Let’s suppose you get a windfall gain of $25,000. What should you do with it? Well, heck, we don’t know. We’re just economists, not financial advisers like our IBJ colleague Mickey Kim.
First a definition: What is a windfall? Our old-fashioned Oxford Reference Dictionary a la 1986 defines it as: 1. A fruit blown to the ground because of the wind; or 2. An unexpected piece of good fortune, especially a sum of money acquired. The key point: It is out-of-the blue and not likely to be repeated.
A major contribution Milton Friedman made to economics was his observation that most people don’t spend as much out of their windfall gains as they do out of increases in income that are more permanent. In economic jargon, windfall gains are transitory income. They are unlike a permanent increase in one’s income from a promotion or a raise in base salary. Those add to what economists identify as permanent income. It ends up, most people sock away much of their transitory windfall as they prudently recognize they are likely to encounter future “negative” windfalls (or negative transitory income) from accidents, legal troubles or uninsured property damages.
Fast forward to the first quarter of 2022. Around the country, federal COVID spending—financed by massive federal deficits—has led to state and local governments having adequate and, in many cases, surplus funds. A one-time windfall. Of course, this is every incumbent politician’s dream—a financial surplus that can be spread among voters who will hopefully return the favor in the next election.
We notice that, as to this pleasant question of how to distribute the windfall funds, politicos are predictably falling into one of two camps. Those to the left are calling for big, new, bold initiatives—for example, permanent reductions in tuition at state universities. Those to the right are calling for reductions in tax rates for their constituents. We are skeptical of both.
Just as it is probably not prudent for a private household to take out a mortgage on a lake home as result of a $25,000 windfall, it is not prudent for state or local governments to enact permanent programs or tax cuts because of COVID-induced surpluses. One-time rebates? Sure. One-shot grant? OK. But to paraphrase Adam Smith: What is prudence in the conduct of a household can scarcely be folly in that of a state or local government. Hopefully, our elected officials are listening.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.