Why Not $200,000 Relief Checks?

Why Not $200,000 Relief Checks?
<a href="https://pixabay.com/users/Anestiev/">Anestiev</a> / Pixabay

It is always Christmas in Washington. This particular holiday season, politicians raced to the bottom of the fiscally incoherent barrel. What started as a $600 direct payment all of a sudden became $2,000 as the spenders yell out, “look at how good I am!” They would have us believe their benevolence is bestowing upon us much needed relief. Some might even call it stimulus.

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Q3 2020 hedge fund letters, conferences and more

In the end, the $600 payments prevailed, but president-elect Biden has already said the $600 checks are merely a “down payment” on future stimulus.

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Why Not Send Out $200000 Checks?

Of course, direct payments are not fiscal stimulus. If they were, why stop at $600 or $2,000? Why not send out $60,000 or $200000 checks?

The answer is rather simple: If the federal government can stimulate the economy by making direct payments to citizens, then there would be no reason to limit those payments to $600, or $2,000. It is similar to the lack of logic in limiting the minimum wage to only $15. The absence of rationality tends to not prevent Washington from fiscal malfeasance. After all, if there existed some multiplier greater than one by which government spending could increase GDP, then it would be insane to not increase government spending ad infinitum. They have certainly tried their best to make this faux stimulus work.

What does that attempt even look like? Sadly, it is a vicious cycle. The federal government makes direct payments totaling, say, $500 billion. Where does that money come from? The Treasury issues bonds to raise the $500 billion from the markets. With $28 trillion in debt, how come rates aren’t rising? The Federal Reserve purchases bonds from the market to keep supply down. Where does the Federal Reserve get the money? It prints it. Then where is the inflation? Take a look at the financial markets. Then where is the stimulus?

That’s just it – there is no stimulus. Tragically, many in Washington believe that there is, and so the vicious cycle persists. Perhaps more nefariously, many in Washington do not care about the vicious cycle, or if there is any actual stimulus. The direct payments are simply a transfer of wealth from some group of people who will eventually pay that debt back in taxes to whatever chosen group the government decides to be the recipient. Of course, the irony is that much of the wealth transfer is from future generations (those in whose name the gargantuan debt is incurred) to the holders of the financial assets that are inflated. Along the way, the direct payment recipients receive a temporary high.

Allow The Economy To Reopen

Making matters worse, people are indeed suffering and there are numerous ways in which the government can actually help. First and foremost, it can allow the economy to reopen now. That would address a bulk of the government induced slowdown. It is bad enough that haphazard government policy causes massive economic damage. Even worse is when the government exacerbates the problem with an incorrect policy measure that lathers on more spending and debt. While an attempt could be made to calculate an actual amount of economic loss from pre-pandemic times, it is nearly impossible to price the myriad unseen costs of educational loss, drug abuse, and depression. Will a $600 or $2,000 check begin to compensate for that?

In general, though, there is a way for government to implement actual fiscal stimulus: cut taxes. Job creation only comes from economic growth. And the only way in which government can stimulate economic growth is by cutting taxes. Tax cuts, empirically and logically, facilitate economic growth and job creation. A direct payment is simply the whim of the government, to be doled out in the amount and timing of their choosing. It allows for little planning or future certainty. A tax cut, on the other hand, provides lasting, durable, and actual relief.

There is a spectrum of reasons why neither of these sensical solutions are being implemented. Similarly there are a variety of reasons why the politicians are pushing the direct payments. Some are well intentioned, some are political, some are rooted in socialistic tendencies, some are rooted in lack of understanding of basic economics.

Regardless, it is a basic question that everyone should be asking. What will this actually do for the economy? How long will a struggling family last on printed dollars that do not facilitate actual job creation? And if it actually works: Why not $200,000?

David Sukoff

David Sukoff

Dave Sukoff is an advisor to the investment management community and previously co-founded and ran a $500mm fixed income relative value fund. He is also the co-founder of a software company and inventor on multiple patents. Dave graduated from MIT, where he majored in finance and economics.

This article was originally published on FEE.org. Read the original article.

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