Meanwhile, Congress passed a scaled‐down version of the March 27 CARES Act on December 27. As before, the new law features a mass mailing of “stimulus” checks, extra and extended unemployment benefits, and more forgivable loans (grants) to businesses. As debt‐financed payments from the original CARES Act were greatly reduced after July, advocates of “a second stimulus” repeatedly predicted that without another burst of federal transfer payments a double‐dip recession is in the cards.
Economists seeing only a stark either/or choice between a second stimulus or a double‐dip recession made the headlines every month – July, August, September, October, November and December. These endlessly humiliating predictions of imminent second recessions never made sense unless the first recession had merely been the result of avoidable bungling of fiscal and monetary management rather than the unavoidable intent and result of state lockdowns and SAH orders.
Economists in the Keynesian tradition who emphasize the demand side of economic transactions invariably tend to prescribe policies intended to maximize incentives to spend (“the propensity to consume”), rather than minimize disincentives to produce.
By contrast, Neoclassical economists who focus on the supply side of the economy (incentives or impediments to production), are likely to view the tightening or easing of state restrictions as far more important than, say, an ephemeral windfall of $600 checks.
From a demand‐side perspective enlarged and extended unemployment benefits have a magical multiplier effect on nominal demand. From a supply‐side perspective, enlarged and extended benefits for being unemployed discourage labor force participation and thus reduce real output. In fact, if governments did manage to stimulate growth nominal GDP (demand) while also restricting real GDP (supply), that policy mix might be a recipe for stagflation.
Economic forecasts (such as last year’s periodic alarms about a double‐dip recession) are often visibly affected by assumptions about the relative importance of changes in supply‐side restrictions, compared to a supposed boost in consumer spending from new stimulus checks.
If the rebound of 2020 was primarily the result of demand‐side “fiscal stimulus” — rather than supply‐side reopening — then we need not be too concerned today about how many states lock down businesses or ban inessential jobs. From the demand‐side perspective, after all, additional stimulus could supposedly make up for any slowdown due to state restrictions on supply. If millions were prohibited from working but nonetheless had all their wages replaced by government benefits, then negative effects on supply (sources of income) can be easily downplayed by the habitual spotlight on consumer demand (uses of income).
On the other hand, if supply‐side restrictions were the main threat last March, and again last December, then “putting more money in people’s pockets” will do nothing to increase the supply of goods and services that stores, restaurants and entertainers are not permitted to sell.
In his year‐end Wall Street Journal column, Greg Ip seemed to emphasize the supply‐side. He wrote, “the economy’s biggest problem isn’t demand, it is supply. Most Americans have money; they are just constrained in how they spend it because of pandemic‐related business restrictions or fears.”
In his previous column however, Ip instead emphasized demand‐side stimulus. He highlighted an “unprecedented funnel of federal cash” among “good reasons to think  will be better — perhaps much better — than you think.” He cited an estimate that the new $900 billion stimulus bill will ultimately bring total stimulus since February to $3.5 trillion.” Never mind that only a fourth of that sum will be spent in 2021, or that only 13% of that ($120 billion) is earmarked to replace lost wages of the unemployed. Still, that $3.5 trillion, wrote Ip, “more than replaced all the wage income lost during the pandemic.”
This claim that pandemic‐related spending replaced “all the wage income lost” has several problems, not the least of which is that it is not true.
The Table, condensed from the Bureau of Economics (BEA), highlights the largest of what Ip calls stimulus spending but the BEA calls “Pandemic Response Programs”(PRP). All figures show changes in key sources of Personal Income from one month to the next, at annual rates. The BEA began the table with April when “stimulus” spending peaked, so monthly changes start with May.