Good economists (and some bad ones) disagree on the effects to the economy of this year’s $1200 per person direct stimulus payment. Lots of data get thrown around, but let me suggest that whether you believe another round of direct cash stimulus is warranted depends more, even if you are a “data person,” on which of these three “stories” answers the “empathy brain” question, “Who is my neighbor?”:
- The family who spends their stimulus check on the basics, such as food, rent and utilities.
- The family who buys a new big-screen television.
- The family who socks the check away into their savings or investment accounts.
Obviously, all three of these anecdotes, and numerous variations, played out in the first half of 2020. But the effect of each on the economy is quite different. And if your personal experience has been a struggle to pay this month’s bills during the shutdown, that may actually make you a better economist than the White House advisor who cares more about his investment portfolio.
In the Bible’s gospel of Luke, Jesus tells a story about a “steward” (in the English translation) who is either very wise or very crooked, depending on how you read the story. The word used in the earliest Greek manuscripts later translated as “steward” was oikonomos, which literally meant “manager of the household.” It is from this word that we get the modern descriptor of economist. (For a rabbit-hole look at this story see Note 1 below.) If you know people struggling to get by right now, trying to manage their own households, welcome to the community of armchair economists.
The velocity of money
To better understand how your own household’s management of that stimulus check affected the economy, let me toss out for consideration two basic economic concepts. The first is the velocity of money. This phrase has a mathematical definition, but the practical one is easier to understand. How fast did you spend part of that stimulus check, say, at the grocery store? And when that store paid the clerk’s wage out of the cash you spent, how fast did she spend her paycheck on her rent? And then how fast did her landlord cash that rent check and in turn make a mortgage payment on the property?
That one stimulus check has likely been spent several times over last few months, and indeed keeps rippling through the economy as we speak. Wealth has been literally “created,” not for just the original recipient, but for several families down the line. And if we have an efficient tax system that captures a small piece of every one of those financial transactions (that efficiency being debatable), then that check for $1200 likely comes back to the government coffers eventually in tax receipts. And perhaps more if the velocity is good, helping multiple “home economists” pay their own bills along the way.
This, not coincidentally, is the essential theory behind the controversial universal basic income proposals featured by presidential candidate Andrew Yang and others. If the cash received is spent in this manner, it almost certainly “pays for itself” and significantly helps real people, even though the money was apparently created out of thin air by the government. The faster the velocity, the greater the impact, and the faster the government gets paid back.
An important follow-up question is where exactly does round two and round three of this “money velocity” get spent? Is it really this simple? Well, no, but lets look at this same ideal story and see where it leads.
The locality factor of the spending
This first scenario illustrates the best case. Before my retirement relocation, I would have purchased those groceries at my local Hy-Vee supermarket in a small town in Iowa, seventy miles from the nearest big city (but coincidentally the original headquarters of this now-$10 billion store chain back in the 1930s). As much as $20 out of every $100 spent on groceries there goes right back into local employee payroll and building operating costs, such as electricity from the town’s municipal utility. Most of those employees live in that same small town and spend their much of their paycheck locally as well, and so on down the line. In addition, a good piece of the sales tax collections from each financial transaction gets routed by the state of Iowa back into the source county eventually for “economic recycling.”
Somewhere around $75 out of that $100 spent for food and non-food groceries pays for the “cost of sales” itself. While some of that money goes to local farmers, much of that spending “escapes the town.” However, most of those dollars do go elsewhere in the U.S., to farmers, food manufacturers, paper mills, truckers and so on. Some of the money goes to foreign growers and manufacturers, but food retailing is still primarily a domestic business well down the supply chain. Even cash spent on Mexican produce mostly winds up in American hands through corporate ownership, transportation and markups along the way.
Much of the rest of your $100 spent goes to profits. The Hy-Vee supermarket chain does not publish income statements; the company is employee-owned, and so my estimates here are based on comparable grocery chains. Profits wind up being “less local” than wages because they disappear into the world’s financial markets, but in this case, they are funding retirement security for the chain’s loyal employees, which is a good thing.
When the money “escapes”
In short, money spent at your local supermarket is about as good as it gets when it comes to both the velocity and the local impact of consumer spending. The velocity of that money might be similar if I were to drive 30 miles down my rural Midwest interstate to shop at the nearest Walmart, but the locality factor starts to decline quickly.
For starters, the cash goes into a community other than my own, which is very important in small towns, but also in local neighborhoods in large cities that have been bled of commercial activity. The success of Walmart has often meant the “creative destruction” of many former food, hardware and clothing stores in surrounding towns, who were no longer able to compete on price and selection. Walmart also sources a lot more of their goods internationally, and so more of that stimulus money “escapes the country” quickly. Still, there is likely an “aggregate” positive effect on the economy when you spend your stimulus check locally, even at Walmart.
