Before the recession began, American households saved very little. The personal saving rate was just 1.5% in late 2007. As the recession worsened, the saving rate soared. In the most recent quarter, it reached 5.2%. Critics of the government’s stimulus policies claim the surge in personal saving has undone the intended effects of the stimulus. In their view, the government’s efforts to boost the economy have failed. Is this claim credible?
The last business cycle expansion reached a peak in the end of 2007. Since that time, the number of payroll jobs has shrunk without interruption and total U.S. output has fallen 3.7%. The drop in private personal income was even faster. It fell 4.4% in the six quarters after the end of 2007, a decline of more than $500 billion at an annual rate. At the same time, the net worth of American households fell more than $12 trillion, or about one-fifth.
In the face of the sharp fall in private income and steep dive in household net worth, personal consumption expenditures fell just 2% from the beginning of the recession through the second quarter of 2009. One reason the drop in personal consumption was so small was the massive swing in household tax liabilities and government transfer payments. This swing was partly the result of two stimulus packages passed in 2008 and 2009. In the six quarters since the end of 2007, personal tax payments and social insurance contributions fell more than $450 billion at an annual rate, or more than 18%. Transfer payments to households increased $382 billion, or 22%. In combination these two items added more than $830 billion to Americans’ personal disposable income.
Remarkably, Americans’ disposable income increased more than 3% between the last quarter of 2007 and the second quarter of 2009. This represents a sharp contrast to the 3.7% fall in income from private sources. To be sure, the personal saving rate has increased as households have attempted to rebuild their wealth, reduce their indebtedness, and save for even rainier days that may come in the future. Nonetheless, the increase in personal saving has not been nearly large enough to offset the full effect of lower taxes and higher government transfers. Household consumption has fallen in the recession, but it fell much more slowly than the drop in wages, business profits, and income from interest and dividends.
The notion that the stimulus package failed is based on a very unrealistic benchmark. An assumption of stimulus critics seems to be that for the package to succeed, household consumption must remain constant or even rise in the face of sharply lower private incomes and household wealth. How realistic is this expectation? Not very. My interpretation is that the massive swing in taxes and government transfer payments, produced in part by the stimulus packages, moderated the fall in household consumption that would otherwise have occurred. The stimulus packages did not end the recession, but they reduced its severity.
Critics of the government’s stimulus measures seem to forget another thing. The goal of these programs is not simply to provide a counter-cyclical boost to consumption. An equally important goal is to help offset the income losses experienced by the victims of recession. The hardest hit victims include laid off workers who have suffered long spells of unemployment and loss of their health insurance. For the first time ever, the federal government has done something to help workers pay for continuation of their health benefits after they lose their jobs.
When critics of the stimulus package pronounce with mock sorrow the program has been a total failure, the rest of us should remember an important point: This “failed” program has delivered timely and critical relief to millions of families hurt by the recession. Most of them live more comfortably and consume more goods and services than would have been possible without the stimulus package. Neither proponents nor critics of the stimulus should lose sight of the sizeable benefits conferred on these families.