Personal Transfer Payments and GDP

Transfer payment receipts are defined well by the BEA (Bureau of Economic Analysis, U.S. Dept. of Commerce):

Personal current transfer receipts are benefits received by persons for which no current services are performed. They are payments by governments and businesses to individuals and nonprofit institutions serving individuals.  Transfer receipts accounted for 15 percent of total personal income at the national level in 2008.

Current transfer receipts of individuals from businesses accounted for 1 percent of total transfer receipts at the national level in 2008. These receipts consist primarily of personal-injury liability payments to individuals other than employees.

Personal transfer payments are essentially a wealth transfer process from those that are well compensated to those that are less well compensated.  There are some requirements that recipients work (Earned Income Tax Credit for poverty level wage earners, for example), and that recipients have worked in the past (Social Security Retirement Benefits and unemployment benefits, for examples).  Other transfers have no work requirement at all, food stamps for example.   Whether personal transfer payments are desirable or not has been widely debated.  It is a subject for an Op Ed and will not be addressed here.  Instead we will analyze how personal transfer payments (more specifically increases in the payments) have influenced the course of The Great Recession and the recovery.

We will use GDP as the measure of how personal transfer payments have influenced the economy.  Some knowledgeable readers are going to say: “Hold on!  It is well known that personal transfer payments are not included in GDP.”  That is correct, but when those payments are spent by recipients for goods and services GDP is increased.  And most personal transfer payment receipts are immediately spent on goods and services.  

Some interesting inferences can be obtained from some data presented by Calculated Risk.  First, we see that real personal consumption expenditures have exceeded pre-recession levels:

Click on graph fro larger image.

Next we see that personal income less transfer payments is still 4.5% below previous peak.  We are at levels far below anything else seen in the last 50 years, except for the bottom of the 1973-75 recession:

Click on graph for larger image.

The first obvious question is whether expanded consumer credit has led to the resurgence in consumer spending.  The following graph shows a continuous contraction of consumer credit.  Declining credit is obviously not fueling the rise in personal consumption spending.

Since personal income less transfer payments is lagging, let’s look at the recent history of transfer payments. 

Currently, transfer payments appear to be about $250 billion greater (annualized amounts) than what they would have been if the pre-recession trajectory had been maintained.

While it is often stated that the consumer is supporting the recovery in GDP, it is really the government providing some of that support, via transfer payments. Without the transfer payments, GDP would have been about $250 billion less in 3Q/2010 and for most of 2010 and the second half of 2009.  There was a small increase in 1Q/2010 to about $270 billion and a spike in transfer payments in 2Q/2009 to about $300 billion above the trend line.  In 1Q/2009 the GDP got a boost of about $150 billion of “extra” transfer payments.  All the above are annualized amounts – the accumulated “extra” personal transfer payment receipts for 2008 estimated through year end 2010 is approximately $569 billion.  This comes from $87 billion in 2008, $226 billion in 2009 and $256 billion in 2010.  

If the estimated “extra” transfer payments are subtracted from GDP the quarterly annual growth rates for GDP are changed.  The result is displayed in the following graph.

The cumulative GDP changes starting with 1Q/2008 are plotted in the following graph.  The real GDP of record is compared to the estimated GDP had the “excess” transfer payments not been made.  There are assumptions here:

1.  The transfer payments have a multiplier of 1.

2.  There are no externalities that would have influenced GDP differently without the transfer payments.

The first assumption seems reasonable. The bulk of the “excess” came from increased food stamps, extended unemployment benefits, tax rebates and reduced personal income taxes.  These are all estimated by some to have multipliers greater than 1, some very much greater.  Using CBO numbers, Menzie Chinn points out there is wide range of disagreement about multipliers.  For example, extended unemployment benefits are reported to have a range of multipliers from 0.8 to 1.9.  Establishing what the multipliers should be is obviously not a scientific process.

The second assumption is one I can find no basis to defend or criticize.  It will have to remain  largest unknown in this analysis.

The effect of the “excess” transfer payments appears to be broadening the bottom of the recession, making it less deep.  In addition, the recover from the bottom is sharper, more “V” like, in the hypothetical case without “excess” transfer payments.  However, the follow-on recovery in GDP follows parallel paths after the initial rebound from the bottom is complete.

It can be concluded that the increase in personal transfer payments was effective in softening the impact of the recession and has, so far in the recovery, put the economy on a better footing, at least as measured by GDP, than would otherwise have occurred.  However, this has come at a price.  The national debt has been increased by essentially the same amount as the “extra” personal transfer payments, or $569 billion, over the three years 2008-2010.

