There's Plenty of Stimulus Fuel Left to Drive the Economy

(Bloomberg Opinion) -- As Democrats struggled to find agreement on a pair of infrastructure bills, some have been concerned that the waning impact of fiscal stimulus will act as a drag on economic growth just when the economy is struggling with supply-chain problems. But that thinking is too simplistic; while some pandemic relief programs are winding down, there's still plenty of fuel in the system to keep this recovery moving ahead.

The American Rescue Plan passed in March was a massive $1.9 trillion, and while much of that has been disbursed or set to expire — such as the enhanced unemployment benefits earlier this month — a large chunk of it has yet to be spent. State and local governments are still figuring out what to do with the $350 billion they were allocated. Child tax credit checks that started going out this summer will continue through the end of the year. Of the hundreds of billions of dollars sent out in the form of $1,400 relief checks, it's unclear how much was spent versus saved. Household cash balances remain well above pre-pandemic levels thanks to multiple rounds of fiscal stimulus and a lack of spending on services like dining and travel, for instance.

Beyond Rescue Plan money, state and local government tax coffers are swelling from surging home values and sales tax revenue, a much different dynamic than we saw in the years following the 2008 financial crisis when plunging home values depressed local taxes. Tax receipts are up by 11% between the first quarter of 2020 and the second quarter of 2021, a surge that has continued into the third quarter.

The biggest challenge has been what to do with all that money. It's going to come in handy now because of the urgent need to hire in a competitive labor market. Employment in state and local governments is down by 800,000 jobs from pre-pandemic levels, and openings, which were already at a record heading into the pandemic, have increased by an additional 36%. While evidence is still largely anecdotal, the passing of Labor Day and the beginning of the school year has seemed to make governments more aggressive in recruiting workers. My local school district, for instance, emailed all parents this week saying they need to hire school custodians and are offering signing bonuses of up to $2,000 for workers who come onboard before Nov. 1.

Something convenient about the types of jobs that need to be filled — school bus drivers, custodians, sanitation workers, teachers aides — is that they're labor-intensive service jobs that don't rely on goods like semiconductors from Taiwan. Auto manufacturers and retailers might not be hiring while they can't get the raw materials they need, but there should be no such constraint for local governments, assuming they're willing to pay higher labor market rates.

This all looks a lot different from when fiscal stimulus was waning at the end of the 2008 financial crisis. Back then households needed to go through years of deleveraging following the borrowing binge during the housing bubble years. At the same time, state and local governments made deep budget cuts as they wrestled with their own deficits. With both households and local governments trying to balance their budgets, the early 2010's on Main Street felt more like recessionary malaise than a real recovery.

Today, both households and state and local governments are flush with cash. All that money is going to get spent one way or another, and with a need to staff up after so many lost their jobs during the pandemic, a lot of it will go out to workers — signing bonuses today rather than job cuts in 2010. At the same time, households are flush with cash and in a position to spend down excess savings accumulated over the past 18 months.

The federal government may have done the heavy lifting to keep the economy afloat during the worst of the pandemic, but state and local governments and households are well-positioned to take things from here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.

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