There has been a new wave of despair among journalists in the last couple of weeks as several major news outlets, including the Los Angeles Times and McClatchy News Service, announced layoffs and/or pay cuts. The immediate cause is the coronavirus. Pandemics sharply reduce advertising opportunities, but the underlying model is clearly not viable for most news outlets.
There is a limited amount of money that businesses are willing to pay for web ads, which is now by far the largest form of distribution. This is especially the case when Facebook and Google can offer much better targeted advertising. Subscriptions can raise some money, but apart from the New York Times and a few other elite publications, this source of revenue will not go far in supporting the people who produce and edit content.
While the immediate problem of the coronavirus forced shutdown will eventually abate, the longer-term trends in the industry are not going away. Fewer and fewer journalists will be supported through the current model, leaving us ever more poorly served. We clearly need a new model.
A New Approach
Most of the thinking on a new model involves some sort of government subsidy to existing news outlets. This is likely a political non-starter, since it is almost inconceivable that Republicans would support papers like the New York Times or the Washington Post, much less more progressive outlets. Of course, few non-Republicans would be able to stomach tax dollars going to Fox News or some of the other looney outlets on the right.
It is also hard to justify from a moral standpoint. Why should the government entrench the current structure of the media? Maybe at some point in the past people thought that certain news outlets provided valuable content, and that made them profitable (or they just had good marketing), but what is the rationale for locking in this outcome with government dollars?
There is a way around this roadblock. Instead of having the government directly give money to news outlets, we can have the government give individual tax credits to people, who could then support the news outlet(s) of their choice. The model for this already exists: the charitable contribution tax deduction. (I discuss this in somewhat more detail in chapter 5 of Rigged [it’s free].)
With the charitable tax deduction, the government is effectively picking up the tab for 37 cents of each dollar of a rich person’s contribution to whatever charity they choose. If a rich person decides to give a million dollars to the local symphony, we give them $370,000 back on their taxes. The same is true if they give the money to a museum, or the Church of Scientology.
I picked the last one to make the obvious point that this subsidy is not necessarily going to an organization that many of us would think of as serving the common good. Perhaps we should be bothered by that, but in any case, we have been living for decades with a tax code that provides large subsidies to organizations that many of us would not approve of, without it become a major political issue.
An individual tax credit would work along the same lines as the charitable contribution deduction on income taxes, with some important differences. First, it would be a credit, let’s say $100 per person, that would be fully refundable. This means that every adult in the country would have the right to give $100, regardless of whether they owed taxes or not. This is far more progressive than the charitable contribution deduction, which overwhelming benefits high income people. This is in part because the value is larger for people in higher income tax brackets (it’s worth 37 cents on the dollar for people in the top bracket, versus 12 cents on the dollar for the bulk of the population in the 12 percent tax bracket). Also, only people who itemize can benefit from the deduction, and the vast majority of moderate and middle-income taxpayers do not itemize their deductions.
The second difference would be that it would be used for supporting journalism and other creative work and workers. This could mean writers of both fiction and non-fiction, musicians, moviemakers, and other people doing creative work. The reason for drawing the line broadly is that we don’t want the I.R.S. to be in the business of deciding who is doing journalism and who isn’t. If we draw the lines at creative work, we don’t have to get into arguments about whether a reporter with a political slant is still doing journalism. Also, all creative work has suffered in the Internet age, as it is very difficult to raise revenue from recorded music, videos, and other material when it can be transmitted at a near-zero cost over the web.
There will still be boundary questions, where it can be debated whether work can qualify as “creative,” but this is not likely to be a major problem. After all, someone could try to qualify as a tax-exempt religious institution by creating the “Church for Ripping Off the I.R.S.” Scams do happen, but they are not frequent enough to be a major problem.
We also will need an explicit system of registration, comparable to registering for 501(c) status as a tax-exempt organization. This would mean reporting to the I.R.S. an individual or organization’s status as a creative worker or an organization that supports creative work. It would require reporting what creative work a person claims to do or an organization supports. The I.R.S. would make no evaluation of the quality of the work, just as it does not attempt to evaluate the merits of a religion filing for tax-exempt status. The only issue would be one of fraud, where the I.R.S. could investigate whether a person or organization is actually engaged in doing or supporting the creative work they identified.
The other aspect to filing to be eligible to receive money through the tax credit system would be that the person and/or organization would be denied getting copyright protection for a substantial period of time, say 3-5 years. The logic here is that copyright monopolies are one way the government supports creative work. The tax credit is an alternative mechanism. People are entitled to getting support through whichever mechanism they choose, but not both.
The reason for having a waiting period between getting money through the tax credit system and getting it from copyright protection is to avoid people using the former system to establish a reputation and then cashing in from copyright protection. We do not want the tax credit system to be a farm system for writers, musicians, and other creative workers to work their way through before making it big-time in the copyright-protected system. If people want to start out in the tax credit system, they should likely expect to stay in the system.
The nice aspect of this provision is that it is entirely self-enforcing. Suppose that we have a 5-year ban on copyright protection, that a popular singer tries to get around by securing a copyright for songs recorded three years after their last payments through the tax credit system. Since it would be public record that they had been in the tax credit system three years earlier, anyone could freely copy and transfer the new songs in spite of the singer’s copyright. He would have no recourse, since the copyright was not legally issued. This requires no action from the government; it is simply not enforcing an improperly awarded copyright.[1]
Supporting Journalism and Creative Work in the Tax Credit System
Suppose we went the tax credit system route and chose the $100 level. With roughly 250 million people over age 18, this would imply $25 billion a year to support journalists and other creative workers. At an average annual pay of $100,000 a year, this would support 250,000 journalists and other creative workers. At an average pay of $50,0000, it would support 500,000 creative workers.
I once used this $50,000 figure in a talk and got many creative workers very angry at me, since they felt I was under-valuing their work with this number. There are two important points to remember here. First, many creative workers, such as musicians or writers, do this work part-time. In other words, they have day jobs. For these people, getting $50,000 a year for work they very much value would sound quite good.
The other point is that being in this system does not prevent creative workers from making money through other channels. Musicians could still get paid for live performances or teaching music. Writers could get paid for workshops. In fact, nothing prevents someone from even printing out books (or newspapers) and selling them at a profit. However, without copyright protection, they probably could not hope to make too much money going this route, since a large markup would lead others to enter the market and undercut their price.
From the standpoint of the individual taxpayer this system could be made very simple. Individuals could have the option to make their $100 contribution and then file for their refund on their tax form. They would only have to identify the recipient in the event of an audit. Alternatively, the I.R.S. could provide a number corresponding to every eligible recipient of the tax credit. The person would then indicate which individual(s) and/or organization(s) they wanted to receive their $100. This could be divided among as many recipients as the individual chose.
To benefit from the tax credit system, creative workers and organizations would have to promote themselves as being worthy of people’s contributions. For newspapers and television news outlets, they would have to make a case that they provide especially useful and important news or that they give a political slant that people should find appealing. Writers, musicians, and other creative workers would have to tout the merits of their work. Alternatively, organizations that support particular types of writing or music or other creative work would tout the great work they are currently supporting.