8 replies on “Personal Transfer Payments and GDP”

  1. It’s good to see the data supporting the common sense and widely held belief that adding to the incomes of the lowest income level translates directly into increased GDP by a factor of at least 1, because poor people spend all of their income on consumption. This was a standard assumption, proved by experience, among classical economists discussing wage increases for the working class, and the assumption still holds true today It is also common sense to assume the multiplier will be greater than 1, if we recognize that businesses who are the recipients of the increased spending will not use all of their increased revenue and profits to pay down debt and to increase their savings, but will use some or most of the increased income to increase their inventories and their personal spending and otherwise reinvest the money where it will get counted again as GDP increases.

    Now, if these transfer payments from government to individuals could be financed by very low or zero interest QE money from the Fed, for e.g. by buying zero interest Treasuries or municipal debt, then while the new government bonds would
    technically be adding to debt, the very low to zero interest would effectively make that new money “free”, especially if the bond were perpetual (no maturity date) or very long term maturity. The government has the constitutional authority to issue the national money, and here at the terminal point of our post Great Deppression debt supercycle, the addition of new free money into the economy is the only practical way of avoiding what Von Mises called the “inevitable” collapse of the debt inflated price structure of the economy, which event is better known as a deflationary depression that bankrupts both the banking system and the economy. Austrians welcome this event because they believe the inflated price structure needs to deflate and all the bad debt needs to be defaulted and written down, taking down all equity in the banking system along with it. This is actually a version of a debt Jubilee and I admit that as long as the mass default succeeds in destroying all the money that was created when the debt was first borrowed and spent, a deflationary depression might indeed generate a salutary economic renewal as the Austrians imagine will be the case. But in fact so much of the money has exited the banking system that originally issued the debt and whose equity and capital will be extinguished covering loan losses, all the money having escaped into the shadow banking system, that a depression would wipe out the normal banking system leaving the economy wide open to plunder by shadow banking vulture capital. If the debt and the money are destroyed at the same time then the Austrian solution might be a good option. If the debt is destroyed and the economy’s price structure deflates to let’s say 20% of it’s current values, without simultaneously destroying the pools of money that could swoop in and buy the country at an 80% discount, then the Austrian solution merely accelerates our current trend toward a new feudalism owned and operated by plutocrats.

  2. a) the author seems uncomfortable with the discovery that our republic is the monopoly issuer of our currency?

    b) the author discovers that public issuance of $US currency accounts for all private access to $US currency?

    Weren’t both those issues fully settled by the US Constitution, and fairly well worked out operationally pre-1900, with the last few blips ironed out in 1933 and 1973?

    Since the population has unlimited ability to pursue public initiative, including new currency creation, then public will always has the capacity to overcome the shadow currency pools feared by Austrian economists. If we were still on a gold std, currency supply levels would be yoked to the whim of gold-hoarding plutocrats instead of to other measures of public purpose. In that instance, Austrian economics would seem to hold. Since we’re no longer on a plutocrat-favoring gold std, our outcome depends, as usual, upon intelligent use of public initiative.

    ps: Given fiat currency, what’s so worrisome about fiat debt? Any fiat debt can be removed by a keystroke from the monopoly issuer. It would seem that the only remaining analog of shadow currency pools depends on the ability of deficit terrorists to convince a population to arbitrarily limit arbitrary and instantaneous currency supplies. Would it be any surprise that investment bankers & billionaires themselves constitute the biggest & most active pool of deficit terrorists? Anyone calling for arbitrary limits on public spending is by definition calling for arbitrary limits on public initiative. For that reason it is some, if not all, of the deficit terrorists themselves that I would distrust.

    The issue of adaptive currency supply calls for deeply reasoned measures of public purpose, general well being of the populous, national security & national capabilities. Worrying about the absolute magnitude of currency creation & currency supply growth helps no more than worrying about the absolute magnitude of population growth, technology growth, economic activity, or sum transaction rates. They are all fully dependent variables that have no meaning apart from emerging context.

  3. Roger – – –

    Season’s greetings!

    I believe that many of the arguments you present are reasonable. However, I wasn’t exploring the nature of debt in a fiat currency regime. I was looking for an explanation for personal consumption expenditures rising faster than earned income. One of the reasons is increased transfer payments.

    A reader has corresponded with me to suggest that another source of extra consumption could come from the redirection of payments formerly made on debt now forfeited, especially mortgages. Somewhere on page 2 or 3 of my “things to look into” notebook is just that question.

    I am looking at the situation as a flow of funds question for consumers. I may have mislead you about my thesis when I stated as an aside that the extra transfer payments corresponded to an increase in the national debt beyond what it woud have been without the “excess” transfer payments.

  4. Pingback: transfer payments

Comments are closed.