In addition to $1,200 in helicopter money dropped on 159 million adults, and subsidized PPP loans to some lucky noncorporate businesses, the “stimulus” package included longer and larger unemployment benefits –an extra $600 per week. Added to state unemployment benefits, the $600 federal checks provided the equivalent of a $24–28 an hour wage in most states. By contrast, the average wage in the leisure and hospitality industries was $16.86 in July, and falling, according to the Bureau of Labor Statistics.
With the federal government’s $600 weekly add-on, unemployment benefits were the equivalent of working for $31–36 an hour in Oregon, Washington, Minnesota, New Jersey and Massachusetts. Why work? In June, New Jersey and Massachusetts suffered the nation’s highest unemployment rates of 16% and 17.4% respectively.
Unemployment and the economy in 42 other states, however, began to improve as soon as COVID-19 business closures and stay-home orders were partially rolled back in most of them by May 29. By August 5, the U.S. economy was expected to rise at a 20% annual rate in the third quarter, according to the Atlanta Fed GDPNow model, regardless of another Congressional spending spree. If so, that would mean the steep recession apparently lasted just 4 months.
Consumers did not buy fewer haircuts, gym memberships and restaurant meals in the second quarter because they lacked immediate income. On the contrary, disposable personal income soared as personal spending fell. Consumers bought less because (1) sellers were not permitted to sell what they wanted to buy, because (2) gubernatorial mandates shutting down many businesses made future profits and wages insecure, and because (3) people are too sensible to commit to big ticket purchases on the basis of an ephemeral windfall from vote-buying politicians.
So, what was stimulated by the stimulus? The answer is obvious. Federal nondefense spending rose at a 39.7% annual rate. Big government spending can and does grow big government.
The only conceivable rationale for repeating the latest of many failed experiments with fiscal stimulus (borrowing from Peter to pay Paul) might be to “stimulate demand.” But we just tried that. It didn’t work. It never works.