Contemplating the (No Deal) Cliff

The recovery package cliff, that is. DeutscheBank research outlines what they think is likely (baseline) and what a no-deal means for disposable personal income.

Source: Ryan, et al. “Outlook for consumers,” Deutsche Bank research, August 19, 2020.

What does this mean for disposable personal income? Holding constant other components (about $4021 billion SAAR), here’s what it looks like in the two scenarios.

Figure 1: Disposable personal income (blue), disposable personal income assuming DB baseline of Phase IV fiscal package $1.5-$2 trn and no other changes in other components (dark blue open triangle), disposable personal income assuming no deal and no other changes in other components (solid blue triangle). Source: BEA, DB, Ryan et al., (2020), author’s calculations.

What happens to consumption then depends on (1) the marginal propensity to consume out of disposable income, and (2) the sensitivity consumption to both household wealth, and to uncertainty, with the former having a positive impact, the latter a negative. Here’s the evolution of the two variables, up to the most recent data.

Figure 2: Household net worth, end-of-quarter, billions of Ch.2012$ (blue, left log scale), Economic Policy Uncertainty index (brown, right scale). Household wealth deflated using personal consumption expenditure deflator. Source: Federal Reserve Flow of Funds, BEA,, author’s calculations.

What will happen to consumption, given the uncertainty regarding parameter stability (who knows what the MPC will be in the aggregate? The benefit cuts will weight on low and middle income consumers heavily, who have a higher MPC, but account for a smaller share of overall consumption), and wealth elasticity, and the impact of uncertainty — of all types, not just policy uncertainty. What we do know is that holding all else constant, a drop in household income will exert a depressing effect on consumption ceteris paribus. Note, the multiplier effect is not contained in the calculations in the table.





32 thoughts on “Contemplating the (No Deal) Cliff

  1. Barkley Rosser

    I am not going to forecast specific numbers, but this DB projection is certainly reasonable regarding the outcome with no deal, and no deal so far seems to be what we are getting. I note that along with Menzie I signed a petition with many other professional economists calling for a deal, and one that specifically would provide substantial aid to states and local governments, who are facing serious financial problems and due to their balanced budget rules and the near impossibility of raising taxes will probably be laying off lots of people in the case of no deal.

    it is my impression that Trump and his Chief of Staff Mark Meadows, think they can blame the Dems in Congress for the consequences of no deal, with Meadows having “blown up” the negotations two weeks ago I think it was, according to all sources, with SecTreas Mnuchin supposedly trying to cut a deal as he did several times earlier in the year. But Trump and Meadows saw Trump’s “executive actions” of two weeks ago as a substitute that would both work and be used to bash the Dems. But it is now clear that his actions are doing nothing and they are now all but forgotten, and assuming indeed that Q3 does turn out badly as increasingly seems likely, they are just plain stupid not to understand that for better or worse, fairly or unfairly, voters hold presidents responsible for the state of the economy in an election, not Congress or anybody else.

    1. rjs

      a week or so ago i got a one question telephone survey call that asked if i felt that the Democrats were deliberately sabotaging the economy to make Trump look bad before the election….

    2. Barkley Rosser

      Washington Post had a front page story today on how the actions by Trump have not delivered the goods. Exactly one state, Arizona, has begun paying unemployed an extra $300 per month. Montana and Kentucky might, but have not yet. No companies are going along with the the supposed deferral of fica taxes. Regarding halting evictions, only housing with FHA mortgages have been put on an order to slow them down, which are a small minority of what is out there. It said nothing about the student loan deferments, but that is not a big deal anyway. So, indeed, there is almost nothing coming out of those actions, but there is no sign of any renewal of negotiations with the Dems in Congress in sight either.

  2. 2slugbaits

    Despite the recent drop in unemployment between June and July, the number of folks who returned to the labor force barely budged. We’re still about 4.7M lower than a year ago. Given that the pandemic is likely to be with us for a very long time this drop in the labor force could be a new way of life that we’ll have to accept. Many of those people (mostly women) may never reenter the labor force.