As with the current system, there is no guarantee that everyone who wants to do creative work would be able to find enough backers to support themselves. If not many people value a particular writer’s work or a musician’s music, then they may not be able to make a living under the tax credit system, just as is the case now.
And, there is no guarantee that the Los Angeles Times or any other news outlet would be able to maintain a full staff of reporters and editors under this system. That would depend on them convincing enough people of the merits of their work. That may trouble some people who want to ensure that such news outlets survive, but it is hard to see what case can be made if these outlets can’t convince enough people of the merits of their work.
Obstacles to the Tax Credit System: Politics and Simplicity
I have no illusions about the obstacles to implementing a tax credit system along these lines. A large segment of the political establishment (pretty much the whole Republican party) would be very happy if any sources of information other than Fox News disappeared. They would have zero problem if every newspaper in the country went under. Most of them don’t really care about the fate of other creative workers either. That is an enormous obstacle to any effort to having a new program intended to shore up reporting and boost creative work.
But there is also the obstacle that many people who do support independent reporting can’t get themselves to think beyond the current system. Many continue to believe that what we just need is direct government subsidies to the existing outlets, as though this would be politically feasible or even desirable. Looking to a whole new system is a step too far.
The proposal outlined here probably also suffers from its simplicity. I recall once having an extended exchange with a professor at a major university. I explained several times how the system worked and how it would be determined who would get how much money. He was still insistent that I needed a measure of clicks or some other unit of viewership to determine the money that outlets or individuals received. For some reason, he simply could not understand that people’s contributions were the sole determinant: end of story.
Anyhow, I have never heard a remotely compelling argument as to why a system along the lines I have outlined would not work. I get the political obstacles, but if someone says we don’t have a way of supporting journalism in the Internet Age, they just haven’t done much thinking on the issue.
[1] We also would need some rules to prevent simple types of fraud. For example, to prevent two people from trading their credits with each other, we could set a minimum level (say $3000) for someone to be able to get money through the system. People could still scam the system, but it would require a lot of effort for not much payoff.
There has been a new wave of despair among journalists in the last couple of weeks as several major news outlets, including the Los Angeles Times and McClatchy News Service, announced layoffs and/or pay cuts. The immediate cause is the coronavirus. Pandemics sharply reduce advertising opportunities, but the underlying model is clearly not viable for most news outlets.
There is a limited amount of money that businesses are willing to pay for web ads, which is now by far the largest form of distribution. This is especially the case when Facebook and Google can offer much better targeted advertising. Subscriptions can raise some money, but apart from the New York Times and a few other elite publications, this source of revenue will not go far in supporting the people who produce and edit content.
While the immediate problem of the coronavirus forced shutdown will eventually abate, the longer-term trends in the industry are not going away. Fewer and fewer journalists will be supported through the current model, leaving us ever more poorly served. We clearly need a new model.
A New Approach
Most of the thinking on a new model involves some sort of government subsidy to existing news outlets. This is likely a political non-starter, since it is almost inconceivable that Republicans would support papers like the New York Times or the Washington Post, much less more progressive outlets. Of course, few non-Republicans would be able to stomach tax dollars going to Fox News or some of the other looney outlets on the right.
It is also hard to justify from a moral standpoint. Why should the government entrench the current structure of the media? Maybe at some point in the past people thought that certain news outlets provided valuable content, and that made them profitable (or they just had good marketing), but what is the rationale for locking in this outcome with government dollars?
There is a way around this roadblock. Instead of having the government directly give money to news outlets, we can have the government give individual tax credits to people, who could then support the news outlet(s) of their choice. The model for this already exists: the charitable contribution tax deduction. (I discuss this in somewhat more detail in chapter 5 of Rigged [it’s free].)
With the charitable tax deduction, the government is effectively picking up the tab for 37 cents of each dollar of a rich person’s contribution to whatever charity they choose. If a rich person decides to give a million dollars to the local symphony, we give them $370,000 back on their taxes. The same is true if they give the money to a museum, or the Church of Scientology.
I picked the last one to make the obvious point that this subsidy is not necessarily going to an organization that many of us would think of as serving the common good. Perhaps we should be bothered by that, but in any case, we have been living for decades with a tax code that provides large subsidies to organizations that many of us would not approve of, without it become a major political issue.
An individual tax credit would work along the same lines as the charitable contribution deduction on income taxes, with some important differences. First, it would be a credit, let’s say $100 per person, that would be fully refundable. This means that every adult in the country would have the right to give $100, regardless of whether they owed taxes or not. This is far more progressive than the charitable contribution deduction, which overwhelming benefits high income people. This is in part because the value is larger for people in higher income tax brackets (it’s worth 37 cents on the dollar for people in the top bracket, versus 12 cents on the dollar for the bulk of the population in the 12 percent tax bracket). Also, only people who itemize can benefit from the deduction, and the vast majority of moderate and middle-income taxpayers do not itemize their deductions.
The second difference would be that it would be used for supporting journalism and other creative work and workers. This could mean writers of both fiction and non-fiction, musicians, moviemakers, and other people doing creative work. The reason for drawing the line broadly is that we don’t want the I.R.S. to be in the business of deciding who is doing journalism and who isn’t. If we draw the lines at creative work, we don’t have to get into arguments about whether a reporter with a political slant is still doing journalism. Also, all creative work has suffered in the Internet age, as it is very difficult to raise revenue from recorded music, videos, and other material when it can be transmitted at a near-zero cost over the web.
There will still be boundary questions, where it can be debated whether work can qualify as “creative,” but this is not likely to be a major problem. After all, someone could try to qualify as a tax-exempt religious institution by creating the “Church for Ripping Off the I.R.S.” Scams do happen, but they are not frequent enough to be a major problem.
We also will need an explicit system of registration, comparable to registering for 501(c) status as a tax-exempt organization. This would mean reporting to the I.R.S. an individual or organization’s status as a creative worker or an organization that supports creative work. It would require reporting what creative work a person claims to do or an organization supports. The I.R.S. would make no evaluation of the quality of the work, just as it does not attempt to evaluate the merits of a religion filing for tax-exempt status. The only issue would be one of fraud, where the I.R.S. could investigate whether a person or organization is actually engaged in doing or supporting the creative work they identified.
The other aspect to filing to be eligible to receive money through the tax credit system would be that the person and/or organization would be denied getting copyright protection for a substantial period of time, say 3-5 years. The logic here is that copyright monopolies are one way the government supports creative work. The tax credit is an alternative mechanism. People are entitled to getting support through whichever mechanism they choose, but not both.
The reason for having a waiting period between getting money through the tax credit system and getting it from copyright protection is to avoid people using the former system to establish a reputation and then cashing in from copyright protection. We do not want the tax credit system to be a farm system for writers, musicians, and other creative workers to work their way through before making it big-time in the copyright-protected system. If people want to start out in the tax credit system, they should likely expect to stay in the system.
