This Too Shall Last?

April 5, 2021
This Too Shall Last

The U.S. economy should grow more than 5% “real” gross domestic product (GDP) this year. I had been looking for 4.5% GDP growth, but have recently increased my growth expectation due to President Biden’s recent stimulus bill generating $1,400 checks for millions of Americans. 

We have been told that the government stimulus checks are a one-time distribution, driven by the need to help qualifying Americans make it past the worst of the recession exasperated by the pandemic. With vaccines becoming more widely available for most Americans, it leads me to question the purpose of the latest payment. 

Distribution Fundamentals

I have argued in earlier commentaries that the federal cash distributions should have been smaller, and more targeted to those in true need. Checks are being sent to individuals with less than $75,000 in adjusted gross income, heads of household with up to $112,500 and married couples with up to $150,000, plus payments for their children or dependents.

To refresh, the government has approved and mailed three rounds of checks. According to the Peter Peterson Foundation, a family of four making less than $160,000 would have received a total of $11,400 from the government, representing the three distributions that started about this time last year. 

The $11,400 payments have been very meaningful to most folks. According to the Census Bureau, the average U.S. household income in 2019 was $68,703. Consequently, to an average family of four earning the average household income, the $11,400 government payments paid over the last year or so represents a true cash bonus payment of 16.6% of household income. 

Consider what these payments have meant to the average household. Consider what a cash bonus totaling 16.6% of household income means. According to the St. Louis Federal Reserve, the median household income increased by an average of 3.2% per year from 1984 through 2019 (nominal, before inflation). So, the 16.6% bonus is a larger increase in pay than the average household has seen in five years of gains. All in one year. 

Need or Want?

I’ve written in the past about government payments to most adults in our country, which have occurred over the last 12 months. Many, and I include myself in this view, have concerns regarding the broadcast method of distribution that was chosen by politicians to get money in the hands of Americans.

We can look at the evidence that these distributions, particularly the latest Biden administration-driven payment of up to $1,400 per person, were not necessary from a macro-economic perspective. We can also question the necessity of the eight pieces of legislation which have been passed to rescue our economy from COVID’s savaging, which has cost a total of $5.335 trillion to date1. Were these bills really needed or were they simply wanted? 


The stated goal of the latest broad-based distribution was to soften the blow of the COVID shutdown to our economy. According to Morgan Stanley, from February – May 2020, personal income from wage compensation declined by about 10%, while unemployment rose to 14.8% from less than 4%. 

Since May 2020, personal income from wage compensation has risen back to about 1% less than where it was prior to the COVID lockdown.2  If the purpose of the latest government payments to households is to soften the blow of COVID on the average person in our country, then the checks are too late. The COVID-driven negative impact to macro-earned income has passed.

What of “total” personal income over those same periods? Again, according to Morgan Stanley, total personal income actually rose by about 10% from February – May 2020, and, following the stimulus checks paid to date, total personal income has risen by about 20% from February 2020. 

So, where did the money come from to finance this income increase?    

US Federal Government Budget Deficit and Borrowing

The chart above from Ed Yardeni Research shows the yearly change in U.S. treasury securities (government-issued debt) which is held by the public. Most of the government’s largesse is being financed by the ballooning of our national debt. I believe we are harming our national balance sheet to help our short-term income statement (GDP growth). This is something the government should do (borrow money to finance economic stimulus) when the economy is in free-fall, not when household incomes appear to be recovered.    

Many in Washington want to distribute wage income more evenly, irrespective of productivity, or profitability of one worker compared to another. Some call this desire economic justice. There are two ways to make this happen. Either raise the taxes on high-earners or raise the income of low-earners.  Many in Washington are keen to accomplish both events.  

It appears that the majority of stimulus checks received by Americans has either been saved or used to pay down debt, not spent.

Let’s look at real (after inflation) changes in Personal Consumption Expenditures (PCE) as compared to Disposable Personal Income (DPI) over the last year. PCE declined significantly from March 2020 until the summer of 2020. Then, PCE increased by March 2021 to roughly the same level it was a year earlier. 

What of the changes in DPI? Real DPI increased dramatically over the last 12-month period, which indicates that income received (DPI) was much higher than consumption growth (PCE). This shows that household incomes increased much more rapidly than household expenditures.

2021 and Beyond

The title of my piece today is “This Too Shall Last.” Let’s move this discussion ahead one year. That average family we discussed above will have an income decline of 16% over the next 12-month period.  The people at Morgan Stanley believe the average increase in DPI in 2021 will be 7.1%. In their opinion, that increase (more than 2x the longer-term average) will be followed up by an increase of 2.1% in 2022. 

Remember, 2022 is an election year, and every member of the House of Representatives will be up for reelection. How will people respond to this income shrinkage? How will politicians respond?  


A total of $850 billion has been paid to the people of our country, in the quest of healing economic pain.  Will folks stand still for the government largesse to vanish? Some politicians understand this issue. To give money to people is fun, and people enjoy it. To take that money away is painful, from an economic and political standpoint.  Politicians don’t like political pain, particularly during an election year (2022). I suggest there is a possibility that some form of broad-based government payments will continue, raising the call for higher taxes to those making well-above average earned income, and those for whom wealth levels are much higher than average. 

The Cost

Remember, in economics, there are no solutions only trade-offs. The magic of a quick economic recovery from the deep contraction seen last year will have a cost. The cost this time around could potentially last years, and be borne by us all, through eventual misallocation of capital and the continued levering of our nation’s balance sheet to the benefit of our nation’s income statement.

Remember, in all cases, be it individuals, businesses or governments, income statements measure growth. Balance sheets measure sustainability. I believe our nation has started down the path of potentially sacrificing sustainability to benefit shorter-term growth.


1Data per the Peter Peterson Foundation

2Morgan Stanley

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