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GDP Boosted by Personal Transfer Payments

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 for 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.

John Lounsbury

About 

John Lounsbury provides comprehensive financial planning and investment advisory services to a small number of families on a fee only basis. He has a background which includes 34 years with a major international corporation, 25 years in R&D management and corporate staff positions. John is also one of the ten most followed writers at Seeking Alpha and a Senior Contributor at TheStreet.com and Real Money. He is a founding partner and managing editor of Global Economic Intersection. Follow him on twitter @jlounsbury59.

7 Comments

  1. This in-depth statistical look by John Lounsbury looks into how consumers are able to hold up the economy by spending more despite anaemic job growth and ongoing deleveraging. Government transfer payments are a large part of this. The question becomes whether state and local government budget cuts in 2011 will counteract the federal transfer payments