The nice aspect of this provision is that it is entirely self-enforcing. Suppose that we have a 5-year ban on copyright protection, that a popular singer tries to get around by securing a copyright for songs recorded three years after their last payments through the tax credit system. Since it would be public record that they had been in the tax credit system three years earlier, anyone could freely copy and transfer the new songs in spite of the singer’s copyright. He would have no recourse, since the copyright was not legally issued. This requires no action from the government; it is simply not enforcing an improperly awarded copyright.[1]
Supporting Journalism and Creative Work in the Tax Credit System
Suppose we went the tax credit system route and chose the $100 level. With roughly 250 million people over age 18, this would imply $25 billion a year to support journalists and other creative workers. At an average annual pay of $100,000 a year, this would support 250,000 journalists and other creative workers. At an average pay of $50,0000, it would support 500,000 creative workers.
I once used this $50,000 figure in a talk and got many creative workers very angry at me, since they felt I was under-valuing their work with this number. There are two important points to remember here. First, many creative workers, such as musicians or writers, do this work part-time. In other words, they have day jobs. For these people, getting $50,000 a year for work they very much value would sound quite good.
The other point is that being in this system does not prevent creative workers from making money through other channels. Musicians could still get paid for live performances or teaching music. Writers could get paid for workshops. In fact, nothing prevents someone from even printing out books (or newspapers) and selling them at a profit. However, without copyright protection, they probably could not hope to make too much money going this route, since a large markup would lead others to enter the market and undercut their price.
From the standpoint of the individual taxpayer this system could be made very simple. Individuals could have the option to make their $100 contribution and then file for their refund on their tax form. They would only have to identify the recipient in the event of an audit. Alternatively, the I.R.S. could provide a number corresponding to every eligible recipient of the tax credit. The person would then indicate which individual(s) and/or organization(s) they wanted to receive their $100. This could be divided among as many recipients as the individual chose.
To benefit from the tax credit system, creative workers and organizations would have to promote themselves as being worthy of people’s contributions. For newspapers and television news outlets, they would have to make a case that they provide especially useful and important news or that they give a political slant that people should find appealing. Writers, musicians, and other creative workers would have to tout the merits of their work. Alternatively, organizations that support particular types of writing or music or other creative work would tout the great work they are currently supporting.
As with the current system, there is no guarantee that everyone who wants to do creative work would be able to find enough backers to support themselves. If not many people value a particular writer’s work or a musician’s music, then they may not be able to make a living under the tax credit system, just as is the case now.
And, there is no guarantee that the Los Angeles Times or any other news outlet would be able to maintain a full staff of reporters and editors under this system. That would depend on them convincing enough people of the merits of their work. That may trouble some people who want to ensure that such news outlets survive, but it is hard to see what case can be made if these outlets can’t convince enough people of the merits of their work.
Obstacles to the Tax Credit System: Politics and Simplicity
I have no illusions about the obstacles to implementing a tax credit system along these lines. A large segment of the political establishment (pretty much the whole Republican party) would be very happy if any sources of information other than Fox News disappeared. They would have zero problem if every newspaper in the country went under. Most of them don’t really care about the fate of other creative workers either. That is an enormous obstacle to any effort to having a new program intended to shore up reporting and boost creative work.
But there is also the obstacle that many people who do support independent reporting can’t get themselves to think beyond the current system. Many continue to believe that what we just need is direct government subsidies to the existing outlets, as though this would be politically feasible or even desirable. Looking to a whole new system is a step too far.
The proposal outlined here probably also suffers from its simplicity. I recall once having an extended exchange with a professor at a major university. I explained several times how the system worked and how it would be determined who would get how much money. He was still insistent that I needed a measure of clicks or some other unit of viewership to determine the money that outlets or individuals received. For some reason, he simply could not understand that people’s contributions were the sole determinant: end of story.
Anyhow, I have never heard a remotely compelling argument as to why a system along the lines I have outlined would not work. I get the political obstacles, but if someone says we don’t have a way of supporting journalism in the Internet Age, they just haven’t done much thinking on the issue.
[1] We also would need some rules to prevent simple types of fraud. For example, to prevent two people from trading their credits with each other, we could set a minimum level (say $3000) for someone to be able to get money through the system. People could still scam the system, but it would require a lot of effort for not much payoff.
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The Washington Post is always telling us that debt, especially government debt is bad, very bad. It’s not quite sure why or how, but debt is definitely bad.
We got the latest confused entry from the Post’s debt cult today, warning us about some “tipping point” that we are at risk of passing. The notion of a tipping point on government debt had its shining hour when a paper by Harvard professors Carmen Reinhart and Ken Rogoff purported to show that when a country’s debt-to-GDP ratio crossed 90 percent, it led to sharply slower growth. While this paper was used to justify austerity in countries around the world, it turned out that the result was driven by an Excel spreadsheet error, as shown in a paper by University of Massachusetts economists Thomas Herndon, Michael Ash, and Robert Pollin. When the error was corrected, the data showed no 90 percent tipping point.
This piece acknowledges that the United States is not likely to see a tipping point, where it can’t sell its debt:
“That scenario has afflicted numerous smaller economies. But such an outcome seems less likely for the United States, given the primacy of the dollar in the world economy and the country’s long track record of relative economic stability.”
While the U.S. dollar is still the preeminent currency in transactions and as a reserve currency, this is not a necessary condition for it being able to issue large amounts of debt without creating a crisis. Japan’s debt to GDP ratio is more than twice as high as in the U.S. and it had near zero interest rates and near zero inflation, just before the coronavirus crisis.
Japan does enter in this piece as a debt horror story:
“Japan has been stuck in an endless loop of disappointing growth, low interest rates and mounting debt, and the United States could face a similar future.”
Actually, Japan’s per capita growth since the bursting of its stock and real estate bubble in 1990 has not been hugely different from growth in the United States. Japan’s per capita growth rate has averaged 1.4 percent over the last three decades, compared to 2.3 percent in the United States.
But Japan also reduced the length of its average work year by 16 percent over this period, while it fell just 3.0 percent in the United States. In effect, Japan is choosing to take the benefits of productivity growth largely in the form of increased leisure rather than increased income. This does imply slower GDP growth, but there is no economic reason to prefer GDP growth to increased leisure.
The piece then gets into what can only be described as non-sequiturs:
“An era of perpetually ultralow interest rates distorts the economy by eliminating the traditional market discipline that discriminates between worthy investments and unprofitable ones. If money is virtually ‘free’ for many years — as it has been since 2008 — even bad ideas can attract financing.”
“As the United States once again turns to debt to rescue the economy, it is locking in a future of lower growth. The national credit card is being used largely to stop today’s financial bleeding, rather than for investments — in the medical system, infrastructure, and education — that would boost future growth.”
The standard economics argument against the problem of high deficit and debt is that it will lead to higher interest rates. We have been seeing extraordinarily low interest rates ever since the Great Recession. Now, this is supposed to be bad because it allows for investment projects of little value to go forward. This makes zero sense. Having projects little value move forward is bad if there is a better use for the resources. Implicitly, there is no better use, which is why interest rates are low.
On the second point, in a period of low interest rates, there is no reason why the government should not be spending money on investments in the medical system, infrastructure, and education. There is not any economic obstacle if the country has idle resources, only the political obstacles due to needless deficit fears promoted by news outlets like the Washington Post.
