An artificial boom

Massive federal spending leaves many in the Badger State better off, but the bill is coming due

By MICHAEL JAHR | April 2021

The federal government over the past year committed nearly $31 billion in relief to Wisconsin, a small part of the $4 trillion in two of the largest federal bailouts in American history.

Some economists say the latest $1.9 trillion stimulus isn’t needed, that the economy is roaring back to life. They argue that the surge in personal income, personal savings and employment indicates that the federal government overreacted to the COVID-19 pandemic with the size of the first stimulus.

These same economists are concerned about the fallout of all of this spending. The U.S. government is now carrying the biggest budget deficits since World War II. The Congressional Budget Office (CBO) estimates a $2.3 trillion deficit for 2021. The national debt now exceeds 100% of gross domestic product (GDP), a milestone last reached in 1945.

Added to the trillions being shoveled into the economy is a Hoover Dam of pent-up demand to spend an estimated $1.6 trillion that American families and business owners managed to save while spending federal grants and loans from the first stimulus.

Wisconsin economists are concerned that all of this overreach will unleash an inflation that will tear down the buffer the federal windfall was supposed to have created while war was being waged on the pandemic.

“I am definitely worried about the long-term consequences of the various stimulus bills,” says Dale Knapp, director of Forward Analytics and author of The COVID Economy: The Economic Impacts of COVID-19 in Wisconsin. “Inflation is one of them but also the debt this is passing on to our children. What happens when interest rates rise to even three or four percent? The annual debt service payment by the federal government will explode, leaving fewer dollars for other federal programs.”

Low-wage workers hit hard early

Few questioned the need for the CARES Act in March 2020, with the federal government taking its cues from the Centers for Disease Control and Prevention (CDC) and strongly suggesting that leaders of state and local governments shut down their economies to limit in-person interaction. Better to be safe than sorry with an uncontrolled virus was the rationale.

Unemployment in Wisconsin shot from 3.2% in March 2020 to 14.8% the next month, hitting the service industry the hardest. However, unemployment dropped to 10.4% in May 2020 and dropped in each of the next eight months, according to the U.S. Bureau of Labor Statistics (BLS). At the end of February, Wisconsin had the ninth-lowest unemployment rate in the country at 3.8%, according BLS data.

Even as many Wisconsinites were thriving, lower-wage workers and the sectors in which they worked suffered. As of mid-November, the number of low-wage jobs in Wisconsin was down 18.7% compared to February 2020; moderate-pay jobs had fallen 2.8%.

Nearly one-third of those in lower-wage jobs said their financial situation had worsened since the COVID-19 outbreak began and they were more likely to have taken on debt or delayed paying bills, a Pew Research Center survey released in March found.

As of December, the arts and entertainment industry experienced a 38% employment decline, accommodation a 35% decrease and food service a 23% drop, according to Knapp. Nationwide, the leisure and hospitality industry lost nearly 500,000 jobs, while the rest of the economy added 358,000 jobs.

“These industries employ a lot of low-wage workers. Job losses in these industries were large,” Knapp says. “White-collar workers were able to continue to work largely due to technology, so there was little impact.”

“COVID clearly had a differential impact,” says Mark Schug, professor emeritus at the University of Wisconsin-Milwaukee and a national consultant on economic and financial education policy. “People with good educations could work from home. Some even did better. I call them the pajama people. People with less education were hit very hard. I call them the apron people. You can’t serve coffee to a customer over Zoom.” 

Better than expected

Although it took nearly a year for states to fully mobilize their vaccination programs, their economic recoveries had mostly exceeded expectations. Wisconsin had gotten $13.9 billion through the Paycheck Protection Program (PPP), cash payments, additional unemployment benefits and more than 130,000 forgivable loans for small businesses.

Overall, the state’s GDP dropped by 3.1%, to $338.7 billion last year from $349.4 billion in 2019, according to data from the U.S. Bureau of Economic Analysis. However, in the last half of 2020, Wisconsin’s GDP recovery was well ahead of the national average, according to Knapp’s study.

“The rise in GDP was due largely to knowing more about the virus and how to deal with it,” says Knapp. “The ability for restaurants to partially open and other businesses finding ways to work using social distancing.”

State tax revenues also exceeded expectations. In its November economic update, the Wisconsin Department of Revenue (DOR) forecast that employment would not return to pre-pandemic levels until early 2023. The agency predicted that employment in the arts and entertainment, accommodation and food service industries would be about 10% below pre-pandemic levels in 2023.

However, the Legislative Fiscal Bureau in January reported that by the end of the fiscal year (June 30), the state’s general fund should have nearly $1.8 billion, roughly $630 million more than had been projected in November.

Grim tax revenue forecasts for Wisconsin were wrong, The Wall Street Journal reported in February. “Tax collections for 2020 and the current budget year are now generally in line with the pre-pandemic targets,” the article said. By 2023, Wisconsin is expected to take in nearly $1.2 billion more in tax revenue than Gov. Tony Evers’ administration estimated in November, the Fiscal Bureau reported.

