Here Is The $1 Trillion "Stealth Stimulus" Behind Bidenomics
In recent weeks, with inflation still at all time highs but now rising at a slower pace and with the Dept of Labor generously seasonally adjusting job numbers to make it seem that the labor force is growing relentless no matter how hard the Fed tries to whack it, Joe Biden - who had sternly refused to discuss the US economy for much of the past three years - had a change of heart and, on advice of his handlers, decided to take credit for what he sees as positive changes in the US economy by penning the term "Bidenomics", and flooding twitter with this propaganda, which Twitter's community notes has had a field day exposing.
Here’s what Bidenomics looks like:
— Joe Biden (@JoeBiden) July 21, 2023
Over 13 million new jobs, including 800,000 manufacturing jobs.
Unemployment below 4%, the longest stretch in the last 50 years.
Inflation has slowed every single month for the last 12 months.
We're building the economy for the middle class.
The economy’s continued growth builds on the strongest pandemic recovery and lowest inflation of any G-7 country.
— Joe Biden (@JoeBiden) July 28, 2023
Bidenomics is growing the economy from the middle out and bottom up, not the top down. And hard-working Americans are seeing the results.
But while there are those who have the energy and patience to read between the lines and uncover the lies below the surface, for many people what they see on CNN and MSNBC or read in the liberal press is what they believe: for them Bidenomics is actually working.
Of course, it would be great if Biden was right - one's political ideology notwithstanding - and the economy was truly flourishing, but unfortunately there is another issue, one which the president will never discuss, namely the cost of Bidenomics.
We first got a glimpse of that two weeks ago when Michael Hartnett discussed "the era of fiscal excess" and pointed out that in just the past 12 months the US government spent $6.7 trillion, up 14% YoY...
... something which we previously noted had pushed the US federal deficit for fiscal 2023 up a staggering $1tn to $1.4tn from year before...
... deficit that is largely debt-funded, which is why the US is set to spend over $1 trillion in interest on government debt for the first time ever.
And while there will be hell to pay in due course because no amount of propaganda can cover up cold, hard math, it won't be today - in fact, in order to get re-elected, Biden will do anything to preserve the impression that the economy is strong, and as Hartnett notes, it is "tough to get recession when unemployment 3% & budget deficit 9% GDP."
Which brings us to today's topic, one which this week has drawn in not just Deutsche Bank, but also the largest US commercial bank, JPMorgan.
As DB strategist Jim Reid writes in one of his recent Chart of the Day thematic notes (available to pro subs here as well as the note it is based on), "a question we’ve been asked a few times recently is whether the US is loosening fiscal policy by stealth and in turn supporting the economic cycle."
The answer, of course, is yes and it explains the (at least superficial) success of Bidenomics. Let's dig in.
As Reid shows in his chart of the day (which is essentially a rehash of the Hartnett chart above), the quarterly budget deficit was -8.49% in Q2 and -6.83% in Q1. That’s an increase from the last three quarters of 2022, which came in between -4% to -5.5%.
According to Deutsche Bank, the main reason for the is that income tax receipts are tracking at an unprecedented $442bn below a year ago (three quarters into the fiscal year), which far surpasses the sharp decline during the early days of the pandemic when the unemployment rate rose to nearly 15%. We first showed this two weeks ago when discussing the blowout in the US deficit.
Part of the missing tax revenue is due to disaster relief efforts in several states, which have extended the April 15 tax deadline for areas in several states to between July 31 and October 16. Of course, all that means is that instead of remitting money that was due to Uncle Sam in mid-April, Americans - like the dutiful consumers they are - spent it all, in the process boosting the economy and pushing GDP in Q2 sharply higher than expected. Some more details from Reid:
With respect to income tax revenues, the most notable FEMA-declared disaster areas were in California as severe winter storms, flooding and mud slides impacted large swaths of the state earlier this year. Given that California accounts for a little less than 14% of US nominal income, this matters with respect to federal government coffers.
Of course, as these delayed tax receipts are eventually paid, we will see a sharp pickup in tax revenues alongside the return of student loan repayments in Q4. And since that is money that won't be spent elsewhere, we will also see a sudden pluge in US economic output as the stealth stimulus comes to a screeching halt.
Next, Reid says that "an interesting debate can be had as to whether the surprisingly big deficit this year has helped push growth higher. In theory it shouldn’t have done as if it’s because of a few months delay in tax payments then it is likely that the money would be saved and not spent." To this we would counter that in some ideal world where Americans save rather than spend, yes, the money would be saved... but it wasn't. And instead it amount to a massive stimulus for the economy at a time when the Biden admin is doing everything to put as much lipstick on Pigonomics Bidenomics.
* * *
But it's not just Deutshe. In a note from JPM's Michael Feroli titled "The curious case of the 2023 fiscal expansion" (also available to pro subs), the bank's chief economist echoes Hartnett and Reid, and exposes the $1 trillion stealth fiscal stimulus that has allowed the US economy to avoid collapsing.
As Feroli explains, the FY23 deficit is tracking about $1.5 trillion, but only thanks to the odd accounting of student debt forgiveness. Excluding student debt, the deficit would be closer to $1.8tn, and almost $1tn larger than in FY22. Echoing Reid, the JPM economist writes that "this widening should partly reverse as we move into FY24, when we project a deficit around $1.6tn" at which point fiscal will turn from a tailwind to a headwind, because it will represent a decline in what is already a massive stimulus (absent some unexpected shock, of course).
More importantly, as Feroli puts it, "this year’s “stealth stimulus” may help explain the economy’s resilience to rapid interest rate hikes."
