Checks Without Balances

Washington’s lawmakers have discovered the joys of sending checks to their constituents during bad times. They’ve done it twice so far since the start of the pandemic and are likely to do it a third time shortly. The $1,200-per-person checks sent during April did work to revive the economy from last year’s two-month recession during March and April. The $600 checks sent during January certainly averted any stalling in economic growth in the face of the third wave of the pandemic. It’s not hard to guess what another round of $1,400 checks will do to the economy. Consider the following:

(1) Pandemic. On a 10-day moving average basis, Covid-19 hospitalizations have plunged 55% from a record high of 130,386 during January 15 to 58,394 during February 26 (Fig. 1 ). That’s the lowest pace since November 12, 2020. The Food and Drug Administration on February 27 authorized Johnson & Johnson’s (NYSE:JNJ) single-shot Covid-19 vaccine for emergency use. J&J will provide the US with 100 million doses by the end of June. When combined with the 600 million doses from the two-shot vaccines made by Pfizer (NYSE:PFE)-BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA) slated to arrive by the end of July, there will be more than enough shots to cover any American adult who wants one this summer.

The new vaccine’s 72% efficacy rate in US clinical trials falls short of the roughly 95% rate found in studies testing the Moderna and Pfizer-BioNTech vaccines. Across all trial sites, the Johnson & Johnson vaccine also showed 85% efficacy against severe forms of Covid-19 and 100% efficacy against hospitalization and death. That sounds like a winner for sure! To repeat: 100% efficacy against hospitalization and death. That should turn the plague into a pest by the second half of this year.

In his February 23 congressional testimony on monetary policy, Fed Chair Jerome Powell said:

“While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities.”

I think that both monetary and fiscal policymakers underestimate the stimulative impact of the end of the pandemic.

(2) Real GDP. The V-shaped recovery in real GDP will remain V-shaped during the first half of this year and probably through the end of the year. However, it will no longer be a “recovery” beyond Q1 because real GDP will have fully recovered during the current quarter. Thereafter, GDP will be in an “expansion” in record-high territory.

Last year, real GDP rebounded 33.4% (saar) during Q3 and 4.1% during Q4 (op-ed by economist Larry Summers in which he trashed President Biden’s American Rescue Plan as too stimulative and too inflationary. He also strongly implied that the plan included overly generous unemployment benefits that would discourage the unemployed from taking jobs. In fact, there is mounting evidence that the pandemic-related unemployment benefits provided last year have been doing the same.

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Our February 10 Morning Briefing was titled “Help Wanted.” We wrote, “There actually seem to be lots of job openings, but fewer people willing to take them. That would explain why wages have been rising at a faster pace in recent months.”

(7) Bottom line. There is plenty of stimulus left in the pipeline from last year’s pandemic rescue programs. More rounds of government stimulus programs this year are likely to cause a boom that overheats the post-pandemic economy, which might result in higher inflation. The government’s overly generous extended unemployment benefits could frustrate policymakers’ goal of achieving full employment while driving up wage inflation.

Too much of a good thing is often just too much. The economy is hot and will get hotter with the bonfire of the fiscal and monetary insanities.

Written By: Ed Yardeni