    We’ve got problems with both blades of the supply-and-demand scissors. Demand is weak because of various insecurities; job insecurity and health insecurity. But the supply side is also weakening. For lots of reasons labor will probably become less productive. And businesses will be reluctant to invest in new capital if demand is weak. Technology and innovation could also take a hit as workers become more physically isolated. A steep price to pay for having bars opening up in May.

    1. The Rage

      I sorta doubt it. Viruses run out of gas. The whole point of lockdowns, restrictions and mask mandates is to save a few hundred thousand lives. If no vaccines, then go back to normal and let it play itself out. It’s the most grisley solution, but necessary to end the crisis. Watch the star trek tng episode time squared.

      1. 2slugbaits

        Viruses “run out of gas” when the infectivity time is very short. Typically that means people die quickly before they have a chance to infect others.

        1. Dr. Dysmalist

          Thank you, 2slugs, for your response to another analysis that’s a millimeter wide and a nanometer deep. He’s been reading too much “Dick” “Stryker”.

        2. The Rage

          Well?????? if we get 1-2 millions infections a week, it will burn out by winter. Crisis over.

        3. Moses Herzog

          If I remember correctly SARS was like this. The people I was around at that time were very melodramatic about it (while at the same time being extremely sloppy about personal precautions and enforcement of transmittal precautions that weren’t directly tied to their job security). This is one of (but not all) the reasons I initially didn’t take COVID-19 as seriously as I should have. I kept thinking of it (like late January, early February) in my mind as similar to SARS. When I first found out about SARS, it was LONG before Chinese started getting melodramatic about it. Probably the sharpest guy I met in China (and not just because his English was stellar) asked me if I had heard about it over VOA or NPR (this was like 2002 I think??). He had started out as a Law major and switched to English in his college years. One of the sharpest guys I ever met in my life. When he mentioned it to me, and no one else was discussing it at an old “Cadres” school (that still had some leftovers from the school’s glory days) it perked my ears up for sure.

          The attitude towards COVID-19 (specifically mask wearing) would drastically change overnight if we saw higher percentage numbers of people dying in the 20–45 age range. I feel this is the main reason for the casual American attitude towards the virus.

          1. Baffling

            The main reason for the “casual” attitude is that the nation has far more selfish [email protected]$ than i ever realized. Folks who simply dont care if they infect or kill another fellow human being.

          2. Moses Herzog

            Just to clarify, when I said “SARS was like this” I was referencing the last part of 2slugbaits’ comment~~ “people die quickly before they have a chance to infect others.”

      2. Ulenspiegel

        “I sorta doubt it. Viruses run out of gas. The whole point of lockdowns, restrictions and mask mandates is to save a few hundred thousand lives. If no vaccines, then go back to normal and let it play itself out.”

        Without lockdown you would infect ~250 million US citizens within two years, you would overburden your hospitals and you would therefore observe an IFR of ~1%, i.e. we are talking about 2 million deaths.

        Your arguments is wrong by one order of magnitude. Slow learner?

        1. Willie

          The death rate is currently higher than 1%. That is just a percentage of identified cases though. If it is a half percent fatal and 70% of Americans get infected, that is a lot of dead Americans. Including at least a few here. Seems like a lousy idea to me.

          1. Ulenspiegel

            “The death rate is currently higher than 1%.”

            please, I used as referenec the infection fatality rate, which is the interesting number and which is strictly speaking not really dependent on testing of living people. 🙂

            The IFR is indeed in the range of 0.4% – 0.8%, that with sufficient ICU capacity.

  3. Moses Herzog

    Did commenter AS notice that Trading Economics has 1630k on their August nonfarm payroll forecast?? At least one reference point there, I’m guessing IHS would have one soon. Outside of other fine tuning measures, what commenter AS might do is average or take a number in the range between your own number crunching and IHS Markit’s forecast number (sliding it downward if theirs is lower than yours, sliding it upward if IHS’s is higher than yours.

