2,000 stimulus restores just 7.4% of the income they otherwise would have earned. For an American whose job paid the minimum wage, it restores 13%. Even a $2,000 stimulus leaves many poor people very far behind where they would have expected to be. These people have no cushion, no way of protecting themselves from this recession, and the weak stimulus packages passed thus far have left them mired in stagnancy.
Centrists often respond to arguments like these by calling for means-testing, suggesting we give larger payouts only to the unemployed, or to people who can prove their situation is dire. But we shouldn’t do this for three reasons. First, it creates perverse incentives–“welfare cliffs”–which often lead Republicans to oppose welfare programs. Second, because a flat payout is a larger percentage of a poor person’s income than it is a rich person’s, the plan is still progressive from a distributive standpoint even if it includes payments for affluent Americans, and by including those payments it makes those affluent Americans more likely to support the program politically. Third, because the economy is still depressed by almost 5% below the pre-crisis level and because low-wage employment is still depressed by almost 19%, we need affluent Americans to spend more money to restore lost jobs and lost output.
Americans are experiencing the 2020 recession very differently from one another. The recession has a clear class bias against the poor, even more than usual:
In this environment, it’s easy for wealthy people to forget that the recession is still going on, and that many millions of people are still in deep need. Our political discourse is thoroughly dominated by people in the bracket that has already recovered. Our media is owned and paid for predominantly by people in this income bracket. The journalists who work in the media have been working from home for months. They are in much less danger than the bulk of the American people. When someone like Larry Summers treats the recession as a problem that has already been solved, these journalists and the media tycoons who employ them are all too ready to believe it’s true.
It’s not true. More stimulus is needed. Poor and working Americans don’t have enough of a voice in our politics, and if no one speaks up for them, they are liable to be forgotten. It’s imperative that we push hard on this, right now.