Real GDP increased at an annual rate of 4 percent in the fourth quarter of last year. Normally this would be a very respectable growth rate, but in the COVID-19 era it’s kind of meaningless. Here’s a different way of looking at it that tells a more meaningful story:
If GDP had continued growing at its rate of the past decade, it would have reached $19.5 trillion last quarter. Instead it ended up at $18.8 trillion, which means we’re $700 billion below where we “should be” in the absence of any pandemic effect. This is the amount we need to make up to get back on our old growth path. It’s also the hole that needs to be filled with additional consumer spending.
So how much extra consumer spending do we need to close this gap? We just passed a $900 billion bill and personal savings are still about $1 trillion above their normal level, which means we have nearly $2 trillion in extra spending available over the next few quarters. That might be enough on its own, though I’ll leave the final word up to economists with better analytical chops than me.
Needless to say, there’s not much chance of this extra spending happening until vaccinations are widespread and the economy opens up fully. Call it Q3 at the earliest. In the meantime, we may not need a lot more spending aimed at stimulating the broad economy, but we do need to spend money providing help where it’s needed. That primarily means the unemployed and local governments, both of whom have suffered the brunt of lost income. Let’s get to it.