Typically, my musings in these columns are an attempt at showing what I see happening in our American coronavirus economy. A look beyond what’s seen in social media feeds and websites. An examination of if-then. It’s an effort to try to shine a light on the layers of the economic onion typically shrouded by a colorful outer skin. Economic nuance of the American economy can lead to a jaundiced perspective, and you can understand quickly from peeling the layers of our Vidalia named Capitalism that though sweet by appearance, it can indeed make you cry.
This week, however, I hope you will take this column as a call to action. See, our economy is comfortably nestled in the back seat of Thelma and Louise’s 1966 blue Ford Thunderbird. However, we’re nearing the end of expanded Unemployment Insurance (UI), to the tune of $600 per week for some 14M people, as of July 31st. The effective end date is one week sooner due to cutoff dates with state unemployment office benefit distribution software. Congress has the power of the purse and the ability to either extend those benefits or increase them. They could issue new stimulus checks, too. But Congress and the executive branch have been largely silent on fiscal policy actions since the passage of the CARES Act in late March, taking a wait and see approach. And, since unemployment rates have dropped over the past two months — regardless of the fidelity of the data — they’re even less inclined to act. That places our ride in the Thunderbird at a climactic moment, idling while facing the lip of the Grand Canyon. By doing nothing, Congress hits the gas pedal.
“Melodramatic symbolism, don’t you think,” I can hear you asking. Consider this: That additional $600 per week has gone towards food, housing, and local sales. The 7.5% increase in June retail sales that people like to point out? It’s because of that expanded UI. Since so much of the UI and stimulus checks have gone towards housing, losing that economic support would be hugely injurious. Combine the loss of expanded UI with the expiration of moratoriums on rent and housing, and the potential for evictions and foreclosures points towards disaster. Without people paying mortgages, or without renters paying rent so landlords can pay mortgages, we’re back to what we saw in 2008.
“Yeah, but we have Dodd-Frank.” Yes, but mortgage backed securities are still a significant component of municipal bonds and retirement funds. Credit Default Swaps were insurance on those bonds, and you may have thought we got rid of those too. But when the product works for a bank, and the marketing is bad, what do you do? Simply change the name — 2008’s CDS is 2020’s Bespoke Tranche Opportunity.
The Federal Reserve has done its part. Jay Powell, chairman of the Fed, and the Federal Open Market Committee (FOMC) have moved mountains to ensure credit flows within the economy by funding the repurchase market, moved to ensure cities and counties are solvent by backing municipal bonds, and arguably created the moral hazard of backstopping risk (which encourages bad corporate behavior) by guaranteeing corporate exchange traded funds and bonds. Just this past Friday, the Fed added non-profits to its “Main Street Lending” program. They’ve slashed the federal funds rate to 0.25%. They can’t do much more. Powell himself has argued that fiscal policymakers (read: Congress) needs to take action as well to ensure what nascent recovery we have continues.
How heavy has the virus’s hand rested on the scale of late? 1.3M people filed for first time unemployment for the week ending July 10th, the 17th week in a row that number has been over 1M. Continuing claims were at 17.3M. A concerning part of where those numbers mesh with the future is that big banks delivered their 2nd quarter earnings this past week, and while their returns were greater than analysts predicted since banks bet on the stock market rebound, those same banks have an eerie gaze cast towards an ominous horizon. They’re afraid consumers won’t be able to pay them back because we’re in the middle of a pandemic-induced recession. What money households have is going to go towards a roof over their head, food on the table, and keeping the lights on. Any consumer debt is going to be paid last, and banks know that. The US’s six biggest banks added roughly $36B to their reserves of late, anticipating future loan losses due to a wobbly labor market and household incomes. This past week, five bank executives, four of them CEOs, shared their concerned economic look forward, both for their companies and the world of finance, which they summed up as “uncertain.”
We face these demand-side concerns amid an economic recovery that is losing what steam it may have had. Restaurants worked within the pandemic restrictions their states placed on them, focused on pop-ups, take-out, and delivery, and are beginning to eek out some revenue. Some states allow restaurants to open to 50% capacity — but that’s not a long-term solution. Show me a restaurant able to operate at 50% of its dining room capacity, and I’ll show you a middle class household able to get by on 50% of its income. Now, with states regressing because they opened back up too quickly, those economic green shoots are withering.
State budgets are suffering too. People stayed home and spent less — there went the sales tax revenue. Millions of people lost their jobs — there went the income tax revenue. At the same time, states paid more for Medicaid roles to help the sick and unemployment claims to help the jobless. States got some help from the federal government, rainy day funds, and expanded unemployment benefits and relief checks — which in turn went back into the state income tax stream. The Tax Policy Center estimates states finished their last fiscal year with a total of a $34B shortfall and project a $80B shortfall on top of that for fiscal year 2021. States will have to raise taxes and / or lower expenditures. Fear not: the lender of last resort, the Federal Reserve, has set up a new borrowing program for states, but so far, only Illinois has taken advantage of it.
And the virus? The leading economic indicator? First, a snapshot: on Sunday, July 12th alone, Germany (population 80.2M) had 159 new coronavirus cases, but Florida (population 21.5M) had 15,300. The American response speaks for itself: 3.41M people have been infected with the virus — that’s more than 1% of the US population. More than 133,000 Americans have died due to Covid-19; were those the number of people lost in war in the same amount of time, the sanity of our strategy, tactics, and involvement would be a part of a furious debate. We have no choice but to be involved with the pandemic, but our strategy has been largely absent and our tactics have been haphazardly applied and observed. How do you expect to recover when there is no cohesive national strategy? How do you expect a 50 state patchwork response with little coordination to work when one governor has to utilize his wife’s South Korean heritage to negotiate the receipt of testing kits?
This is not a medical or biological column, but I seek to inform how those sciences affect our economy. So what if 1% of the population has been infected? So what if 133,000 people have died? Most have recovered, right? But for everyone who perishes, 19 will require hospitalization. That’s time lost, income lost, and medical debt potentially accrued, to say nothing of the long-term personal health effects (that we do not know yet) or the mental health of an individual either.
Adaptation is crucial both scientifically and economically. As long as we’re thumbing our nose at Adam Smith — who would let businesses go bankrupt, bailouts be damned — we might as well go full Keynesian, with direct assistance from the federal government to the individual. True demand-side economics. Do what New Zealand did: quarantine everyone for four weeks (that’s two cycles for the virus to present itself), grant a moratorium on rent and mortgages for three months, and pay everyone 80% of their salary. As for the virus? We don’t know what it will do long term. We do know that masks, distance, and good hygiene prevent its spread.
Were this crisis originally a financial problem, as the Great Recession was, I wouldn’t argue for government action. Let the businesses in trouble flop — that’s how better things come about, not by propping up what doesn’t work. “Too big to fail” is a lie. Is anyone irreparably harmed that Bear Stearns went bankrupt? Anyone in pain over Lehman Brothers stock going to $0.00? No. Build the social safety net so those who fall victim to the actions of some C-suite scofflaw don’t lose their homes, and let businesses fail.
But this crisis is not originally a financial problem. It’s a biological one that kills people if they show up to work. If it doesn’t kill them, they transmit it to an exponential number of others, and many will require hospitalization. Soldering together new avenues of financial connectivity is necessary in this economy to protect what exists writ large and allow for a shift to a new work and interaction culture. That’s why these moves by the Fed — and one hopes Congress — are so crucial. So call your reps and urge them to pass legislation extending benefits. Because without extended assistance from Congress, our blue 1966 Thunderbird of an economy may very well head into the chasm of the Grand Canyon.