Helicopter money distort the GDP estimates in the USA

In our previous post, we described the difference between the (BEA) published and predicted by our model values of the real GDP per capita, rGDPpc. We have developed and tested since 2005 a model linking the change rate in rGDPpc, and the change rate of the unemployment rate, u (paper here): 

            du = a + bd[ln(rGDPpc)] , 

where a and b are regression coefficients, which depend on the change in measurement units. This difference between the published and predicted values was explained by the government transfer in 2020 and 2021 which has never been observed before. This was “helicopter” money taken from some sources out of the US economy, i.e. not generated in any economic activity, and considered as a part of the economy. In this post, we describe the unique properties of this transfer and explain the conflict between rGDPpc and u.   

One of the largest components of the (nominal) GDP is Personal Income, PI, which is published by the BEA. This parameter served as the main channel to pour the “helicopter” money into the US economy in 2020 and 2021. Among its constituent components, the PI contains “Personal current transfer receipts”, PCTR, which is a parameter including “Government social benefits to persons” as a major component. Figure 1 presents the evolution of the PI and PCTR since 1947. (Please notice the logarithmic income scale.) Figure 2 presents the evolution of these two parameters normalized to their respective levels in 1947. The PCTR share in the PI has been growing much faster than the PI itself. The surge in the PCTR’s share published for 2020 and 2021 has never been observed during the measurement period. One can also notice that the PI curve had a short-term fall in 2009 accompanied by a significant rise in the PCTR curve. This effect has a clear explanation – the unemployment benefits (a part of the PCTR) compensated for the surge in unemployment. In 2020 and 2021, there is no fall in the PI curve which is accompanied by a dramatic surge in the PCTR. This pattern means that the fall in the PI induced by a dramatic increase in the unemployment rate was overcompensated by the surge in PCTR. The PI in 2021 was 105% of the GDP in 2020! If real, such a configuration of the PI and GDP would mean the economic "Perpetual Motion Machine". 

Figure 3 presents the PCTR/PI ratio to illustrate the growth in the PCTR share since 1947. The spike in 2020 and 2021 is unprecedented. In 2008, the growth in PCTR was much smaller. Figure 4 stresses the difference between the government reaction in 2009 and 2020. The PI fell by approximately 400 billion dollars in 2009 as a reaction to the Great Recession. The PCTR was increased by approximately 100 billion dollars in 2008 and 2009 relative to the 2007 level. This was an economic reaction to the recession despite the dangerous situation later called the Great Recession. The growth between 2010 and 2019 was not accompanied by an increase in the PCTR. There were other channels to pump money into the economy and galvanize it. In 2020, one could expect a much deeper fall in the PI than that in 2009. The PCTR was used to avoid such a fall and one can see that the PI annual increment grew instead. The same situation was observed in 2021. 

In 2008, the rise had economic reasons and was accompanied by a drop in real GDP per capita described by a long-term linear relationship. In 2020, the surge in u was non-economic and was not accompanied by a proportional fall in the real GDP per capita. The difference in reaction is explained by the government transfer of a few trillion dollars. The decrease in u between 2009 and 2019 was driven by economic growth. The drop in 2021 is also caused by a 9% spike in real GDP per capita.

  

Figure 1. The evolution of Personal Income, PI, and Personal Current Transfer Receipts, PCTR: 1947 to 2021. Notice logarithmic scale.

Figure 2. The evolution of Personal Income and Personal Current Transfer Receipts normalized to their respective values in 1947. Notice the surge in 2020 and 2021. 

Figure 3. The evolution of PCTR/PI ratio 

Figure 4. Annual increment of the PI and PCTR. Notice the difference in reaction in 2008 and 2020. 

Figure 5. The rate of unemployment between 1947 and 2021. The largest annual rises were observed in 2008 (to 9.3 from 5.8 in 2007) and in 2020 (to 8.1 from 3.7 in 2019).