    1. AS

      Hi Moses,
      I noticed the forecast at 1,418, but can’t remember if I saw Trading Economics at 1,630.

      My forecast may be far off this month, given the and Trading Economics’ forecasts.
      I am still coming-up with a negative forecast of -190. I may need to forfeit my software after this month.
      I had to enter my forecast as of August 20. So too late to make any adjustments.
      Last month I entered a forecast for the FRED game at 1,543 compared to actual of 1,763.

      I found a crowd source forecasting website:
      The current forecast for non farm payroll for August is 578.

      1. Moses Herzog

        @ AS
        I wonder if you should think about studying “R” program, or even Gretl as 2slugbaits has suggested to me. You never have to worry about forfeiting that “R” software. I hate to rat myself out, but I think there is a pretty good chance you are sharper than I am, and I am certain you have a better work ethic than me (my biggest problem learning “R”). You strike me as not a 2-3 year hobbyist on this stuff, but the guy who is playing with his Lionel (or American Flyer??) electric train set clear into his octogenarian years. Why not learn a FREE program (that you never have to forfeit) when you know you’re going to be following this stuff a long time??

        1. AS

          HI Moses,
          I own the software, so just jesting. However, it will be discouraging to be far off the mark on the forecast for the change in non farm payroll. I can often get close to the consensus, so it is confusing to be so far from the consensus this month on the change in non farm payroll, especially when the curve fit on the model I used is very close to past values.

          Eviews is far easier to use than “R”.

          Did get a Lionel train for Christmas 1950, so not yet an octogenarian, but close.

        1. AS

          Thanks for the links.
          Regarding the first link in which the writer shares correlations among variables. Looking at the ratio of dlog (ICSA/CCSA), there is a correlation of -0.90 with the ratio(-1) and dlog(PAYEMS) and a correlation of 0.87 between d(WEI) and dlog(PAYEMS). What I like about using the ratio of dlog(ICSA/CCSA) and d(WEI) is that ICSA is a weekly data series as is WEI and both precede the release of PAYEMS. Depending upon the lagging of the ratio of ICSA/CCSA, you may need to forecast CCSA, especially if you use a mixed frequency forecast model.
          For the past few months averaging a couple models, the curve fit and actual have been close to actual PAYEMS using the above regressors:
          Actual 133,028
          Curve fit 133,005

          Actual 137,819
          Curve fit 137,914

          Actual 139,582
          Curve fit 139,192

          Regarding the second link, IHS requires a subscription to access its data series PMI.

  4. pgl

    More disgusting and dangerous lies from Trump:

    President Donald Trump on Saturday suggested that his own FDA is making it difficult for drug companies to enroll people in clinical trials for vaccines and therapies to treat Covid-19, part of a “deep state” plot to hinder his re-election prospects.
    “Obviously, they are hoping to delay the answer until after November 3rd,” the president tweeted, tagging FDA Chief Stephen Hahn. “Must focus on speed, and saving lives!“
    The president did not provide any evidence to support the accusation.
    Trump also tweeted that many doctors disagree with the FDA’s decision to revoke its emergency use authorization of hydroxychloroquine and chloroquine for treating coronavirus, a move made more than two months ago. The agency pulled the authorization after several randomized, controlled clinical trials showed no benefit from the drugs.
    Sounds familiar: This is the second time in a week that Trump has accused FDA scientists of purposely hindering the coronavirus response.
    The president on Wednesday blamed government scientists for slow-walking convalescent plasma, a safe but unproven therapy, for political reasons. In that case, the FDA decided against authorizing emergency use of the plasma after scientists at the National Institutes of Health warned the clinical-trial data was still thin.
    Trump has also repeatedly touted hydroxochloroquine, citing “many doctors” who believe the malaria drug is effective against Covid-19, despite numerous clinical trials that show it has no effect.

  5. macroduck

    Based on the interactive electoral vote map at, Biden has a pretty good lock on 278 votes, 8 more than needed to win the presidency, with 91 votes still undecided. If Biden were to win half the undecided votes (rounded down to be conservative), he’d win 323 electoral votes. That’s not quite an Obama-sized win, but better than Shrub. That is a big advantage for Trump to overcome.

