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Will $1,400 checks stimulate the economy? No, and here’s why not, say three prominent economists

March 23, 2021, 12:30 AM UTC

You hear it from the Biden administration, the Congressional Budget Office (CBO), and virtually all TV and press coverage: As long as Americans spend their “stimulus” checks, the economy will get a powerful boost. “We need to go big now, and we can afford to go big,” Treasury Secretary Janet Yellen recently declared on PBS, adding in a CNBC interview that “these checks will help jump-start the economy [by] giving people money to spend.”

The CBO hasn’t yet provided an estimate for how much the $1.9 trillion American Rescue Plan will grow the economy. But in a September report on the stimulus legislation enacted last March and April, it reckoned that those earlier emergency measures would lift national income by a total of 8.1% in 2020 and 2021, and that the second round of payments at $1,200 per person would supply over 40% of the firepower. It’s likely that the CBO will soon posit that the new blast of fatter checks will propel an even stronger advance.

But for three prominent economists contacted by Fortune, sending $1,400 to around 150 million individuals––$5,600 for a married couple with two kids earning up to $150,000––won’t stimulate anything. For these non-Keynesians, a group that includes a Nobel Prize laureate, the whole exercise amounts to a shell game that shifts the same billions from one part of the economy to another, specifically from savings that provide the corporate cash to build plants and buy forklifts, to spending on the likes of restaurants, clothing, and cosmetics.

To make matters worse, the windfall that gets folks to consume mostly comes dollar for dollar from the funds available for the private investments that enhance productivity and seed future growth. Even the CBO acknowledged that the debt burden from showering all that helicopter money in 2020 will slow the economy in the years ahead.

The three skeptics are responding to an obvious problem: All this money has to come from somewhere. Isn’t it possible that payments, estimated to total $400 billion, amount to rerouting resources from uses that provide just as much juice as they will generate in the hands of families? If so, the economy gains nothing now, and Americans lose in the long run by shouldering loads of new debt. For our three skeptical economists, those $1,400 checks are mainly empty calories that may not even produce so much as a sugar high.

Let’s listen to this distinguished trio, all of whom take a similar view on the futility of handing cash to households. J.D. Foster served as associate director for economic policy in the Office of Management and Budget under President George W. Bush, and as chief economist for the U.S. Chamber of Commerce. John Cochrane is a senior fellow at the Hoover Institution and a former official at the National Bureau of Economic Research (NBER). And Eugene Fama is a 2013 Nobel Prize winner and a professor at the University of Chicago Booth School of Business.

J.D. Foster: Big deficit spending doesn’t drive growth

In an email, Foster tells me that sending out those $1,400 checks simply transfers purchasing power from one group to another, and does absolutely nothing to make Americans more prosperous overall. All of that $400 billion in “new money” has to be borrowed, and the people and companies that buy the Treasuries simply hand the money they were saving to families that either spend or save the same dollars. “Deficit spending of any kind cannot create purchasing power,” Foster writes. “It cannot increase overall demand. The additional government borrowing takes money from private savings, so the U.S. has less domestic investment.”

The portion of the $1,400 people spend, notes Foster, is financed by the people, banks, and funds that buy newly issued Treasuries. That borrowing lowers national savings, reducing the pool of funds available for purchasing the trillions in Treasuries being sold to finance the rescue packages. To compensate for the shortfall at home, the U.S. can “import” foreign savings by selling a big chunk of the bills, notes, and bonds that fund the $400 billion in stimulus checks and trillions in outlays-to-come to the Chinese, Japanese, and other foreign investors that already own one-third of our federal debt.

But given the math of international trade, says Foster, the U.S. would need to run an even bigger deficit in goods and services to balance the flow of Treasuries abroad. That means buying more cars, computers, and semiconductors from China and Japan, selling them less of our own products, or a combination of both. The jump in our trade deficit would lower GDP, blunting the extra spending at Whole Foods, Target, and Starbucks from the $1,400 checks.

John Cochrane: Savings get spent, too––only on factories and R&D labs instead of restaurants and video games

“The whole point of the payments is shifting from investment to consumption,” Cochrane tells me in a phone conversation. “They’re a mechanism for transferring money that was invested in businesses to buying Treasuries that go to checks to voters, some of which they’ll spend. People who buy Treasuries don’t invest in factories. Why should we as a society be encouraging that trend?”

