I've been pondering where the money from a massive coronavirus stimulus will go as the weeks and now months pass. After all, nearly $3 trillion in new government spending must go someplace.
Strangely, or maybe not so strangely, government has provided a clue by dividing the national work force into segments labeled 'essential' and 'non-essential'.
$3T doesn't just get spent and evaporate. Someone has title to the new money and more wealth to spend. Who?
The answer almost jumps out at you when you take a look at a locked-down barber and his expected customer. The barber is not working due to the coronavirus lock down. He has no income for the duration. On the other hand, his expected customer, ready to come in the day of lock-down, has money ready to spend. This ready-money is destined to await spending for the duration.
The barber has become income destitute. The customer has become a forced saver.
A similar thing is happening (albeit on a different scale) in the airline industry. The aircraft transportation industry has been 80-90% shut down for the duration. The customer flyer has money ready for spending but this money is now held in-pocket for the duration. The customer has become a forced saver.
The Analysis
There really isn't much debate about the wisdom of helping workers through this crisis. Something needs to be done. We are going to think about where relief/help in the form of dollars-from-government will linger for a while at least.
First, notice that customers were judged to have money ready to spend the moment the lock down order arrived. This money will not disappear from bank accounts.
Next, notice that government relief must come from borrowed or newly created money. Government could borrow from banks (who hold customer money-suddenly-frozen), or government could borrow from the central bank (who has no money to lend but can create money). Either way, relief money flows to people unable to earn in a normal fashion, thus increasing their wealth.
Now observe that government has effectively divided the nation into essential and non-essential work sectors.[1] The essential sector (food, some medical, government, and more) mostly continues to work as usual (albeit with increased risk) and continues to take home near normal income. On the other hand, the non-essential sector (air transportation, personal care, sports, many more) has been asked (forced) to shut down. This sector suffers grievous loss and severe income damage,.
Being a government induced wound, it is logical to help the non-essential sector. Here is where the logic gets interesting. Helping the non-essential sector allows non-essential sector participants to cover essential costs and prepare for their own non-essential spending---non-essential spending that they will need to delay for the duration.
Whoa! Are we saying that at least part of government relief will go to savings because only the essential spending portion will actually filter down through the economy? Yes, that is exactly what we are saying. To the extent that stimulus replaces spending otherwise saved but destined for non-essential consumption in normal times, a savings overhang will be built.
Estimating Macro Effects
We shouldn't need to worry about near term inflation from a wealth spike. The near term economic bias is strongly toward savings because of government mandated income redistribution.
We could make a very rough estimate of the potential savings buildup. Assume complete income replacement by government relief programs and then estimate the amount of non-essential spending foregone. The estimated amount of delayed non-essential spending should be the amount of expected wealth increase.
However, this would not equal the total wealth buildup expected in the private sector.
At least part of the relief money would be used to make payments to preexisting loans. To the extent that loans are paid down at a rate greater than created, money based wealth will appear to be destroyed. In a situation where government is providing relief money ultimately used to repay loans, government debt will replace private debt. In a macroeconomic financial sense, the economy can be expected to behave in a stable fashion except for displaying an increase in government debt levels.
Of course, if the private sector pays down debt during the coronavirus response period, the private sector will have a continually improving balance sheet.
Conclusion
There we have it. Assuming that all income lost by the non-essential sector is replaced by government relief, the essential sector will have near normal income while the non-essential sector will be a relief beneficiary. Participants in both essential and non-essential sectors will become (perhaps unwillingly) savers to the extent that they have locked funds available for non-essential spending. All of this locked money would potentially be available for rapid deployment at the end of the coronavirus event.
Careful readers will observe that some of the actual government relief is targeted toward the essential sector. Rather than being called 'relief', this portion of government dollars transferring ownership is better called 'stimulus'. What ever the actual name, the majority of actual dollars transferred could be expected to onward flow through the non-essential sector or onto loan repayments.
Brian Romanchuk has an article "The Pandemic Normal:Whither Income Flows?" that takes quite a different tack[2] on roughly the same subject.
[1] This post builds on a previous post "MMT Style Economic Distortions".
[2] "tack", a sailing term meant here to imply a different course of travel.
(c) Roger Sparks 2020
"Whoa! Are we saying that at least part of government relief will go to savings"
ReplyDeleteActually, all the government relief will go to savings. It can't be otherwise. The accounting identities make that clear. Excluding the external sector for simplicity, here is the identity:
(G - T) = (S - I)
Every dollar of deficit spending, i.e., G > T, ends up as a dollar of net financial assets, i.e., S > I.
e.g., Say the government gives someone $100. Since saving is the excess of income over consumption, that $100 is all saving, some intended, some unintended. $100 = $100. Now say that person spends $90 into the economy. There is now $10 of intended saving, and $90 in the community. $100 = $10 + $90. And so on. Each round of spending means that the initial $100 of saving is being distributed among the community. At every single point of time, there will always be exactly $100 of saving in the community. This is true even if money received is used for paying down loans, because that counts as an increase in that person's savings.
If some of that spending is on imports, than a portion of that saving ends up in the foreign sector.