    Meanwhile, 270 has the Senate as a dead heat. If that is the actual result and Biden wins, Schumer displaces Moscow Mitch. A Republican majority in the Senate is all that can prevent the overturning of radical right-wing laws and the passage of middle-muddle laws that the public is likely to favor.

    September is a critical month in this election because of a high number of expected early voters. That leaves little time for Republicans to come to terms with Democrats on an economics package. Meadows seems not to care. Trump surely does. He doesn’t care about the budget, though he obviously prefers that the non-rich do poorly.

    From a longer-term perspective, handing over power after tanking a recovery gives Biden and Democrats an easier starting point to show economic gains. So both for this election and the next, tanking the recovery is not in Republican electoral interests. A public which hands Trump a shellacking would probably be less prone to object to jailing him than a public that produced a close finish. Unless Trump is not thinking clearly (I mean that in Trump terms, not normal terms), he should want to dump Meadows and get back to the table with Democrats.

    No sign so far, though, that Trump is unhappy with Meadows. So either I’m an idiot, Trump’s an idiot (in Trump terms, not normal terms) or some information is missing.

    1. Barkley Rosser

      I agree Biden is in the lead, but nobody should underestimate how high the levels of uncertainty are on many fronts between now and Nov. 3. Anything can still happen, and everybody should remember that the period of short term memory is two weeks, with most people tending to focus heavily on what has happened in the most recent two weeks. That was why James Comey’s reopening of the silly email investigation of Hillary Clinton 11 days before the 2016 election was so devastating. There is no way we can predict what might happen in the two weeks prior to Nov. 3.

      BTW, this was my line in 2016.

      1. Willie

        And it’s the intelligent line in 2020. There’s a whole lot of snowflake on display whenever Trump opens his yap these days, but anything that can happen, will happen.

    2. Moses Herzog

      @ macroduck
      My immediate off the cuff thought on the latter part of your comment is, that it is highly unlikely donald trump goes to prison for any of his many crimes, and if the orange creature does face prison time, it will be somewhere in the jurisdiction of New York.

      These are not my sentimental wishes, these are statements of what I individually view as pragmatic foreseeing. BTW, this (my) view assumes donald trump loses the election (which I gauge at a 40% chance at this moment) which obviously increases that chance the orange creature gets serious prison time. i.e. “Even if it loses, its chances of going to prison are small”

      1. baffling

        “Even if it loses, its chances of going to prison are small”
        curious, does this also extend to his family and close associates (not including the ones already in prison)?

        1. Willie

          My take is that if he loses, he will whine, sue, and make an enormous mess. Which the Supreme Court will shut down in a reasonable amount of time. Then he will make as many messes as possible in the lame duck period leading up to January 20. 2021. He will resign with a week to go to get a blanket pardon from Pence. And, before that, he will provide blanket pardons for his family members and a few others. Everyone else will get kicked to the curb.

        2. Moses Herzog

          @ baffling
          My thoughts on trump’s family and friends prison time are less definitive. But one I might mention is Steve Bannon on his fraud charges related to the southern border “wall”. How do you pardon a crime which hasn’t come to a conclusion in the courts yet?? How do you pardon someone who hasn’t been found guilty yet?? Unless the court proceedings go relatively quickly I don’t see how Bannon weasels out of that one. Happy to be educated by any lawyers out there that my perception on that is wrong, or someone like a Neal Katyal popping into comments and informing us of a rough approximation of how that would normally go. Katyal probably saves those grand observations for his MSNBC employers.

          1. Barkley Rosser

            Gerald Ford pardoned Richard Nixon for any crimes associated with Watergate that he might be charged with committing, ans quite a few of his associates did go to jail. Of course, many people think that Ford’s pardon was key to Carter narrowly defeating him in 1976. So, indeed, one can be pardoned for something one has not yet been charged with doing.

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