The shutdowns last year, which continue in some form this year, devastated the economy. The unemployment rate increased from a 50-year low in February 2020 to the highest rate since the Great Depression in April 2020. The policy response to this economic devastation has been unprecedented. Three COVID-relief bills have sent three waves of checks to most Americans, as well as giving aid to state and local governments and various businesses. Unemployment benefits have been repeatedly extended and enhanced so that currently, an extra $300 per week is added to the weekly unemployment benefit. Numerous other benefits have been included in these relief bills, including an expansion of the child tax credit to $3,600 for children under six years old and to $3,000 for children over six.
The checks and the expansion of the child tax credit represents a massive amount of government spending going to most Americans. The COVID relief bill signed into law by President Biden in March 2021 paid $1,400 to everyone in a household below an income threshold of $75,00 for a single person, $112,500 for a head of household, and $150,000 for a couple filing jointly.
Consider a family of four with two children under six years old. This family would have received four, $1,400 checks plus $3,600 for each of child, or $12,800 total from this latest bill. This is on top of the payments the family would have received in the first two COVID relief bills. This payment was sent regardless of whether the family lost employment or income during the shutdown. Many people were able to work from home during the shutdowns and thus suffered no loss of employment or income yet received substantial cash payments from the federal government anyway. This is impossible justify on economic grounds and is unsustainable over the long term.
This is an issue because after three rounds of relief payments over the course of a year, many people are expecting these relief payments to become a permanent fixture of the economy. A petition for monthly, $2,000 relief checks has over two million signatures as of this writing. Elected officials likely realize that funneling this kind of money to voters will be politically popular, increasing the likelihood that these checks become permanent.
State and local governments received $350 billion in relief payments from the March 2021 COVID relief package. State and local tax revenues declined by $100 billion the second quarter of 2020 but rebounded by the same amount in the third quarter and then increased by $60 billion in the fourth quarter due in large part to the economy reopening. This means that state and local governments collectively lost approximately $40 billion in tax revenues in 2020 due to the COVID-19 economic shutdown. The aid to state and local governments in the March 2020 relief package is thus nearly nine times the loss of that revenue that these entities suffered due to COVID! The point of a COVID relief package is to give aid to those who have suffered a loss of income and employment during the recession, not be like winning the lottery.
Shoveling unlimited quantities of money through these relief packages is politically popular but has long term costs. One is the national debt, which has increased by $4.5 trillion during the last year. The national debt is currently larger than the amount of yearly economic output in the United States, a level not seen since World War II. The national debt will likely increase by another $4 trillion in 2021, with multi-trillion dollar yearly deficits as far as the eye can see after that. Political pressure to for future relief packages will only add to that amount. At some point, lenders are going to question the federal government’s ability to repay what it has borrowed. When that occurs, then the federal government will be in real trouble.
Taxes will have to be raised, spending cut, or money just printed to cover the difference. Raising taxes to cover a $3 trillion budget deficit is not feasible. The federal income tax collects just under $2 trillion per year during normal economic times. Thus, income taxes would have to more than double to raise an additional $3 trillion, assuming everyone pays, which they would not as black markets would flourish to avoid taxation. If income taxes were really increased by this amount, that would push the effective tax rate a middle-class taxpayer pays to nearly 50%, meaning half of all income earned would just go towards paying federal income taxes. Throw in all the other taxes people pay, such as payroll taxes and state and local taxes and approximately 80% of someone’s income would be taxed away. This would never happen without causing an economic collapse. There simply are not enough rich people to tax to raise taxes on the rich to cover this spending. The federal government could seize all the income from the top 1% not currently being taxed and it would not be nearly enough to close the budget deficit.
Cutting $3 trillion in spending would be politically impossible. The government could eliminate everything it does besides Social Security, Medicare, defense, interest on the debt, and COVID relief and that would save less than $1 trillion. Cutting more than that would mean cutting programs that have long through to be politically untouchable, programs such as Medicare.
Printing money is often the path of least resistance when a government finds itself in this position. In other words, the government just prints what it is short and then spends this newly printed money. A lot of this has happened during COVID. The Federal Reserve has essentially become the financing arm of the federal government, having increased the money supply by approximately $2.5 trillion during the pandemic. The concern is that this will lead to inflation. The chair of the Federal Reserve as said inflation will be “transitory,” meaning it will be a short-term phenomenon. We are seeing signs of inflation already. Home prices are up by 12% nationwide since the pandemic began, with prices increasing even more rapidly in some markets. The supply of available homes is in short supply with bidding wars for houses that hit for the market and the final sales price being above asking. Lumber prices have more than doubled during the pandemic with construction material prices in general increasing by 17%. Food prices have increased by less but are still nearly 4% higher than before the pandemic.
Some of these price increases are due to supply chain disruptions, which is why the Federal Reserve Chair claims inflation will be transitory. Once the supply chain disruptions get ironed-out, prices will fall, so the thinking goes. However, some of the price increases are likely due to the massive relief packages financed by printing money. If people receive over $10,000 from the federal government that was simply printed and try to spend it, then the prices of what is purchased will start to rise. This likely explains why the prices of housing, lumber, and construction materials has risen as demand for these things has surged during the pandemic.
The economy feels broken. Help wanted signs are everywhere and there are currently as many job postings as before the pandemic. Yet, the unemployment rate remains stubbornly high with a fewer percentage of Americans working than even at the bottom of the Great Recession 12 years ago. One reason is that the enhanced unemployment benefit disincentivizes work as unemployment fully replaces lost income from working for many workers. Many bars and restaurants are offering signing bonuses in the hundreds or thousands of dollars to attract workers and have had to reduce hours due to a lack of staff. Random things are in short supply at the grocery store. Federal spending and monetary expansion are clearly unsustainable. The entire economy is on an unsustainable trajectory and it is not all clear how long these trends can continue before the damage is irreversible. Policymakers need to work on getting the economy back to where it was in February 2020 before what is broken cannot be repaired again.
