On December 27th, President Trump signed a $2.3 trillion coronavirus relief package passed by Congress. This includes $600 direct payment checks for every adult and child earning up to $75,000.
What I want to know, though, is where is the money coming from?
The short answer is that this money is coming from ourselves.
During the lockdowns, households that did not lose income decreased their household spending. This was because there were very few businesses to spend their money on. Therefore, this caused an increase in household savings. This means that more money is sitting in savings accounts and less money is in circulation in the economy. The coronavirus relief package translates that money from household savings and turns it into somebody else’s income. This recycles the money so that it is not putting an anchor on economic growth.
The government does not have money, instead, the government receives money through taxes and bonds. For this relief package, the government borrows money from the private sector through bonds. The government sells bonds to the private sector (American households and privately owned businesses) with the promise that it will increase their return on investment in the future. Due to the increase in household savings (see graph), there was a record number of bonds purchased this year. The government takes this money and puts it into economic circulation. In this case, the money was sent through the relief package to the private sector (households earning up to $75,000) and the public sector (local cities and governments).
The Wall Street Journal posted a five-minute informational video that explains this process in more detail. I highly recommend you take a look. Click here to view the video.
Ideally, the private sector does this translation process instead of the government. An increase in household spending on business services typically leads to an increase in business investments (business expansion and entrepreneurship). This increases the number of available businesses that keep the economy circulating. The economy circulates because Americans are spending money not because the government is borrowing money. But this type of capitalist economic model cannot be relied on during a crisis. This is especially true during the pandemic in which businesses shut down and employees were laid off. This type of economic outlook is not conducive to business expansion and entrepreneurship. In this case, it is helpful for the government to step in.
On one hand, the coronavirus relief package helps circulate money back into the economy, which we need. But there are two dangerous flip sides to this. First, the government will have to pay back these bonds in the future with interest. Remember that the government receives money through taxes and bonds. Therefore, the government will need to either raise taxes or sell more bonds in the future to pay off the two coronavirus relief packages of 2020.
Second, this translation process puts much power into the hands of the government. As a political conservative, I lean toward small government power. Where do you want more dollars to be: in the hands of the government or the private sector? In the private sector, there is a profit motive, capital allocation, and rational decision making. We need some dollars in the hands of the government, after all, they have to run the government. But, as this percentage of our economy increases more and more, it will suffocate economic growth in the future. Borrowing money instead of having sustained, organic economic growth is a major concern. This is the economic outlook America seems more and more determined to go down as evidenced by our increasingly large debt and deficit.
It seems much more profitable to encourage businesses to open up safely and thus put control back in the hands of household consumers. Ultimately, Americans, not the government, should be the ones who determine where their dollars go.