In late July, there were increasingly frantic claims in the media that failure to enact another massive fiscal package would hurt the economy. I’ve pointed out that disposable income growth in 2020 has been astounding, and argued that a lack of fiscal stimulus is not the problem. So what will people say if the economy does not tank in August?

One prediction I can make with near 100% certainty is that a continued recovery in August would not be viewed as evidence against the (old) Keynesian view of fiscal stimulus and in favor on the New Keynesian/monetarist view. The efficacy of fiscal stimulus is now accepted almost as a matter of faith, despite the 2013 debacle. Instead, other explanations will be sought.

Here’s the headline and subhead to a new Bloomberg piece by Conor Sen:

The Stealth Sunbelt Virus Turnaround Will Boost the Economy

Even without a new stimulus package, there are reasons for optimism.

It’s worth noting that those reasons for optimism were typically not cited in late July, before the recent data on falling unemployment claims and rising stock prices.  So we need to figure out whether the “reasons for optimism” reflect new economic data, or actual external shocks that would justify an increased level of optimism.  I suspect it’s the recent economic data.

Sen cites the recent Covid-19 data from Arizona, which has indeed improved sharply in recent weeks, after a very bad July.  But Arizona is only a tiny fraction of the overall economy.  Here is daily Covid-19 fatality data for the US:

Deaths peaked at just over 2000/day in April, fell to just over 500/day in late June, and then doubled again by late July.  Ignoring day of the week fluctuations in Covid reporting, the first half of August is still near the July peaks.  So one does not see the Arizona improvement in the national fatality data.

On the other hand, reported new cases are trending downward nationwide, although they are still several times higher than in June. (The recent decline is a bit smaller than it might appear to the naked eye, as the most recent two days are weekend data (reported Sunday and Monday), and today will probably see a jump upward).

This decline may partly reflect reduced testing, but a portion of the decline is almost certainly real.  The question is whether that’s enough to explain a modest improvement in the economy in August, despite the end of fiscal stimulus.  I doubt whether consumers are that sensitive to a drop in reported cases that is not showing up (yet) in the fatality data, but I can’t rule it out.

Even so, you have to wonder how important fiscal policy actually is if a fairly modest improvement in Covid-19 can explain why dire economic predictions don’t seem to be coming true.  If anything, I believe this supports my claim that it’s the virus, not a lack of disposable income, which is driving the economy right now.

PS.  I always need to point out that a major increase in the budget deficit was appropriate this year.  I am merely questioning stimulus for stimulus sake, such as giving $1200 to middle class people with jobs and giving unemployed people more than they earned on their previous jobs.  I favored the provisions that expanded unemployment compensation to a wider range of people during recent months.  So I’m not suggesting that doing nothing right now is appropriate; rather this post is aimed at the macroeconomic effects of using fiscal stimulus as a tool to boost disposable income.

Update:  This David Beckworth tweet provides additional evidence that a lack of disposable income is not what’s holding back spending.