by Mitch Kokai
Senior Political Analyst, John Locke Foundation
July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. They’re wrong.
Referring to the bonus sunset, Paul Krugman explained in August that “I’ve been doing the math, and it’s terrifying. . . . Their spending will fall by a lot . . . [and there is] a substantial ‘multiplier’ effect, as spending cuts lead to falling incomes, leading to further spending cuts.” GDP could fall 4 to 5 percent, and perhaps as much as ten percent, which is almost $200 billion less national spending a month.
Wednesday the Census Bureau’s advance retail-sales report provided our first extensive look at consumer spending in August, which is the first month with reduced benefits (reduced roughly $50 billion for the month). Did consumer spending drop by tens of billions, starting our economy on the promised path toward recession? …
… But in August, retail sales increased $3 billion above July, which is quite a normal monthly change. …
… Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy.
The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total.