A Shut-Down Economy Waits for the Doctors to Let it Go Back to Work

In mid-March, 211,000 Americans applied for unemployment insurance, about the number that reflects normal job changes, and early in March 54% of small businesses said they were hiring. One week later, new applications for unemployment insurance soared to 3.3 million. Last week, just when private and commercial rents came due, that record number doubled, to 6.6 million, bringing to just short of 10 million the number of workers who report they have lost paychecks in just two weeks, and the unemployment rate to about 10%.

America lost more jobs in the past two weeks than in the 18 months of the Great Recession (8.7 million). The number of newly idled exceeds the entire population of London. More shops are shuttered than at any point during the previous two recessions. The 113-month consecutive streak of job creation went down in flames. America, until very recently a growing economy that was the envy of the world, is closed until its doctors decide it is well enough to re-open.

No surprise that Washington is abuzz with talk of a new relief package, even before the print has dried on the CARES (Coronavirus Aid, Relief, and Economic Security) Act $2.3 trillion package, $6 trillion counting 10-to-1 leverage by the Fed on its $454 billion share of the package. And before a single dollar has found its way to the laid-off workers and small businesses.

One package being mooted comes from House Speaker Nancy Pelosi. First, she would increase the sums contained in the $2.3 billion CARES package. Then, a permanent expansion of the welfare state – on the list bailouts for (mostly union) pension plans, expanded health-care coverage. And infrastructure projects that “expand jobs immediately” — improve water supply and broadband access for lower-income Americans. Finally, Pelosi would roll back Trump-created provisions that limit the amount of state and local taxes that wealthy Americans can deduct from their federal income tax. Although Democrats have always argued that increasing the disposable incomes of the wealthy does not increase total demand, she now says that the tax saving would increase spending and jobs. More likely, her plan would lower the carrying cost of multi-million dollar condos, and force poorer taxpayers to make up for the revenue lost by the federal government.

The Speaker claims her program will attract bipartisan support. Probably not, since she is threatening another impeachment try – an “after-action review” by a newly created coronavirus committee with subpoena power. Pelosi charges the President with responsibility for many of the virus-induced deaths, and, drawing on an iconic phrase from the Nixon impeachment investigation, wants to know “What this President knew and when did he know it?” Also, drawing on another bit of history, she wants the committee to mimic then-senator Harry Truman’s 1940 investigation of government contracting with arms manufacturers in the run-up to WWII, and monitor the use of funds being dispersed pursuant to the CARES relief act, alert to Trump-family conflicts of interest.

Not to be outdone, Trump tweeted that he plans a new infrastructure programme that “Should be VERY BIG & BOLD.” Specifically he has in mind $2 trillion to be spent on ‘”shovel-ready projects.” Barack Obama’s $800 billion stimulus package in 2009 was also directed at “thousands” of such projects. He later chuckled, “Shovel-ready was not as shovel-ready as we expected.”

This President, never one to shy from deficits, now joins leading Democrat economist, former Treasury Secretary Larry Summers, in pointing out that with interest rates at zero, it costs the government nothing to borrow money, so why not borrow and borrow and spend and spend. No less an authority that James Bullard, president of the St. Louis Federal Reserve Bank, lends some support for trillions more borrowing. “We are taking it on at very low interest rates” that will “probably stay very low for quite a while. … It is a big country. We can carry 10% more debt. It is not ideal but … if there ever was a time when you wanted to do something like this, now is that time.” Not quite Modern Monetary Theory, but a step in that direction. Recall: MMT holds that debt can be increased until inflation rears its frightful head, at which time taxes can be raised, presumably by an as-yet-undiscovered set of fearless politicians unafraid of voter reaction to tax increases.

The lack of shovel-ready projects is only one reason infrastructure spending will not immediately expand jobs. Another is that NIMBY and environmental groups will go to court to stop roads from being built and airports from being modernized. Also, the work force does not consist of homogeneous, interchangeable parts. Millions of unemployed service staff from closed, empty hotels are not likely to lay down their brooms, laid-off waiters are not likely to lay down their spoons, all to don hardhats and grasp shovels to dig and build. With the permission of the trade unions that dominate the construction sector.

There are several other reasons for skepticism about the desirability of turning on new cash spigots. First, government agencies are hard-pressed to handle the disbursement of the already-approved $6 trillion; it will take some four weeks for the cash flow from the Treasury to reach its peak. Many banks (Citibank, Wells Fargo, Citizens, Truist Financial, US Bancorp and PNC among others according to the Financial Times) could not meet last Friday’s Treasury target for disbursing cash to individuals and small companies because they had not received government rules for recipient eligibility. Recipients who do not have bank accounts accessible by the Treasury will have to wait twenty weeks for paper checks, their landlords still longer to collect rents if indeed they can, and lenders to those landlords longer still.

Second, the day will come when interest rates rise, and by more than a little. The government will still be borrowing to cover trillion-dollar deficits. Lenders will seek higher interest rates to compensate for the risk that such borrowing will trigger inflation, devaluing the currency in which they will be repaid. Absent major tax increases, those payments will consume an unsustainable portion of current GDP.

Third, increased grants and loans designed to shore up demand will run into a problem – supply constraints, such as those that are causing the prices of medical supplies, including ventilators to soar. The economy is shut down – it cannot produce and distribute more goods if a stimulus increases spending power and demand. It is not impossible to spend money over the internet, but it is impossible to have a drink with friends at a closed bar, or to shop for a car without coming within six feet of an excited, hard breathing car salesman (auto sales down 30%), or to sell a house to someone who cannot come to see it, or to fly in a grounded plane to visit grandma in a residence not allowing visitors.

None of this is to deny that more will need to be spent before the economy returns to normal or, more precisely, the dead hand of the doctors is denied its monopoly of decision-making. The government has received requests totaling $600 billion from its various agencies. States that already have received $150 billion, facing significant drops in revenues from sales and income taxes, are asking, “more, please, sir”. Funds seem to be needed for more and better protective equipment for health care workers. And with Bank of America reporting on Friday that it had received and is reviewing 60,000 loan applications, totaling $6 billion, it is a safe guess that the $349 billion in forgivable loans for small businesses that retain their workers (the Paycheck Protection Program) will very quickly be drawn down, as will the $260 billion allocated to supplement existing unemployment benefits.

Capitalism as we knew it before the Chinese virus arrived is unlikely to survive unchanged. In return for loans and grants, the government quite sensibly demands power to limit executive compensation; to order companies dependent on it to strengthen their balance sheets by eliminating share buybacks; to require retention of unneeded workers and bar offshoring of jobs. It also is substituting the long arm of government for the invisible hand in allocating many crucial resources.

University of Michigan professor Erik Gordon said it best, “We went to bed as America and woke up the next morning looking like social democratic Europe.” This leftward lurch comes although the US macroeconomy now is in the hands of two capitalists, former Wall Streeters Steve Mnuchin and Fed chairman Jay Powell. The question now is whether we will permanently clothe capitalism in this new look or revert to its pre-virus, old-fashioned style.