Should economic shocks make Americans richer? In one of the disturbing parts of John Steinbeck's Of Mice and Men, a lead character accidentally kills his own puppy because he does not know his own strength. Such are often the effects of Congress trying to prove its worth by "responding" to a problem.
The $1.9 trillion American Rescue Plan Act just passed by Congress proves yet again how remarkably imprecise and disproportionate it can be on economic policy. The bill's timing is bad, it will slow the recovery, and it will flood swaths of the economy with liquidity where it is not needed. The Act includes many job- and productivity-killing measures in several employment- or income-tested programs that will prevent about half of the lost jobs from last year from coming back. Many industries have had a hard time finding workers who are paid more by the government while not working. The Act will flood blue states with cash to pay government pensions and to slow the migration of their workers and companies to states with lower taxes and less regulation.
The Senate's plan for health insurance may do the most to reduce work. The 2010 Affordable Care Act (ACA) created what is now the most important credit against the personal income tax: credits for premiums paid for individual health-insurance insurance plans sold on the ACA exchanges. Take Mike Smith, who in 2010 was working long hours in California as a district manager for a national auto-parts parts retailer. Mr. Smith kept the manager job into his 60s because he and his wife wanted the health insurance that came with it. Yet according to National Public Radio, they both retired in 2014 because the ACA gave them heavily subsidized health insurance, for which they would have been ineligible if Mr. Smith had remained in his job. Why work to get health insurance when taxpayers would now pay it for them? In other instances, workers at many schools, restaurants, and municipal offices had their hours cut so that the ACA did not recognize them as full-time workers. The Senate and House bills would increase these disincentives to hire, work, and earn.
As an economic stabilizer, Congress has long been recognized to be notoriously bad in its timing. Such packages take a long time to debate, and many of its projects are not within a year of being "shovel ready," long after downturns have subsided. Lawmakers can't keep up and often end up either stimulating an already growing economy or restraining an economy that is already contracting. Meanwhile, the private sector steams ahead as we saw in the February job gains and in the surprisingly low unemployment claims that were reported last week.
Failing to argue that the Recovery Act is a stimulus, some economists have instead resorted to arguing that it should be viewed as a liquidity bridge. In other words, the measures harm economic incentives but provide a bridge to an economy saved by the vaccines that the private sector produced with record speed under Operation Warp Speed.
But liquidity has been over-provided twice throughout COVID and will now be for a third time with this package. Our government has made the COVID recession unlike any other one. Disposable income (private-sector income + government payments) always falls in recession, and it has now exploded twice during COVID because of the government's fiscal overreaction. With the newly passed American Rescue Plan Act we are heading for a third overreaction. The figure below shows the two spikes in disposable incomes from the CARES Act and the December follow-up. Astonishingly, they both represent a far larger growth in disposable income than from any booms recorded in the past.
Indeed, since last summer, we have argued that there has been a massive fiscal overreaction to COVID in terms of liquidity. Bothe the CARES Act and the December bailout was subject to this and the same is true of the Recovery Act.
At first glance, it would seem that the $1.9 trillion would increase national spending as Americans begin to cash the government checks. But aggregate spending includes not only the spending of government-program participants, but also the spending (both consumption and investment) of those who finance the government. When government redistributes, the taxpayers and lenders to our government have less to spend and save. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates aggregate demand rather than increases its total. Indeed, retail sales really started to grow in August and September when parts of the March 2020 CARES Act began to expire, in direct contradiction to the "Keynesian" predictions.
Maybe a better path for mitigating harm to the economy would be for Congress to acknowledge its own handicaps and stop inflicting more damage. Less is more when it comes to governments helping economies.
Casey B. Mulligan and Tomas J. Philipson are both economists at the University of Chicago and served on the White House Council of Economic Advisers, Mulligan as chief economist 2018–2019 and Philipson as member and acting chairman 2017–2020. Mulligan's new book You're Hired! Untold Successes and Failures of a Populist President details President Trump's engagement with policy and politics.