Summers: The Case Against $2,000 Stimulus Checks

Larry Summers raised some eyebrows a week ago when, in a Bloomberg interview, he came out against the Democrats' (and Trump's) idea of $2,000 universal checks. In a follow-up Bloomberg op-ed, he lays the economic case for his thinking. 

Summers is all for assisting those impacted by Covid-19, including extended unemployment insurance and eviction protections. But he argues that the majority of Americans who are working don't necessarily need it. Because total employee compensation is "now running only $30 billion per month behind the pre-Covid baseline." Measures in the new stimulus bill will add $150 billion per month to household incomes to more than offset this deficiency.

Furthermore, because of the stimulus bills already passed in 2020 household incomes relative to the economy's potential is already at "abnormally high levels" as shown below:

Adding $2,000 checks to the mix, would be moving into "completely uncharted territory" and risks overheating the heating the economy... 

...But, would it really? The fall back inflation argument seems contradictory to Summer's own writings. He wrote a whole paper on why no one knows the reasons interest rates remain so low...and that governments should take advantage of it with more aggressive fiscal policies. Also inflationary pressures are good because it will deflate away some of the debt, all else equal. So, what's the problem?

Now, people may simply save or pay down debt with their stimulus checks, which would be unhelpful. In fact, a Fed paper showed households utilized only 29% of the CARES Act payments for consumption by June 2020. So you'd need to give people money and incentivize them to spend it, like prepaid cards good only at non-financial institutions for 12 months. 

Sure, as Larry suggests, the smart way for Congress to help the economy is through generous targeted support for those most impacted by Covid-19. But that's not going to happen. And $2,000 blanket checks won't bring about stagflation either.

Also this...Musk and Bezos increased their wealth by over $200 billion in 2020. In fact, US billionaires collectively gained more than $1 trillion last year. Hooray! That's enough to cover a $3,000 check to every American man, woman and child.