April saw by far the largest increase in personal income ever seen in America. That’s not normal for a month that is likely to end up being the absolute trough of the 2020 depression. And saying it’s “not normal” during a depression is an epic understatement.
In freshman macroeconomics, the letter Y often is used to stand for GDP and for national income, interchangeably. In the national income accounts, they are arrived at separately. Nominal GDP is measured as the purchases of goods and services at market prices. Nominal income is the payments received by workers and investors. Any difference between these two measured is labeled as a statistical discrepancy.
Personal income includes transfer payments, which are checks written by the government–Social Security, or unemployment compensation, or this year’s stimulus checks. Transfer payments are not part of national income, because they are not earned from the sale of goods and services. If you counted transfer payments in national income, the “statistical discrepancy” would get out of hand.
All of these flows are measured at annual rates. If you get a $1000 stimulus check in April, then at an annual rate that is $12,000. And some of us did not even get our checks until May. So the second quarter (April, May, and June) is going to see a whopping increase in personal income.
Some households will spend their stimulus checks right away, but many households will not. There’s only so much spending you can do with all the stores closed. In the national income accounts, there will be a big increase in personal savings. This will not be matched by investment; instead it will be matched by government dis-saving, a larger government deficit.
Suppose that households were to spend all of their income in the second quarter. Meanwhile, 20 percent are unemployed, so output should be down by a lot. Nominal spending up and real output down means that prices have to rise.
As I see it, the price rise was delayed by the fact that households did a lot of saving. Eventually, as they spend their stimulus checks, we will see the impact on prices.
Consider an extreme case. Suppose that textbook Y is $1. That is, we produce $1 of output and receive $1 in income. Next, the government writes a total of $99 in stimulus checks to households. Now households have $100 in personal income, and the government has a $99 deficit. When households spend their $100 on the output, the price of output will go up. Income will also go up, which means people can spend still more. The process only stops when the government engages in saving by running a surplus. That surplus cuts into personal income, reducing spending.
This is a compelling, well-formed argument, but it does seem to run counter to some of your other arguments, namely PSST. You frequently argue that one of the problems with traditional macroeconomics is the trope of thinking of the economy as a GDP factory, rather than intricate Patterns of Sustainable Specialization and Trade. How do you reconcile this line of thinking (which, again, seems reasonable to me) with the folly of thinking of the economy as a GDP factory?
Does it matter if a lot of the stimulus money goes to rent? I guess that the stimulus payments could prevent too large a rise in vacancy rates and hence keep rental rates from falling like they did in 2009-2010 (when I moved every 12 months or so in part because all the apartment buildings were offering “3 months free rent”), that would count as inflationary.
Won’t there likely be some kind of race between the ramp of spending and the ramp up of employment and output? Is the outcome of such a race predictable with any degree of confidence?
You seem to have a fiscalist theory of the price level.
I don’t.
I go with Phillips curve models.
I am willing to bet $1000 that the PCE inflation rate in 2020 is lower than in 2019 despite “stimulus” checks and a big fat deficit.
I know you don’t like textbook macro but consider that the aggregate supply curve is flat right now. Demand can rise a lot with a rise in real incomes and employment but without a rise in inflation.
But really these checks are not Keynesian fiscal policy. They are not stimulus and there is no multiplier. These various programs are social insurance: they give people money to pay their bills while they are home without a paycheck. They are home because we are lockdown to stop the transmission of a virus. Disagree with the policy if you want, but that is not the point. The point is that these checks are not designed to boost employment but to keep people alive and to keep the banking system solvent by allowing people to service debts without default.
One caveat about price rises, though, might be reducing defaults. Perhaps without a stimulus check, a family simply does not pay rent but now they do. Yes, the landlord may then spend, but I think we quickly end up with most of the stimulus money in the hands of people with very low marginal propensities to consume and who realize that the money is will have to be repaid in taxes quickly enough that it ought to be saved now anyway.
the price rise was delayed
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Prices have already crashed if we are talking consumer prices. The price deflator will show a negative for a quarter or so. So, yes, there will be a partial price recovery later.
The receivers of stimulus checks are ow being charged about half the seigniorage costs by he banks in consumer fees and rates, (there is no magic). The last recession saw us cut the retail banking sector by half, we will cut it again by half I am sure. We always have more disinflation after a recession because we never completely recover before the next recession hits. And that is the fiscal theory of price that matches the charts. Regular recessions, about every eight years, less disinflation, more income skew, less real growth.
We can do that for a while but eventually the generations have to deal with it.
I mean:
Less inflation in the future.
I get that backwards as no one really has a real definition of inflation. I can make up any theory I want until someone actually defines inflation, breaks it into components..
The bolded part seems like a critical and questionable assumption. It’s possible that:
1. The unemployed don’t actually add much output.
2. How much PSST shift is there? We are producing a lot fewer baseball games, but also, businesses are spending a lot less on advertising. The prices of both tend to be falling, but I don’t expect ticket prices to be ridiculously high when games start again.
Alternatively, when people spend the money imports may surge rather than prices rising.
I would think that after the experiences with The Reagan,Bush and now the Trump tax cuts people would know better than to assume a closed economy.