Digging into Feroli's note, we read that if one simply looked at the deficit figures from CBO (generally considered the best in class) then it looks as though the fiscal situation should be little-changed between fiscal years 2022 and 2024 (Figure 1).
However, that artificial stability is mostly an artifact of the peculiar way CBO is mandated to account for the White House’s student debt forgiveness plan and the subsequent reversal of that plan — neither of which affected current taxes or spending. Excluding the largely meaningless swings imparted by student debt forgiveness, the deficit looks like it is set to almost double from $950 billion in FY22 to $1.839 trillion in the current fiscal year ending September 30!
One might be tempted to say: well, duh, in ’21 and ’22 Congress passed the IRA, the CHIPS Act, and the infrastructure bill. However, when Feroli digs into the sources of the widening of the (ex.-student debt) deficit over the past year, he finds that very little of it is accounted for by spending from these three pieces of legislation. Instead, it was an unusual mix of factors, very little of which arises from new laws.
And while the JPM economists does not think that all this 3%+ of GDP fiscal expansion should be counted as stimulus to aggregate demand, a trillion dollars is not nothing.
While assigning fiscal multipliers to the tax and spending considerations discussed below is difficult, it would be hard to whittle them all down to zero. As such, it is abundantly clear to the JPMorgan economist that "some of the surprising first-half resilience of the economy owes to fiscal outcomes." However, the deficit is set to narrow in the coming fiscal year, due partly due to the recent budget deal, partly to some of the unusual factors discussed below unwinding. Which is why Feroli warns that if the Fed were to plow ahead assuming the same economic resilience, albeit with a different fiscal backdrop, it risks making the classic “fool in the shower” mistake.
Going back to the (ex-student debt) US deficit number, Feroli asks what is causing this surprising weakness?
He responds that starting with tax receipts, the weakness is largely explained by a $321bn decline in individual income and payroll taxes and a $92bn drop in remittances from the Federal Reserve, relative to the first nine months of fiscal year 2022 (Table 1), similar to what Deutsche Bank said above.
The tax decline is partially due to last year’s weak performance of financial assets (no capital gains tax, when there are - well - no capital gains), but has also been supported by California’s extension of the tax deadline to October. Looking ahead, the year-to-date increase across risk assets supports stronger individual income taxes in FY24. Meanwhile, the receipt of California tax payments in October should support a smaller deficit for the first month of FY24. Last, remittances should stay at zero for several years into the future.
On the outlays side of the equation, the weakness has been driven by a $98bn increase in spending for Social Security benefits, unsurprising given the COLA adjustment expectations we outlined last year, a $125bn increase in outlays across Medicare and Medicaid, a $135bn increase in net outlays for interest on the public debt, and a $52bn increase in outlays of the Federal Deposit Insurance Corporation (FDIC). Going forward, JPM thinks further increases across Social Security, Medicare, and Medicaid benefits should slow down, partly on the back of more moderate inflation adjustments. And then there is of course the exponential surge in interest payments (see chart above) which will continue for the foreseeable future, if slow modestly now that the Fed has hiked as high as it will go.
Overall, these sources of weakness should either reverse or at least moderate as we move into FY24. Hence, JPM argues that its $1.58 Trillion forecast for next year’s budget, or roughly 6% of GDP, reflecting an improvement from FY23’s ex-student loan accounting $1.8tn deficit, remains appropriate.
It’s all gotta go somewhere
One common way of measuring how much influence the federal government is exerting on aggregate demand is to look at the change in the deficit (usually as a percent of GDP). If we think of deficits as outlays less revenues, then the 3.2% increase in the deficit this fiscal year would be the third largest since 1950, after FY08 and FY20. Needless to say, but Feroli does so anyway, "fiscal thrust this large is deserving of further investigation."
To see how curious this “stimulus” is, consider first the largest item from Table 1 above, the decline in personal taxes. According to CBO, much of this was accounted for by capital gains realizations in 2022 coming in below 2021. But as seen in Figure 2 below, 2021 was easily a record, and if CBO is correct then 2022, while weaker than the prior year, was not weak. So while lower capital gains realizations don’t feel like your classic stimulus, it was still the case that higher cap gains taxes were paid in 2Q22, when asset markets were weakening, and less in 2Q23, when they turned the corner. And in any case, less of this year’s federal outlays is being paid for by current taxes. Likewise, higher interest outlays wouldn’t be considered stimulus, but even after accounting for foreign holdings, they are contributing to domestic personal income growth (the ironic twist discussed by Albert Edwards how higher rates is actually stimulative to cash-rich actors, comes to mind). And while COLA adjustments merely sustain the real value of Social Security checks, more of the hit to purchasing power occurred in FY22, but the adjustment was made in FY23.
And while capital gains taxes, interest payments, and social security checks all respond automatically to changing economic conditions, it would be odd to call these “automatic stabilizers” as the economy has been performing relatively well (especially when double counting the impact of the stimulus) — just the opposite of when automatic stabilizers should boost the deficit.
In any case, however one classifies it, relative to FY22, in FY23 the federal government is taking in a lot less cash than it is sending out. But, as JPM warns, "those funds are going somewhere, and are not benefiting all agents in the economy."
One thing is sure: they are going to the most important agent in the economy, the US president, who has quietly internalized the benefit from this massive $1 trillion excess deficit (vs 2022) and has flipped it on its head to represent not the opportunity cost of another massive debt increase (because, really, who cares at this point how much debt the US has) but instead is taking credit for the latest episode of "spending like a drunken sailor" and calling it - you guessed it - bidenomics.
More in the full notes from Deutsche Bank and JPMorgan available to pro subscribers.