To be sure, millions of low-income families are in desperate need of extra cash and deserve to get it. But most households aren’t craving more money to spend. In the lockdown, Americans are lavishing far less on cars, airline tickets, or health clubs because they are mainly staying at home. Instead, they are banking most of their paychecks. That money sits on the sidelines, poised to reenter the arena as the crisis lifts. “Bank accounts are skyrocketing, and people are paying down debt,” says Cochrane.

The direct payments program gives money to tens of millions of relatively high income families who don’t want or need to spend it. Cochrane is amazed that former Treasury Secretary Lawrence Summers, a fan of huge borrowing and spending to supercharge growth, thinks issuing those checks is a bad idea. “When Larry, who advocates throwing money around like fertilizer, says, ‘No, this is overdoing it,’ you have a spending plan that is really overdoing it,” says Cochrane.

Eugene Fama: It’s a zero-sum game. If consumer spending increases, investment goes down by the same amount

Fama argued that stimulus payments don’t work in an excellent critique of the Bush administration’s rescue plan, expressed in a January 2009 blog post. I emailed Fama to learn his current viewpoint, and he sent me an article from mid-February that forecasts a puny increase in consumption from the new wave in spending. Clearly, his finding that “stimulus” is a bust hasn’t changed.

Before exploring Fama’s views, it’s important to assess how much of the $400 billion in payments will actually be spent versus saved. A recent study for the National Bureau of Economic Research furnishes an excellent guide. Economists Olivier Coibion of the University of Texas, Yuriy Gorodnichenko of UC–Berkeley, and Michael Weber of the University of Chicago examined what recipients did with the $1,200 checks issued in last year’s second round of direct payments.

They found that only 15% of the respondents said they planned to spend most of the money or had already done so. That group tilted heavily to low-income folks and those who had left the workforce. Overall, the authors estimate that 40% of the $287 billion total went to consumption, while 30% paid down debt, and the remaining 30% flowed to bank accounts, stock purchases, and other forms of savings.

If the new $1,400 regime follows the same pattern, Americans will park 60% or $240 billion in savings, a category that includes repaying credit card and loans, and only 40% or $160 billion will go to new spending.

Fama contends that stimulus checks are all about shifting money from savings to consumption, but that what is subtracted from the former erases any boost from the latter. In the 2009 blog, he references “an identity in macroeconomics” stating that private investment, meaning all funds held in businesses big and small, stocks, bonds, office buildings, and all other parts of the private sector, must equal the sum of private savings, corporate savings or retained earnings, and government “savings.” Since government “savings” means surpluses, that category counts as “dissavings,” since the U.S. is running big deficits, and acts as major negative in the equation. “Stimulus plans seem attractive in periods of unemployment, but they’re not a cure,” Fama writes.

“The problem is simple,” he continues. “They’re funded by issuing more debt. Borrowing the added debt absorbs savings that would otherwise go into corporate investment.” Any money spent, he says, “replaces private and corporate savings elsewhere.” Money that used to go to building auto plants or semiconductor fabs shifts, dollar for dollar, to consumption. The NBER paper found that almost all spending from the $1,200 checks in 2020 went to consumer goods, while paltry sums flowed to big ticket items such as cars and appliances.

Let’s track the probable course of the $400 billion in new payments. One group of people buy $240 billion in Treasuries and reduce their savings, and another group bank $240 billion in stimulus checks and increase their savings by exactly the same amount. But that bump from the 40% that will likely be spent on consumption doesn’t necessarily increase GDP, even temporarily. It’s offset by what we’ll call the forklifts versus Netflix phenomenon. As the late, legendary monetarist Allan Meltzer once told me, savings have to be spent. Savings that buy forklifts today generate the same degree of economic activity as spending on dining out this week and adding Netflix, Disney+, and Hulu to Americans’ streaming choices.

Fama makes the crucial point that over time, shifting money from one use to another can indeed enhance growth––but only if the funds are switching from a less to a more productive use. The problem with the $1,400 checks is that the money is moving in the wrong direction. Private investment increases productivity, profits, and worker incomes. A one-time splurge at Walmart, Costco, or a Florida pizza emporium does little to drive efficiency. Hence, the new stimulus will actually lower future growth, the same legacy the CBO projects from the rescue spending in March and April of last year.

In his recent article, Fama concludes, “The presumption seems to be that failed stimulus has low cost.” He disagrees, noting that the trillions supposed to give the economy a big pop now will endure as debt that needs to be serviced and repaid by future generations. The stimulus looks harmless now, but shrinking the private sector and dumping the burden on America’s kids and grandkids are the makings of a diminished future.

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