The piece does rightly raise the risk of inflation, which is real. However, any inflation in the months ahead will be primarily the result of the fact that large sectors of the economy, such as restaurants, hotels, and airlines, are likely to have sharply reduced capacity even after the shutdown period is over. They are also likely to see rising costs due to the precautions needed to slow the spread of the coronavirus.
It is also striking that patent and copyright rents are not mentioned once in this piece. The granting of these monopolies is an alternative mechanism to direct spending, which the government uses to pay for things it wants done. For example, right now it is paying Gilead Science to do testing on remdesivir as a treatment for the pandemic with the promise of a monopoly on the drug if it proves effective.
The rents from these monopolies, which are effectively privately imposed taxes, dwarfs the interest burden of the debt. It is over $400 billion a year in the case of prescription drugs alone.
The debt complaints move on to the corporate sector. While debt burdens in the corporate sector are high, this should not be surprising given very low interest rates which encourage companies to take on debt. After-tax profits are also at historically high levels as a share of GDP. Furthermore, stock prices remain at historically high price-to-earnings ratios even after the plunge earlier due to the pandemic. This means that many companies can easily issue stock if they need money to meet their debt obligations.
It’s true that not all companies are in this situation, but so what? If a company that is otherwise viable, is facing debt service problems, it is likely that another company will take them over. Many companies, such as the airlines, also operate just fine through periods of bankruptcy. If a company is not otherwise viable, then the problem is not the debt, the problem is the company is not viable.
Finally, the piece tells us we should be worried about household debt, which is also near record-high levels relative to income. Here again the key point is that interest rates are low. As a result, the financial obligation ratio, which measures debt payments and rent relative to income, is near a four-decade low. It’s true that many people may face eviction or foreclosure in the months ahead, but that will be because they have lost their jobs, not because of high debt burdens.
In short, this piece is desperately trying to create a problem where one does not exist. Having large chunks of the U.S. economy shut down because of a pandemic is a really huge problem. The debt that is created as a result is not.
The Washington Post is always telling us that debt, especially government debt is bad, very bad. It’s not quite sure why or how, but debt is definitely bad.
We got the latest confused entry from the Post’s debt cult today, warning us about some “tipping point” that we are at risk of passing. The notion of a tipping point on government debt had its shining hour when a paper by Harvard professors Carmen Reinhart and Ken Rogoff purported to show that when a country’s debt-to-GDP ratio crossed 90 percent, it led to sharply slower growth. While this paper was used to justify austerity in countries around the world, it turned out that the result was driven by an Excel spreadsheet error, as shown in a paper by University of Massachusetts economists Thomas Herndon, Michael Ash, and Robert Pollin. When the error was corrected, the data showed no 90 percent tipping point.
This piece acknowledges that the United States is not likely to see a tipping point, where it can’t sell its debt:
“That scenario has afflicted numerous smaller economies. But such an outcome seems less likely for the United States, given the primacy of the dollar in the world economy and the country’s long track record of relative economic stability.”
While the U.S. dollar is still the preeminent currency in transactions and as a reserve currency, this is not a necessary condition for it being able to issue large amounts of debt without creating a crisis. Japan’s debt to GDP ratio is more than twice as high as in the U.S. and it had near zero interest rates and near zero inflation, just before the coronavirus crisis.
Japan does enter in this piece as a debt horror story:
“Japan has been stuck in an endless loop of disappointing growth, low interest rates and mounting debt, and the United States could face a similar future.”
Actually, Japan’s per capita growth since the bursting of its stock and real estate bubble in 1990 has not been hugely different from growth in the United States. Japan’s per capita growth rate has averaged 1.4 percent over the last three decades, compared to 2.3 percent in the United States.
But Japan also reduced the length of its average work year by 16 percent over this period, while it fell just 3.0 percent in the United States. In effect, Japan is choosing to take the benefits of productivity growth largely in the form of increased leisure rather than increased income. This does imply slower GDP growth, but there is no economic reason to prefer GDP growth to increased leisure.
The piece then gets into what can only be described as non-sequiturs:
“An era of perpetually ultralow interest rates distorts the economy by eliminating the traditional market discipline that discriminates between worthy investments and unprofitable ones. If money is virtually ‘free’ for many years — as it has been since 2008 — even bad ideas can attract financing.”
“As the United States once again turns to debt to rescue the economy, it is locking in a future of lower growth. The national credit card is being used largely to stop today’s financial bleeding, rather than for investments — in the medical system, infrastructure, and education — that would boost future growth.”
The standard economics argument against the problem of high deficit and debt is that it will lead to higher interest rates. We have been seeing extraordinarily low interest rates ever since the Great Recession. Now, this is supposed to be bad because it allows for investment projects of little value to go forward. This makes zero sense. Having projects little value move forward is bad if there is a better use for the resources. Implicitly, there is no better use, which is why interest rates are low.
On the second point, in a period of low interest rates, there is no reason why the government should not be spending money on investments in the medical system, infrastructure, and education. There is not any economic obstacle if the country has idle resources, only the political obstacles due to needless deficit fears promoted by news outlets like the Washington Post.
The piece does rightly raise the risk of inflation, which is real. However, any inflation in the months ahead will be primarily the result of the fact that large sectors of the economy, such as restaurants, hotels, and airlines, are likely to have sharply reduced capacity even after the shutdown period is over. They are also likely to see rising costs due to the precautions needed to slow the spread of the coronavirus.
It is also striking that patent and copyright rents are not mentioned once in this piece. The granting of these monopolies is an alternative mechanism to direct spending, which the government uses to pay for things it wants done. For example, right now it is paying Gilead Science to do testing on remdesivir as a treatment for the pandemic with the promise of a monopoly on the drug if it proves effective.
The rents from these monopolies, which are effectively privately imposed taxes, dwarfs the interest burden of the debt. It is over $400 billion a year in the case of prescription drugs alone.
The debt complaints move on to the corporate sector. While debt burdens in the corporate sector are high, this should not be surprising given very low interest rates which encourage companies to take on debt. After-tax profits are also at historically high levels as a share of GDP. Furthermore, stock prices remain at historically high price-to-earnings ratios even after the plunge earlier due to the pandemic. This means that many companies can easily issue stock if they need money to meet their debt obligations.
It’s true that not all companies are in this situation, but so what? If a company that is otherwise viable, is facing debt service problems, it is likely that another company will take them over. Many companies, such as the airlines, also operate just fine through periods of bankruptcy. If a company is not otherwise viable, then the problem is not the debt, the problem is the company is not viable.
Finally, the piece tells us we should be worried about household debt, which is also near record-high levels relative to income. Here again the key point is that interest rates are low. As a result, the financial obligation ratio, which measures debt payments and rent relative to income, is near a four-decade low. It’s true that many people may face eviction or foreclosure in the months ahead, but that will be because they have lost their jobs, not because of high debt burdens.
In short, this piece is desperately trying to create a problem where one does not exist. Having large chunks of the U.S. economy shut down because of a pandemic is a really huge problem. The debt that is created as a result is not.
