$2,000 Covid 19 Stimulus, Helicopter Money and The Federal Debt

On December 26, 2020, President Donald Trump decided to sign the combined $900 billion Covid-19 relief and $1.4 trillion omnibus appropriation bill for government agencies. But the one-time payment in this bill to all Americans earning under $75,000 per year is $600 and he wants it increased to $2,000. In addition he criticized fourteen pork-barrel spending projects totaling $4.8 billion in the obnibus bill. Assuming that this $2,000 in helicopter money would go to 75% of the population, it amounts to $495 billion, or $347 billion more than the $600. Trump noted that he signed these combined bills after the Senate committed to consider legislation to increase the helicopter money from $600 to $2,000. The Democrats who control the House were already enthusiastically supporting that legislation.

This is why no amount of “stimulus” helicopter money will accomplish anything more than increase the already excessive federal debt:

The business failures and unemployment of this recession are not due to lack of enough money or income for consumers to spend. It is clearly due to having to close down or reduce the business activities of restaurants, airlines, bars, theme parks, movie theaters hotels and other places where people congregate indoors in large groups. Part of this is was the result of shutdowns dictated by state governments and part of it comes from people’s efforts to avoid the contagion of the Covit-19 virus. No amount of increased consumer income is going to be spent on these services where the business failures and unemployment concentrate.

In fact very little increased spending will result from any amount of one-time helicopter money. This type of behavior was first observed by libertarian economist Milton Friedman and is widely accepted among economist today.

Note on the graph below the huge increase in the personal savings rate that occurred when the lockdowns started in March and April. The $1,200 helicopter “stimulus” check was sent in April. The savings rate on that month hit an astounding 33.7% and continued at 24.7% and 19% during the next two months, compared to an average of about 7.5% before the pandemic. Even by November of 2020 it was still 12.9%.

Yet many businesses that are favored by the pandemic, particularly internet-related services are prospering more than ever. All of this makes it clear that the great majority of people have the money to spend, and they are spending it on products and services that are available. The pandemic-related business failures and unemployment cannot be cured by giving almost everyone any amount of money to spend, since it is not possible to spend money on businesses that are literally unable to provide their services.

The only type of justifiable government spending in this case is to compensate businesses and employees who are losing profits and wages because of state mandated lockdowns. These lockdowns (whether they are justified for pandemic control purposes or not) are a form of “taking” by the government from the people that affects them in an uneven and capricious way. The income lost by ownes and workers should be compensated for the same reason that government compensates land owners when using eminent domain to take their property. Compensating people for regulations that diminish their income or property value is the only action that is consistent with the libertarian principle that governments and ordinariy private individuals should not do harm to others by taking actions by force that harm them.

There is no reasonable argument for the helicopter money that will go primarily to the majority of people who are doing just fine economically and cannot be spent on the adversely affected businesses. Therefore, most of it will just result in an increase in the federal debt to the public (including foreign individuals and centeral banks of other coutries), which was at $16.8 trillion at the end 2019. That debt was at 79% of the 2019 GDP, close to its peak at the end of World War II of 100%. The federal budget deficit that has been further increasing our debt in 2020 was already a high $1.02 trillion during 2019, a year of very high prosperity and an incredibly low unemployment rate. If we cannot have a balanced budget (let alone a surplus) during the best possible year of prosperity, there is no hope that the size of the debt will ever stop growing faster than GDP. So any unnecessary increase in this debt is highly irresponsible.

The problem is not just that “we are deferring its payment to our children and grandchildren”. Worse than that is the fact that a high debt/GDP ratio will eventually result in loss of lender confidence in our ability to pay the debt, therefore more spending to pay for higher interest rates, making it even more difficult to reduce the deficit. This traps us into a situation where, to restore a balanced budget, the amount of spending cuts or tax increases will have to be so large that they will be even more politically untenable, leading to more loss of lender confidence and higher interest rates. And this eventually leads to an intense fear of default on the US federal debt that will cause a sever depression due to a freezing of lending. This is what happened recently in Greece and has happened several times in Argentina. But the U.S is just too big to be saved from this by a loan from the International Monetary Fund.

All of this makes it very clear that both Donald Trump and the Democrats are acting as irresponsible populists (a eulogism for demagogues). After placing his signature on the previous $1,200 of helicopter money (replacing the usual signature of the secretary of the Treasury that goes of federal checks), it is clear that Donald Trump sees this new helicopter money as another public relations opportunity to promote himself. And the Democrats, well, to paraphrase Will Rogers, they never met a spending bill they didn’t like.

Although the first $600 payment has already been signed into law as part of the usual bills filled with excessive spending on bureaucracies and pork barrel projects, it is still possible to stop the remaining $1,400 in helicopter money. But the only hope to stop this is in the Senate. Lets hope that the Republican Senate majority holds to the deal they originally negotiated with the Democrats, and that there are no Republican Trumpists that, hoping to get Trump’s support on the next primary, will side with the Democrats and Trump on this issue.

Unfortunately, the Biden administration has put the $1,400 of helicopter money for all as part of its initial legislative push.