Big screen televisions were hitting a peak in popularity in 2008 when George W. Bush signed into law a cash stimulus of $1200 per married couple. “Big box” electronic retailer Best Buy saw a nice bump in television sales that year. About $77 out of every $100 spent at Best Buy goes to the cost of sales, and in this anecdotal case the cash almost always went right to an Asian manufacturer, and so the velocity effect virtually disappeared in days. Later studies showed that about one-third of the 2008 cash stimulus went into personal savings, while a significant portion went to pay off debts. If those debts are local in nature, say to your local landlord, then there is still economic benefit generated here. But in retrospect, most economists rate the 2008 stimulus as a dud. Dampened velocity of money, too much “fast escape” out of the local and domestic economies, and weak corporate investment did it in.
The lousy consumers among us
I will confess that, even before the coronavirus crisis, my spouse and I were not helping this economy very much. We live off pensions and retirement savings. Our planned vacation is now on hold. At best we run into the local grocery or takeout restaurant to drop some quick cash. My car sits in the driveway. This self-enforced quarantine has allowed us more time to donate to our favorite non-profits and charities, albeit virtually. But most of that cash stimulus has admittedly gone into the ether of the financial markets, to protect us against an uncertain future.
When you are among the rich elite like presidential advisor Stephen Moore, you may complain that “there is no benefit from dumping money from helicopters into people’s laps.” This is because these guys are even more worse consumers than I am as a percentage of their incomes and don’t know any “real people stories.” I guarantee Stephen Moore is not sweating about how he is going to pay his rent this month. The 2017-2018 tax cuts for the rich and corporations were a bust precisely for this reason. The financial markets were already (and still are) awash in cash, sitting in investment accounts owned by the Jeff Bezos’ of the world. How many times does it need to be demonstrated that it is increased consumer demand that causes smart entrepreneurs to invest, and not cheap cash? Where there is no demand, there is no investment.
Granted, there has been some impressive incremental consumer spending by the rich. My Florida congressman, one of the richest members of the House, famously ordered a new yacht the day he voted for the largest tax giveaway to rich Americans in history.
And so, if you are seeing the world through this last anecdote, where stimulus money gets immediately sucked into the bowels of the global financial markets, additional stimulus makes no sense. Which makes the answer here obvious. Steer the stimulus more to where it makes sense, and tax back the ill-gotten gains from 2017-2018.
As far back as that 2008 stimulus, the SNAP (“food stamp”) program aimed at the poorest Americans was estimated to provide $1.73 of economic benefit for every dollar spent, precisely because of the first story we told here. Poor people consume almost all of the their income locally and quickly. More recent research supports that amount of “velocity benefit” is still accurate. Indeed, it is the closest we get to testable “universal basic income.”
A bigger stimulus at the lowest incomes, tapering off gradually to zero with rising incomes, would provide the fastest, most local rollover of government cash, and thus the most effective continued stimulus. And the profit takers will still get their share as the money gets spent in the businesses in which they own stock. My modest personal investments will be fine if you get the cash to pay your rent and buy some grocery store items manufactured by Proctor and Gamble.
Realistically, better-off Americans usually demand their share whenever we talk about aid to poorer people, and so any successful political move here likely needs to benefit people farther up the income scale as well. Consider this pure political payoff, however, with little or no economic return. Big business is not so much “capitalist” anymore; rather, they are aggressive “rent-seekers,” with the petitioning for government cash or tax advantages being central to their business models.
In that opening story from the gospel of Luke, the wise or crooked “economist” (though perhaps better described as an accountant) feared for his job. He said that he needed this job because “I am not strong enough to dig, and I am ashamed to beg.” That is kind of how I wound up studying economics and accounting as well.
- This is the parable from which comes the famous punchline of “No one can serve two masters…You cannot serve both God and money.” Few people have read the whole story, however. This steward/economist/accountant was in charge of his master’s “debtors,” which we today call the “accounts receivable.” In the little editorial notes at the top of each page, some Bible versions call him the “unjust steward,” because he is a bit shady. Other versions call him the “wise steward” because Jesus calls him wise. This guy goes to the people owing his boss money and tries to strike a private deal, and hoping they might hire him if that boss fires him. One customer owes 100 jugs of olive oil to resolve his debt. The accountant says, “Get me 50 jugs now and we write off the rest.” The second debtor owes 100 bushels of wheat, so the accountant says “Make it 80 bushels and we are even.” When the boss finds out about these side deals he surprisingly complements the accountant, calling him “wise” or “shrewd,” depending on the translation. Jesus then comments, perhaps either being sarcastic or digging at the naivete of his followers:
“For the people of this world are more shrewd in dealing with their own kind than are the people of the light. I tell you, use worldly wealth to gain friends for yourselves, so that when it is gone, you will be welcomed into eternal dwellings.”
- A tax plan for Biden #1 – the quick hits
- A tax plan for Biden #2 – guiding principles
- A tax plan for Biden #3 – taxing corporations
- “Rent-seeking” and the socialist corporation