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The subhead of Bret Stephens’ latest column tells readers “there should be no big-pharma haters in pandemics.” The point is that researchers at Gilead Sciences, one of the biggest pharmaceutical companies, are working tirelessly on the testing of remdesivir, which at the moment is the most promising treatment for the coronavirus. Stephens’ column focuses on Diana Brainard, the lead researcher on the project. Somehow the fact that Dr. Brainard is apparently a dedicated researcher is supposed to mean that we should love Big Pharma.
Stephens is apparently unaware of the debates over access to medicine over the last three decades, which is understandable, given that he is a conservative columnist at the New York Times. This battle has nothing to do with whether Big Pharma had dedicated researchers, the issue is the ability of Big Pharma to get government-granted patent monopolies over life-saving medicines, especially when much of the research was paid for by the government, which is very much the case with remdesivir.
We do need to pay people to do the work that Dr. Brainard is doing, but that doesn’t require patent monopolies. Economists have discovered that many people will work for money. The government could just pay Dr. Brainard and her team for her work. This would have the great advantage that not only would it mean remdesivir would be available as a cheap generic, but all the findings along the way would be open-sourced for researchers around the world to see and comment on. This would likely be a huge help in moving forward with the research.
So yes, we absolutely should hate Big Pharma in this pandemic. Its quest for patent monopolies has almost certainly slowed down the effort to find effective treatments and vaccines. And by the way, there is a huge amount of money at stake with patent monopolies in prescription drugs, likely over $400 billion a year (more than $4,000 per household). This is more than five times the size of the annual food stamp budget that gets Mr. Stephens’ conservative friends so upset.
The subhead of Bret Stephens’ latest column tells readers “there should be no big-pharma haters in pandemics.” The point is that researchers at Gilead Sciences, one of the biggest pharmaceutical companies, are working tirelessly on the testing of remdesivir, which at the moment is the most promising treatment for the coronavirus. Stephens’ column focuses on Diana Brainard, the lead researcher on the project. Somehow the fact that Dr. Brainard is apparently a dedicated researcher is supposed to mean that we should love Big Pharma.
Stephens is apparently unaware of the debates over access to medicine over the last three decades, which is understandable, given that he is a conservative columnist at the New York Times. This battle has nothing to do with whether Big Pharma had dedicated researchers, the issue is the ability of Big Pharma to get government-granted patent monopolies over life-saving medicines, especially when much of the research was paid for by the government, which is very much the case with remdesivir.
We do need to pay people to do the work that Dr. Brainard is doing, but that doesn’t require patent monopolies. Economists have discovered that many people will work for money. The government could just pay Dr. Brainard and her team for her work. This would have the great advantage that not only would it mean remdesivir would be available as a cheap generic, but all the findings along the way would be open-sourced for researchers around the world to see and comment on. This would likely be a huge help in moving forward with the research.
So yes, we absolutely should hate Big Pharma in this pandemic. Its quest for patent monopolies has almost certainly slowed down the effort to find effective treatments and vaccines. And by the way, there is a huge amount of money at stake with patent monopolies in prescription drugs, likely over $400 billion a year (more than $4,000 per household). This is more than five times the size of the annual food stamp budget that gets Mr. Stephens’ conservative friends so upset.
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For all the suffering caused by the pandemic, one important positive effect is that it may lead to clearer thinking about government debt and deficits. To Congress’s credit, it has focused on dealing with the problem of sustaining the country through a period in which much of the economy is shut down, rather than worrying about the large deficit it will run this year, as well as the amount it is adding to the national debt. (I strongly suspect that this would not be the situation if a Democrat was in the White House. In that case, most Republicans would likely be making angry speeches feigning outrage over the burden that Obama, Biden, etc. was imposing on our children and grandchildren.)
Anyhow, the story on the deficit and debt are both simpler and more complicated than is generally imagined. The basic question with the deficit is, are we pushing the economy too hard? Specifically, the issue is whether the additional demand created by a government deficit is exceeding the economy’s ability to produce goods and services, leading to inflation.
There is an intermediate step in this story. If the Federal Reserve Board correctly sees excessive demand leading to inflationary pressures, then it may act to head off actual inflation by raising interest rates. In that case, the problem of a large budget deficit would be high interest rates in the economy. High interest rates will reduce demand by lowering housing construction, public and private investment, and consumption. High interest rates will also raise the value of the dollar, reducing net exports. This reduction in demand prevents inflation, but means that we will have less investment for the future.
Of course, the Fed may also raise interest rates out of a mistaken belief in inflationary risks, in which case the Fed was the cause of high interest rates, not the fact that the economy was being pushed beyond its limits. That was likely the case in 2018 when the Fed raised interest rates four times. As it turned out, there was very little evidence of accelerating inflation and wage growth peaked in early 2019, in spite of the extraordinarily low unemployment rate last year.
Anyhow, the immediate concern with large budget deficits is whether they are leading to too much demand in the economy, and therefore generating either high inflation or high interest rates. Ordinarily, a $2 trillion boost to demand (roughly 10 percent of GDP) would lead to a serious problem of inflation, especially with an economy operating at 3.6 percent unemployment. However, tens of millions of workers are now losing their paychecks, so consumption demand would be collapsing without the additional spending and tax cuts. The purpose of this rescue plan is to allow families to more or less keep themselves whole through a period in which large segments of the economy are shut down.
There is actually a possibility that this could lead to inflation, as people are competing for a relatively limited supply of goods and services. Thus far, there have been shortages of fairly narrow categories of items, such as toilet paper, cleaning supplies, and other items seeing unusually high demand as a result of the pandemic.
Many stores have looked to ration sales, rather than jack up prices, limiting the inflation coming from these sectors. However, that could change if the shutdowns are prolonged or if other links in the supply chain began to fray. For example, if we see a big falloff in the number of truckers willing to drive through the crisis, we may see widespread shortages of a wide range of items. That could lead to a serious problem with inflation.
However, even in this case, the budget deficit is not really the cause of the problem. We may face shortages of food, drugs, and all sorts of other items, which would result in higher prices because the government is giving people money to buy these things, but the shortages would still be there without the budget deficits. In that case, large numbers of people who are now getting unemployment insurance and other forms of income support in the shutdown period, simply would not be able to buy anything, thereby eliminating the demand and price pressure.
The additional spending in the rescue package is essentially about allowing people to pay for food, rent, and other necessities until they are able to return to work. We don’t really have any alternative unless we are prepared to see mass impoverishment. The extent to which this leads to serious problems with inflation will depend on our ability to maintain the flow of essential goods and services through a shutdown period. If we can do that, then the large deficit will not be a problem.
The Debt Burden on Our Children
The other part of the big deficit story is that we are adding more than $2 trillion to the debt that our children and grandchildren will have to pay off, or so the story goes. While that may sound scary, there are several points to keep in mind.
First, this is not a case of our children paying the money to us, it is a case of some of our children paying money to other of our children. At some point, everyone who is alive today will be dead. At that point, the interest will be paid to whoever happened to inherit the bonds. So, the burden created by the debt is not really our kids paying interest on government bonds to us, the problem is that most of our kids will be paying interest to the heirs of Bill Gates, Jeff Bezos, and other wealthy people. That is not an inter-generational problem, it is an intragenerational problem.
