There have been only a few times in U.S. history where government social benefits have showed up large in monthly personal income data. This will be one of them.

In Brief:

You get a car! You get a car! Everybody gets a car!” announced talk-show host Oprah Winfrey in 2004 to a dazed studio audience that was slowly realizing their heroine was just (figuratively) dropping a shiny new Pontiac G-6 sedan on them. Although the Pontiac hasn’t aged well, the idea of a beneficent entity bestowing social benefits has been a recurring theme throughout U.S. political and economic history (see Figure 1), especially in hard times.

The idea isn’t too dissimilar from proposals of a guaranteed annual income that have entered the popular culture recently from sources such as Andrew Yang (former 2020 Democratic presidential candidate) and Tesla Chairman Elon Musk.

The damage of the COVID-19 shutdown to the U.S. economy has been swift. It is also concentrated in employment that is hard to cushion without direct intervention by the government through social benefit programs. But America isn’t used to a high throughput of social spending, and the success of distribution has been spotty. So far the bulk of 2020 spending is being pushed through the unemployment insurance system as it is the government’s only somewhat-efficient mechanism for doing so. It stands to reason that there will be more experimentation in the future.

Economic data will soon provide the evidence of some serious Oprah-like money in the economy, in the form of fiscal stimulus. There have been a few times in U.S. history where government social benefits have showed up large in monthly personal income data but, in my opinion, we’re going to see a whole new level of intervention going forward. Any recession in the past few decades usually has been accompanied by a boost in unemployment insurance spending. However, I believe the rate and size of the fiscal injection in 2020 will dwarf all prior episodes. Additionally, there will be great scope for “other” benefits from government – spending outside of healthcare, social security, unemployment, or veterans’ benefits.

Figure 1. There Have Been Five Major Periods in U.S. History When a Largess of Fiscal Stimulus was Distributed to the Population

1. Medicare: The July 1965 launch of this program is still the largest month-on-month percent change in social spending in U.S. monthly personal income data.
2. Early Great Society: Also in 1965, the Johnson administration instituted lump sum retroactive payments to Social Security. There were also sizable jumps in veterans’ benefits, which at the time were larger in relative terms than today.
3. Early Nixon: In the 1970s, President Nixon’s administration made similar adjustments to Social Security. (That stimulus was later followed up by the Tax Reduction Act of 1975).
4. Carter-Volcker Handoff: In 1980, the Carter administration issued a $1.6 billion special energy allowance paid out to individuals, alongside further tweaks to Social Security. One year later, U.S. Federal Reserve Chairman Paul Volcker began an anti-inflation campaign.
5. The Two Stimuli: In 2008, the outgoing Bush administration tried to boost the economy through tax cuts via the Economic Stimulus. Rebates under this plan came either as an offset to personal income taxes (for those with a tax liability) or as a government social benefit (for those who paid no taxes). In 2009, the Obama administration’s American Recovery and Reinvestment Act distributed $250 to anyone who received Social Security, veterans’ benefits, and [OR?] supplemental income.

Figure 2 examines each of the five periods in terms of the month-on-month nominal change (in billion US$) in two categories – government social benefits and personal income levels, including proprietorships (typically small businesses). In Figure 3, one can see the impact of social benefit programs, particularly in the context of the 2008-09 financial crisis.

Figure 2. There Have Been a Few times in U.S. History When Government Social Benefits Have Showed Up Large in Monthly Personal Income Data
Month-on-month nominal change in billions (US$) in select periods

Source: U.S. Bureau of Economic Analysis.

An interesting twist in the 2020 economy is that while extensive monetary support is likely to cushion personal income receipts on assets (such as dividends and distributions received from investments) proprietor’s income may drop more quickly than in any other prior recession. In short, it will be interesting to see how well, the drab colors offset the pastel colors in Figure 3.

Figure 3. The 2008-09 Crisis Weighed More Heavily on Financial Assets Than it Did on Proprietor’s Income
% contribution to year-on-year growth in social benefits and personal income (2007-March 31, 2020)

Source: U.S. Bureau of Economic Analysis

Final Thoughts

We expect the U.S. government to issue a lot of debt to cover what are unusual policies by American historical standards. Given the Fed’s determination to keep interest rates low, however, investors are unlikely to experience a sharp move higher in rates anytime soon. Though, with economic carnage so concentrated in small businesses and increased demands for social spending, it could be that more regulations and political tension are heading our way. This is, after all, a presidential election year.

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