With the economy still stumbling, expiration dates for federal supplemental unemployment benefits impending, and early August deadlines for businesses to apply for Paycheck Protection Program aid, we are hearing calls for more federal relief for a virus-beleaguered public.
The appeals fall into three categories.
Some, including President Trump, are calling for another round of “helicopter money,” which is direct payments made to nearly every family. Those supporting this approach believe that we should get money to as many people as we can and that the enhanced income, even if temporary, will enable people to bridge the gap between where they are now and a prettier, post-pandemic prosperity.
People who question this approach, which the president has also done at times, worry about work incentives, suggesting that another round of direct cash payments can reduce people’s healthy efforts to find ways to supplement their incomes.
A second group, including House Speaker Nancy Pelosi, calls for extending the $600 per week emergency unemployment compensation supplement. They believe that we should get money to the people who have been laid off or furloughed and would otherwise suffer inordinately while waiting to be called back to work. Indeed, some would like to see people made even better off while out of work than when working. That’s why unemployment checks have been more generous than usual these past few months.
Those opposed to this position also worry about the disincentives of a supplement. Why hurry back when, for many, it means taking a substantial cut in income?
A third group, which in some cases includes members of the first two groups, calls for a payroll tax holiday that might last six months or longer. The temporary elimination of payroll taxes, including Social Security withholding, would generate the equivalent of a 7.5% raise for a large number of workers and save employers from having to pay an equal amount. Those favoring this approach place large emphasis on work incentives and on enhancing the ability of employers to give people pay increases. Proponents of this measure believe that, unlike direct cash payments and enhanced unemployment benefits, eliminating payroll taxes means higher pay that will generate more work and, therefore, more economic activity.
The payroll tax holiday idea, and to some extent the other proposals, is based on the expectation that a working economy will soon replace what we have today, which is essentially a command economy that limits work and earning opportunities. This, of course, is a crucial assumption. After all, people work in order to gain real goods and services, not just stacks of green pieces of paper.
As 19th century French economist Jean-Baptiste Say explained, in a normal market economy, supply creates its own demand. Workers go to work in order to get what other workers produce. If shopping opportunities continue to be curtailed by coronavirus policies, supply cannot create its own effective demand because we have fewer goods to work toward attaining.
This challenge is seen graphically, using Federal Reserve data, which displays the total amount of savings contained in all United States banks.
The last observation is for the week ending June 22. Notice how savings have accelerated since the start of the coronavirus command economy in March. Notice, also, how savings have remained at a stratospheric level. The chart suggests that getting more money into our pockets and purses does not generate economic activity. Money in savings will surely make us feel more secure in an insecure time, but with few places to spend the cash, actual economic activity will languish.
Common sense and a vast amount of economic research tell us that incentives matter. If people are paid more to be unemployed, unemployment will last longer. If helicopters bring money, then more people will await the next flight rather than seeking work. If payment for work increases by 7.5%, more people will be inclined to head toward work.
While we know incentives matter, we cannot with equal certainty say that any of the proposed programs will help to regenerate our bruised command economy. For that to happen, the doors of the economy must open wider.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.