It is also important to keep our eye on the ball. The burden of the debt, insofar as there is one, is the amount of money that we are paying out each year in interest to service the debt. In spite of our high debt-to-GDP ratio, that figure is actually quite low now, around 1.5 percent of GDP. That compares to an interest burden of more than 3.0 percent of GDP in the early and mid-1990s.
The reason the burden is so low is that interest rates are low. Also, much of the debt is held by the Fed. In that case, the Treasury is paying interest on bonds to the Fed, which then rebates it to the Treasury. That debt imposes no burden whatsoever.
An interesting guidepost in this story is Japan, which now has a debt-to-GDP ratio of close to 250 percent. Its interest burden is essentially zero, as investors actually pay the government to lend it money.
Of course, interest rates could rise in the United States, but even then, we have to ask the reason. Suppose the inflation rate jumps from roughly 2.0 percent to 4.0 percent and interest rates also increase by two percentage points. In that case, we would be paying more nominal interest, but the real value of the debt would be getting eroded at the rate of 4.0 percent annually, rather than 2.0 percent annually. The actual burden of our interest payments would be little changed.
The second aspect of this issue is that our deficit hawks are very selective on what burdens they want policymakers to focus on. The accrual of debt is only one way that the government commits us to future payments.
When it gives out patent and copyright monopolies it is also committing us to future payments, as the holders of these monopolies will be extracting rents for many years. These rents can be thought of like privately collected taxes. In effect, we are allowing Pfizer to collect a tax on drugs and Microsoft to collect a tax on software as payment for the research and development expenses they incurred to develop these products.
These rents dwarf the size of our interest payments on the debt. In the case of prescription drugs alone, the gap between the price we pay with patents and other protections and the free market price is close to $400 billion a year, or 1.8 percent of GDP. If we add in the rents on medical equipment, computer software, fertilizers, pesticides, and other chemicals, and various other areas, it likely exceeds $1 trillion annually, or 4.5 percent of GDP.
We can argue about the merits of the patent and copyright systems (I am not a fan, see Rigged [it’s free] chapter 5), but there is literally no logical basis for excluding the burdens created as a result of government-granted patent and copyright monopolies when talking about the burden of the government debt. The decision by deficit hawks not to include these rents in calculating future burdens can only be explained by political motivations, where they don’t want to bring huge rents earned by large corporations into the discussion.
Finally, if we are seriously talking about the burdens we impose on our children, we have to talk about the whole society we pass down. If we pay off the national debt but do nothing to slow global warming, our children and grandchildren have every right to hate us and laugh in our face if we tell them about how we paid off the debt.
Basically, the debt tells us nothing about generational equity. That is a simple point that it is long past time that we learned, and then we can teach our children.
For all the suffering caused by the pandemic, one important positive effect is that it may lead to clearer thinking about government debt and deficits. To Congress’s credit, it has focused on dealing with the problem of sustaining the country through a period in which much of the economy is shut down, rather than worrying about the large deficit it will run this year, as well as the amount it is adding to the national debt. (I strongly suspect that this would not be the situation if a Democrat was in the White House. In that case, most Republicans would likely be making angry speeches feigning outrage over the burden that Obama, Biden, etc. was imposing on our children and grandchildren.)
Anyhow, the story on the deficit and debt are both simpler and more complicated than is generally imagined. The basic question with the deficit is, are we pushing the economy too hard? Specifically, the issue is whether the additional demand created by a government deficit is exceeding the economy’s ability to produce goods and services, leading to inflation.
There is an intermediate step in this story. If the Federal Reserve Board correctly sees excessive demand leading to inflationary pressures, then it may act to head off actual inflation by raising interest rates. In that case, the problem of a large budget deficit would be high interest rates in the economy. High interest rates will reduce demand by lowering housing construction, public and private investment, and consumption. High interest rates will also raise the value of the dollar, reducing net exports. This reduction in demand prevents inflation, but means that we will have less investment for the future.
Of course, the Fed may also raise interest rates out of a mistaken belief in inflationary risks, in which case the Fed was the cause of high interest rates, not the fact that the economy was being pushed beyond its limits. That was likely the case in 2018 when the Fed raised interest rates four times. As it turned out, there was very little evidence of accelerating inflation and wage growth peaked in early 2019, in spite of the extraordinarily low unemployment rate last year.
Anyhow, the immediate concern with large budget deficits is whether they are leading to too much demand in the economy, and therefore generating either high inflation or high interest rates. Ordinarily, a $2 trillion boost to demand (roughly 10 percent of GDP) would lead to a serious problem of inflation, especially with an economy operating at 3.6 percent unemployment. However, tens of millions of workers are now losing their paychecks, so consumption demand would be collapsing without the additional spending and tax cuts. The purpose of this rescue plan is to allow families to more or less keep themselves whole through a period in which large segments of the economy are shut down.
There is actually a possibility that this could lead to inflation, as people are competing for a relatively limited supply of goods and services. Thus far, there have been shortages of fairly narrow categories of items, such as toilet paper, cleaning supplies, and other items seeing unusually high demand as a result of the pandemic.
Many stores have looked to ration sales, rather than jack up prices, limiting the inflation coming from these sectors. However, that could change if the shutdowns are prolonged or if other links in the supply chain began to fray. For example, if we see a big falloff in the number of truckers willing to drive through the crisis, we may see widespread shortages of a wide range of items. That could lead to a serious problem with inflation.
However, even in this case, the budget deficit is not really the cause of the problem. We may face shortages of food, drugs, and all sorts of other items, which would result in higher prices because the government is giving people money to buy these things, but the shortages would still be there without the budget deficits. In that case, large numbers of people who are now getting unemployment insurance and other forms of income support in the shutdown period, simply would not be able to buy anything, thereby eliminating the demand and price pressure.
The additional spending in the rescue package is essentially about allowing people to pay for food, rent, and other necessities until they are able to return to work. We don’t really have any alternative unless we are prepared to see mass impoverishment. The extent to which this leads to serious problems with inflation will depend on our ability to maintain the flow of essential goods and services through a shutdown period. If we can do that, then the large deficit will not be a problem.
The Debt Burden on Our Children
The other part of the big deficit story is that we are adding more than $2 trillion to the debt that our children and grandchildren will have to pay off, or so the story goes. While that may sound scary, there are several points to keep in mind.
First, this is not a case of our children paying the money to us, it is a case of some of our children paying money to other of our children. At some point, everyone who is alive today will be dead. At that point, the interest will be paid to whoever happened to inherit the bonds. So, the burden created by the debt is not really our kids paying interest on government bonds to us, the problem is that most of our kids will be paying interest to the heirs of Bill Gates, Jeff Bezos, and other wealthy people. That is not an inter-generational problem, it is an intragenerational problem.
It is also important to keep our eye on the ball. The burden of the debt, insofar as there is one, is the amount of money that we are paying out each year in interest to service the debt. In spite of our high debt-to-GDP ratio, that figure is actually quite low now, around 1.5 percent of GDP. That compares to an interest burden of more than 3.0 percent of GDP in the early and mid-1990s.
