Post #946: A billion here, a billion there, and pretty soon you’re talking real money.

Posted on January 12, 2021

Image source:  The Dismal Science, A Novel, by Peter Mountford, via

The stimulus fairy came by last week and left $1200 under my pillow. 

I was surprised.  I don’t think of my self as needing stimulus.  Not of that sort, anyway.  And I didn’t get in on the first round of COVID stimulus, because at that time I was still working and had some income.

But now that I’m retired and a drain on society?  Hey presto, free money.

Of course, to an economist, “free” is a four-letter word.  In keeping with The Dismal Science, I immediately began working out all the downsides of that transaction.

And so, after sloughing off that charity payment to an actual charity, I whipped up a batch of hot chocolate.  I sat by my wood stove and put my feet up.  And settled in for a nice, relaxing reading of the Congressional Budget Office Monthly Budget Review, starting with October 2020 edition (for the fiscal year ending 9/30/2020).  With a side order of National Income and Product Accounts data, courtesy of the Bureau of Economic Analysis.

And so this is a post about the COVID stimulus payments, GDP, and why there ought to be better means testing for COVID stimulus money.

The CBO Monthly Budget Review

If you ever want to know what’s up with the Federal government’s finances, the CBO Monthly Budget Review is the place to go.  Other sources may have more detail, but nobody beats them for clarity.

I already wrote this up the FY 2020 results, back in early October (Post #857), but let me review the high points.

The state of the Federal government’s finances is kind of a good news/bad news joke.  The good news is,  FY 2020 Federal revenues for were just 1 percent below FY 2019.  The bad news is, the FY 2020 budget deficit was about $3.1 trillion, roughly 15.5% percent of GDP, and the largest single-year budget deficit since WWII.

In fairness, that’s not all due to coronavirus.  We were on track for a normal year, as of late, with a deficit of maybe just a trillion or so.   So you can really only attribute the additional $2 trillion to coronavirus per se.

Doesn’t that make the title of this post sound quaint?  That’s a quote attributed to Senator Everett Dirkson.

If you look at the January 2021 CBO Monthly Budget Review, we’ve only added another half-trillion to the debt in the first three months of FY 2021. That’s before the most recent round of stimulus payments.

My only point is that if you hear that most of the economy is doing OK, despite coronavirus, I think the right answer is, it should be.  You can argue over how well the money has been targeted, but you can’t dispute that we’ve thrown a ton of money at the problem. 

(Actually, 22,000 tons of money. In the last fiscal year alone, not counting the current stimulus money. But who’s counting.)

* The $100 bill is the largest in circulation, and weighs about 1 gram.  So we’ve thrown (2,000,000,000,000 / 100) hundred dollar bills at it.  Each bill weighing (2.2/1000) pounds per dollar bill, with 2000 pound to the ton.  Or (2*10^12/100)*2.2/1000)/2000 = 22,000 tons of hundred-dollar bills. 

If you want to cut it another way, that $2T in FY 2020 COVID debt amounts to $8000 for each of 250M U.S. adults.  In that context, this last little $1200 gift for self and spouse is chump change.

I’m neither here nor there on the question of whether or not this was sound policy.  It probably beats having the next Great Depression.  My sole point is, a lot of spendable funds have been handed out, and it’s hard to see that big an impact on the economy.  So, what gives?

U.S. GDP as of third quarter 2020.

And so, what do the latest GDP figures look like?    All the figures in this section are from the U.S. Department of Commerce, Bureau of Economic Analysis, via this web page.  These figures (Q3 2020) are the most recent available at this time.

Answer:  Not too bad, all things considered.

Source:  US Department of Commerce, BEA, cited above.  Note that these are NOT in current dollars, but in “2012 dollars”, so these are not actual spending totals.  The use of “2012 dollars” removes the effects of price changes, so you are looking only at real changes in the quantities of goods and services produced.

Real Gross Domestic Product (GDP) was down about 2.8% in Q3 2020, relative to the third quarter of 2019. Which, considering all the turmoil, isn’t too bad.

Below that aggregate number, you can see that there has been a shift of demand from services to goods, and from commercial construction to housing.

  • Spending for durable goods (things like cars and appliances) was up 12.8%.
  • Spending for services (show in more detail below) was down 7.3%.
  • Investment in commercial construction was down 15.9%
  • Investment in housing was up 7.2%

If you look in more detail about where people are spending their disposable income (above), it’s pretty much exactly what you’d think.  To some extent, purchase of cars and food are up.  But the big winner is recreational equipment, followed by home furnishings.   Sales are down for gasoline, travel, recreational services, and the hospitality industry, including both hotels and restaurants.

But where did all that money go?

At this point, I hope a question is occurring to you.  If the Feds dumped all that free money into the economy, where did it go?  Why wasn’t there some huge bump in spending?

A trillion here, a trillion there, pretty soon, shouldn’t we be talking about real money?  But there were no trillion-dollar jumps in spending.

And so, just two more tables, below.  As before, these are from BEA.  But these are current dollars, at an “annualized rate”, so each quarter’s spending is made to look as if it is the year’s worth of spending, at that rate.

From the tables below, my conclusion is that the main impact of COVID-19 wasn’t that people lost their jobs (although many did). The main economic impact is that people quit spending.  And the main effect of the stimulus was a temporary jump in the private savings rate.

Above, in green, personal income actually rose during the pandemic (Q2 and Q3 2020).  Earned income fell a little bit (green), that that was more than offset by various types of transfer payments (orange).  Unemployment insurance and “other” (direct stimulus payment) went up.  But personal consumption went down a bit.  And as a result, most of the Federal stimulus was offset by a huge jump in the personal savings rate in Q2 and Q3 2020, to a peak savings rate of 26% of disposable income.

Finally, we can see that restated more directly by including both private and (Federal) government savings.  The additional Federal deficit spending of Q2 and Q3 was almost (but not quite) entirely offset by the simultaneous increase in private saving.  And not by private spending.


I don’t think I was alone, in how I viewed this stimulus payment.  I’m betting a lot of people treated that stimulus payment just the way I did.  I wasn’t one of the unfortunates who lost a job.  I didn’t need to spend it on necessities.  So when that free money showed up under my pillow, it didn’t boost my spending at all.  As economists say, my “marginal propensity to consume” was zero.

Beyond that, it’s hard to say much about this, as politico-economic policy, from the raw data.  Plausibly, the stimulus bill would have lacked support if they hadn’t spread the money around.  Plausibly, people would have reduced spending substantially more, absent that stimulus payment, thus pulling down GDP.  Plausibly, they’ll eventually have to raise taxes, and we’ll all end up paying it back, more-or-less.

I guess my only real point is that I have now reconciled the huge buildup in Federal debt, against the relatively modest impact on GDP. The difference is the concurrent jump in private savings.

And I think I’ve vindicated what I felt when I saw that stimulus payment show up in my bank account.  It’s a nice gesture and all, but the Feds really shouldn’t be aiming those payments at people like me.  It might be politically expedient, but as a way to stimulate the economy, it’s not very efficient.  You need to give that to people who’ll go out and spend it, not people who will just deposit in the bank and keep on spending whatever they were spending.