Personal income in the state grew by 4.4%, or a total of $13.7 billion, in 2020 over the previous year, according to the Bureau of Economic Analysis. The number of high-paying jobs — those paying more than $60,000 annually — actually increased 2.7% in Wisconsin between February and mid-November 2020, Knapp told the Badger Institute.

In his report, Knapp noted that mostly online retailer sales were up 89% in 2020 over the previous year. New business formation applications increased dramatically over 2019. Conversely, the federal cash balloon prevented state residents and business owners from having to declare bankruptcy.

Bankruptcies were down 30% across the state in 2020. Individual or nonbusiness bankruptcies were off by 30.5%, to 11,344 in 2020 from 16,326 the year before, according to combined data from the U.S. Bankruptcy Court’s Eastern and Western Districts in Wisconsin. Business insolvencies, including Chapters 7, 11 and 13, were down 23.1%, the court’s data says. (See related article.)

Nationally, Americans’ purchasing power reached record highs as per capita disposable income rose exponentially. The $215 billion loss in total employee compensation in the second and third quarters of 2020 was offset by government personal transfers of $893 billion — four times the amount lost, according to a Wall Street Journal analysis.

These transfer payments, combined with the shutdowninduced curtailment of personal expenditures, contributed to a rise in quarterly savings of almost $800 billion, the analysis said.

This financial improvement among higher-wage workers reflected a larger, national trend. According to the Pew survey, nearly four in 10 upper-income adults in the United States said their family’s financial situation had improved in the past year.

Too much and too little

“The March (2020) stimulus was rushed and surrounded by uncertainty,” says Knapp. “Essentially, it was a ‘shotgun’ approach. And it worked to a degree by supporting spending during the initial shutdown. However, many who continued to work during the pandemic received economic impact payments, and some of their household costs dropped — less eating out, no vacation, maybe savings on daycare. Thus, their financial situations improved.”

The effect of this shotgun approach was to provide too much help to people who didn’t need it and too little to those who did. “I think it’s fair to say that the economy was strong at the beginning of 2020 and that the pandemic didn’t change that — it just closed off big swaths of the economy,” says Ike Brannon, president of the consulting firm Capital Policy Analytics in Washington, D.C., and visiting fellow with the Badger Institute. “It’s clear we should have focused on giving assistance to people who lost their jobs and businesses who lost most of their customers.”

The idea that the economy can be stimulated by focusing primarily on consumer spending is a mistake, says Chris Edwards, director of tax policy studies at the Cato Institute in Washington, D.C. Stimulating demand won’t have the desired effect if the supply side — the production of goods and services — is halted by shutdowns and health concerns, he says.

“Mandatory shutdowns and health fears impacted the supply side and caused the recession,” says Edwards. “People didn’t go out and spend the stimulus money. They saved it. It doesn’t make any sense, and the data reflect that. The only way to open up the economy is to open up business.”

And there is growing evidence that by extending unemployment to 39 weeks and padding it by an additional $600 per week through July 2020 “created a disincentive to return to work,” Knapp says. “However, we don’t know how many workers had an opportunity to return and did not.”

Return to normal?

The Biden administration and Congress presented little evidence of need for the second stimulus. The American Rescue Plan, for example, continues a $300 increase in weekly unemployment payments through September even though unemployment has nearly returned to pre-pandemic levels.

Wisconsin is already getting some of its $5.7 billion allocation, $3.2 billion of it to the state government and $2.5 billion to counties and municipalities.

State residents also started receiving another round of stimulus checks in late March. Individuals earning up to $75,000, or couples making $150,000, plus their children or adult dependents, qualified for $1,400 payments per person.

The child tax credit also was increased from $2,000 per child for one year to $3,600 for children younger than 6 and to $3,000 for children ages 6 to 17.

None of the economic experts interviewed by the Badger Institute think the second stimulus was necessary. “As to whether I think another stimulus will be needed ... probably not,” Knapp says. “Given the pace we are on with the vaccine, I see the economy coming back this summer, probably earlier than I would have expected in December. There will be pent-up demand for dining out, vacationing, etc., which could return us to ‘normal’ soon.”

But can the largest economy in the world, having been distorted by the largest government injection in history, return to normal? For the first time since all of this spending started, the Biden administration is admitting that American taxpayers, however many and in what economic class, are going to have to pay for it.

“The money wasted in various iterations of stimulus represents money we won’t have to build infrastructure or available for businesses to invest,” Brannon says. “It’s just now beginning to dawn on people that a $1.9 trillion stimulus may make it more difficult to pass the infrastructure bill later on this year.”

More ominously, Schug says, the federal and public spending paired with the Federal Reserve’s low-interest monetary policies are an explosive combination.

“The Treasury Department still has $1 trillion in unspent funds,” he says. “Now add a new $1.9 trillion in spending. When consumers start spending again, it will add even more fuel to the inflationary fire.”

Michael Jahr is senior vice president of the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.

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