The reason the burden is so low is that interest rates are low. Also, much of the debt is held by the Fed. In that case, the Treasury is paying interest on bonds to the Fed, which then rebates it to the Treasury. That debt imposes no burden whatsoever.
An interesting guidepost in this story is Japan, which now has a debt-to-GDP ratio of close to 250 percent. Its interest burden is essentially zero, as investors actually pay the government to lend it money.
Of course, interest rates could rise in the United States, but even then, we have to ask the reason. Suppose the inflation rate jumps from roughly 2.0 percent to 4.0 percent and interest rates also increase by two percentage points. In that case, we would be paying more nominal interest, but the real value of the debt would be getting eroded at the rate of 4.0 percent annually, rather than 2.0 percent annually. The actual burden of our interest payments would be little changed.
The second aspect of this issue is that our deficit hawks are very selective on what burdens they want policymakers to focus on. The accrual of debt is only one way that the government commits us to future payments.
When it gives out patent and copyright monopolies it is also committing us to future payments, as the holders of these monopolies will be extracting rents for many years. These rents can be thought of like privately collected taxes. In effect, we are allowing Pfizer to collect a tax on drugs and Microsoft to collect a tax on software as payment for the research and development expenses they incurred to develop these products.
These rents dwarf the size of our interest payments on the debt. In the case of prescription drugs alone, the gap between the price we pay with patents and other protections and the free market price is close to $400 billion a year, or 1.8 percent of GDP. If we add in the rents on medical equipment, computer software, fertilizers, pesticides, and other chemicals, and various other areas, it likely exceeds $1 trillion annually, or 4.5 percent of GDP.
We can argue about the merits of the patent and copyright systems (I am not a fan, see Rigged [it’s free] chapter 5), but there is literally no logical basis for excluding the burdens created as a result of government-granted patent and copyright monopolies when talking about the burden of the government debt. The decision by deficit hawks not to include these rents in calculating future burdens can only be explained by political motivations, where they don’t want to bring huge rents earned by large corporations into the discussion.
Finally, if we are seriously talking about the burdens we impose on our children, we have to talk about the whole society we pass down. If we pay off the national debt but do nothing to slow global warming, our children and grandchildren have every right to hate us and laugh in our face if we tell them about how we paid off the debt.
Basically, the debt tells us nothing about generational equity. That is a simple point that it is long past time that we learned, and then we can teach our children.
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Neil Irwin tells us there will be fundamental changes in the world economy as a result of the pandemic. While he repeats many things that are conventional wisdom, as is often the case, the conventional wisdom is not very wise.
First, the pandemic is supposed to teach us the dangers of having foreign sources of supply, as parts of our supply chain from China shut down when it was hard hit by the virus in December and January. While this is supposed to be a key takeaway from the pandemic, it makes little sense.
We have seen major factories shut down in the United States as a result of the pandemic, most recently a South Dakota processing plant that produces five percent of the nation’s retail pork. The United States does have a huge domestic market, so it can see shutdowns in certain segments and still likely get by without severe shortages, but smaller countries absolutely need diverse sources. And, even in the case of the United States, it is helpful to have access to producers worldwide rather than being forced to just rely on domestic sources, especially since the timing and severity of the pandemic have varied greatly across countries.
The real lesson from this episode is the importance of having large stockpiles of key medical gear. The U.S. did not have adequate stockpiles because of the negligence of its government, but this issue is independent of where the items are produced.
The piece also raises the issue of U.S. companies being reluctant to invest in China because of concerns over intellectual property theft. While this is an often-stated concern, most items, like prescription drugs, can be reverse engineered without great difficulty. The U.S. will be better able to limit China’s appropriation of items to which U.S. corporations have patent monopolies or related claims if it has agreements with China requiring it to respect these rules.
In the absence of such agreements, there is no reason that China should not make copies of items like prescription drugs, medical equipment, fertilizers, pesticides, computers, and software, to which U.S. companies have intellectual property claims, and sell them freely both on their domestic market and internationally. If the U.S. wants to protect the intellectual property claims of its corporations it will need more engagement with China, not less.
Finally, the piece does raise the importance of the dollar as the world’s major reserve currency. This is and has been a growing problem for the world economy, since it makes much of the world subject to the whims of the Federal Reserve Board and the U.S. administration. In the last crisis, dollar swap lines were extended to certain countries, and not others, for clearly political purposes. This is likely happening again today.
However, the issue here is not the importance of the dollar, but rather the reluctance of other major economic powers (e.g. the EU, Japan, and even China) to directly challenge U.S. policy. Given the erratic and arbitrary actions of the Trump administration, hopefully, they will get over this reluctance, but to date this has not been the case.
Neil Irwin tells us there will be fundamental changes in the world economy as a result of the pandemic. While he repeats many things that are conventional wisdom, as is often the case, the conventional wisdom is not very wise.
First, the pandemic is supposed to teach us the dangers of having foreign sources of supply, as parts of our supply chain from China shut down when it was hard hit by the virus in December and January. While this is supposed to be a key takeaway from the pandemic, it makes little sense.
We have seen major factories shut down in the United States as a result of the pandemic, most recently a South Dakota processing plant that produces five percent of the nation’s retail pork. The United States does have a huge domestic market, so it can see shutdowns in certain segments and still likely get by without severe shortages, but smaller countries absolutely need diverse sources. And, even in the case of the United States, it is helpful to have access to producers worldwide rather than being forced to just rely on domestic sources, especially since the timing and severity of the pandemic have varied greatly across countries.
The real lesson from this episode is the importance of having large stockpiles of key medical gear. The U.S. did not have adequate stockpiles because of the negligence of its government, but this issue is independent of where the items are produced.
The piece also raises the issue of U.S. companies being reluctant to invest in China because of concerns over intellectual property theft. While this is an often-stated concern, most items, like prescription drugs, can be reverse engineered without great difficulty. The U.S. will be better able to limit China’s appropriation of items to which U.S. corporations have patent monopolies or related claims if it has agreements with China requiring it to respect these rules.
In the absence of such agreements, there is no reason that China should not make copies of items like prescription drugs, medical equipment, fertilizers, pesticides, computers, and software, to which U.S. companies have intellectual property claims, and sell them freely both on their domestic market and internationally. If the U.S. wants to protect the intellectual property claims of its corporations it will need more engagement with China, not less.
Finally, the piece does raise the importance of the dollar as the world’s major reserve currency. This is and has been a growing problem for the world economy, since it makes much of the world subject to the whims of the Federal Reserve Board and the U.S. administration. In the last crisis, dollar swap lines were extended to certain countries, and not others, for clearly political purposes. This is likely happening again today.
However, the issue here is not the importance of the dollar, but rather the reluctance of other major economic powers (e.g. the EU, Japan, and even China) to directly challenge U.S. policy. Given the erratic and arbitrary actions of the Trump administration, hopefully, they will get over this reluctance, but to date this has not been the case.
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I wrote a piece last week giving some quick thoughts on the post-pandemic economy. I have a few more items to toss in the mix.
