The Excessive Fiscal COVID Response | Opinion

Overlooked data in the most recent GDP report reveals that the federal government's fiscal response to COVID has been like a burst fire hydrant, when all that was needed was a targeted spray from a garden hose. An economy in the midst of a major pandemic nonetheless had an explosive record increase in personal disposable income—not exactly what one would expect. There certainly are people hurting who should be helped, but this undisciplined spending is pocketed by many others who need it less.

Overall, the response has been too large and too non-targeted to efficiently help the truly needy—and too non-synchronized with public health objectives. The young, who will pay for this deficit-financed fiscal overreaction, are also the ones hurt by restrictions on economic activity, ultimately having the end result of an enormous transfer to the old that are gaining marginally in their health. These mistakes should not be repeated. Instead, it is time to focus on helping all Americans, not just the old.

When COVID arrived in the U.S. earlier this year, the American people, not their governments, were the first to respond by sharply cutting economic activity. People were hesitant to work and shop—for good reason, given the limited knowledge we had at the time of the virus. Production, consumption and investment all inevitably declined, historically so in the second quarter.

The customary economic consequence of a decline in production is a decline in income, because they are really two sides of the same coin. The March 2020 CARES Act over-responded to the pandemic by sharply increasing personal incomes even though production took a large dive. Due to its indiscriminate and non-targeted cash payments, worker retention grants and massive addition to unemployment benefits, most people not engaged in production were paid more than when they were working. Unemployment checks of almost $1,000 per week resulted in a raise for most people who became unemployed.

The CARES Act overshot so far that real disposable personal incomes showed an all-time record increase of 10 percent in the second quarter, while GDP dropped 9 percent (45 percent and 33 percent, at annual rates). This enormous growth was not the rebound from a large previous dip, as has been true for other economic measures during COVID; the first quarter experienced a 3 percent annualized growth, which is about the typical rate over the last 60 years. Rather, it resulted from government payments exploding relative to private income losses.

It is quite remarkable, given that every previous recession included quarters of declines in income growth; but the current recession is unique in having a rise in income growth, let alone the astonishing fact of a record rise. To put the 45 percent annualized growth it in perspective, income growth almost always peaks below 10 percent in expansions, as opposed to recessions, and had a previous record high of 14 percent over the last 35 years. Those who want to "go big" in the next fiscal package seem to be arguing for even larger over-payments relative to production losses, in order to make up for the COVID shock.

House Speaker Nancy Pelosi and
House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer Stefani Reynolds/Getty Images

The deficit-financed excessive fiscal response will, of course, have to be paid back mostly by the young. This debt is in addition to the costs on the young from reduced economic activity, which we estimate to be 87 percent of the total U.S. COVID cost so far—the rest being lives lost.

The public interventions banning economic activity are highly regressive, in terms of hitting lower-income workers and the poorer young at the benefit of the old. This is because state mandates mainly apply to low-wage industries. That's why many poor who pay the cost of mitigation are against the mandates, while many of the rich who reap the health benefits are for them.

One of the largest costs on the young is imposed by teachers unions dictating virtual learning. This stymies learning in many subjects and does not begin to teach critical organizational and interpersonal skills. After months of essential workers showing up to their jobs, even while their unemployed peers often take home more money, letting one group of supposed "public servants" hold children's futures hostage is inexcusable.

If schools do not open, it is not only the young who will suffer—the whole economic rebound will slow. There are gains from specialization: Most parents are more valuable outside the home and do not have the skills, the scale economies or time to reproduce what their children learn in the classroom. American children are on a path to lose a half year's of adult earnings, the present value of which is about $10,000 per student—or almost a quarter million dollars of student losses per resisting teacher for a class of two dozen.

What lessons can be learned from failed government overreaction? First, the next policy round should finally focus on helping our young. Families should be allowed to take their education tax dollars to educational options, including home school, private schools, learning pods or anything else other than the closed government-run schooling. In addition to getting kids back in the classroom, this change would make both private and public schools more attentive to what the young need, and put the schooling sector on a better path than it was on before the pandemic struck. Second, the response should be more limited by targeting only industries and regions most affected by social distancing guidelines, like retail and leisure. Non-targeted aid does not deliver the bang for the buck helping those who really need it. Third, to enhance high growth and low mortality future, fiscal measures should be better targeted by subsidizing the separation between the low-risk young who produce our economy and the high-risk old, who are retired. For example, greatly subsidizing the home care benefits in Medicare to limit intergenerational interactions would serve this purpose. Stop paying people not do work.

Congress' current impasse is useful and, counterintuitively, should be applauded, as it provides a chance to assess the massive and historical fiscal overreaction that took place in previous rounds. If the federal government can target the next round of stimulus rather than serving up another deluge of cash, our non-voting kids will appreciate the thoughtful adults in the room.

Tomas J. Philipson and Casey B. Mulligan served at the CEA, Philipson as a member and its acting chairman from 2017 to 2020 and Mulligan as its chief economist from 2018 to 2019.

The views expressed in this article are the writers' own.