As I said in the last piece, I think many people will have money to spend and be anxious to spend it. For most people who kept their jobs, the $1,200 check from the government will be a pure bonus. Also, many of the unemployed will be kept whole or even come out somewhat ahead with the $600 supplement to regular benefits. (Remember, the median weekly wage for full-time workers is just $933, and many of those getting benefits were not working full-time prior to the crisis.)
Most people were not spending money on anything other than necessities during the crisis. Not only were people not going to stores, restaurants, and movies, they were also not buying cars and houses, both of which saw sharp drops in sales in March and are certain to see sharper falls in April.
This means that when we unwind the lockdowns, most likely sometime in May (I’m referring to the politics, not passing judgment as a public health expert) we will have a lot of people looking to make up for having gone two months or more without spending much money. An advantage of car and house sales is that they can generally be done in ways that are consistent with social distancing. Realtors and car dealers don’t have to come into direct contact with their clients and presumably can make do without a ceremonial handshake to seal a deal.
A surge in car sales and house sales will likely send factory demand booming, as auto manufacturers will soon see bloated inventories run down. House sales guarantee a big demand for appliances, like refrigerators and washing machines. Whether U.S. manufacturers are positioned to meet this demand (it will require maintaining safe working conditions in their factories) is an open question, but if they can’t meet the demand, it will lead to a surge in imports, when new supply sources can be found.
The potential backlogs here are likely to mean that sellers will have considerable pricing power, at least for a period of time. Other businesses are also likely to see capacity constraints, accompanied by higher costs. For example, stores will likely need to limit the number of people who enter and have someone at the door doing at least minimal testing (e.g. taking temperatures at the door and asking about contacts), in order to provide some assurance of safety. The capacity constraints will be worse insofar as many businesses do not reopen.
Insofar as restaurants are able to reopen, they will also need to do some checking and likely steer people to outdoor seating and/or have customers much more widely spaced than normal. In the same vein, airlines are likely to fly with limited capacity, for example, Delta is not selling middle seats.
To me, this looks like a story where we see substantial price hikes in many parts of the economy, as businesses adjust to a world where the pandemic is somewhat under control, but far from completely contained. The growth figures for the third quarter are likely to show a sharp rebound from a second-quarter plunge, but still leave us well-below pre-crisis levels of output. This will still leave us with a serious slump and high unemployment, but a real problem with inflation.
We can work through this period if the Fed allows the economy the time to adjust to new circumstances, but there is no guarantee it will be so accommodating. I should add that it easy to envision a far worse scenario if Congress does not approve additional funds for the small business loan program and does not approve enough money for state and local governments to avoid major austerity measures. We should know whether they have come through in these areas in a week or so.
I wrote a piece last week giving some quick thoughts on the post-pandemic economy. I have a few more items to toss in the mix.
As I said in the last piece, I think many people will have money to spend and be anxious to spend it. For most people who kept their jobs, the $1,200 check from the government will be a pure bonus. Also, many of the unemployed will be kept whole or even come out somewhat ahead with the $600 supplement to regular benefits. (Remember, the median weekly wage for full-time workers is just $933, and many of those getting benefits were not working full-time prior to the crisis.)
Most people were not spending money on anything other than necessities during the crisis. Not only were people not going to stores, restaurants, and movies, they were also not buying cars and houses, both of which saw sharp drops in sales in March and are certain to see sharper falls in April.
This means that when we unwind the lockdowns, most likely sometime in May (I’m referring to the politics, not passing judgment as a public health expert) we will have a lot of people looking to make up for having gone two months or more without spending much money. An advantage of car and house sales is that they can generally be done in ways that are consistent with social distancing. Realtors and car dealers don’t have to come into direct contact with their clients and presumably can make do without a ceremonial handshake to seal a deal.
A surge in car sales and house sales will likely send factory demand booming, as auto manufacturers will soon see bloated inventories run down. House sales guarantee a big demand for appliances, like refrigerators and washing machines. Whether U.S. manufacturers are positioned to meet this demand (it will require maintaining safe working conditions in their factories) is an open question, but if they can’t meet the demand, it will lead to a surge in imports, when new supply sources can be found.
The potential backlogs here are likely to mean that sellers will have considerable pricing power, at least for a period of time. Other businesses are also likely to see capacity constraints, accompanied by higher costs. For example, stores will likely need to limit the number of people who enter and have someone at the door doing at least minimal testing (e.g. taking temperatures at the door and asking about contacts), in order to provide some assurance of safety. The capacity constraints will be worse insofar as many businesses do not reopen.
Insofar as restaurants are able to reopen, they will also need to do some checking and likely steer people to outdoor seating and/or have customers much more widely spaced than normal. In the same vein, airlines are likely to fly with limited capacity, for example, Delta is not selling middle seats.
To me, this looks like a story where we see substantial price hikes in many parts of the economy, as businesses adjust to a world where the pandemic is somewhat under control, but far from completely contained. The growth figures for the third quarter are likely to show a sharp rebound from a second-quarter plunge, but still leave us well-below pre-crisis levels of output. This will still leave us with a serious slump and high unemployment, but a real problem with inflation.
We can work through this period if the Fed allows the economy the time to adjust to new circumstances, but there is no guarantee it will be so accommodating. I should add that it easy to envision a far worse scenario if Congress does not approve additional funds for the small business loan program and does not approve enough money for state and local governments to avoid major austerity measures. We should know whether they have come through in these areas in a week or so.
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A Washington Post piece that noted the lack of disclosure requirements in the current round of bailouts referred to efforts to force disclosures in the last bailout. It only noted a suit by Bloomberg to force the Fed to make disclosures:
“During the global financial crisis, the Federal Reserve refused to turn over to reporters the records of some of its emergency bank lending. Bloomberg, the media company, sued for their release and, in a case that went to the Supreme Court, won three years later.”
There were also major disclosures as a result of an amendment that Bernie Sanders got attached to the Dodd-Frank financial reform bill. Sanders’s amendment had the support of a number of very conservative Republicans, which together with more progressive Democrats gave Sanders the ability to force Dodd to include the amendment in the bill.
A Washington Post piece that noted the lack of disclosure requirements in the current round of bailouts referred to efforts to force disclosures in the last bailout. It only noted a suit by Bloomberg to force the Fed to make disclosures:
“During the global financial crisis, the Federal Reserve refused to turn over to reporters the records of some of its emergency bank lending. Bloomberg, the media company, sued for their release and, in a case that went to the Supreme Court, won three years later.”
There were also major disclosures as a result of an amendment that Bernie Sanders got attached to the Dodd-Frank financial reform bill. Sanders’s amendment had the support of a number of very conservative Republicans, which together with more progressive Democrats gave Sanders the ability to force Dodd to include the amendment in the bill.
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That’s for those of you who saw the Washington Post article telling us that we are committed to paying $893 billion over two years to the World Health Organization (WHO). If Trump moves to cut back or eliminate this funding it is not going to have a major impact on our budget situation.
On the plus side, if the U.S. cuts back support for the WHO, it may be better positioned to promote compulsory licensing of drugs produced by the U.S. pharmaceutical industry. This could radically reduce the prices paid for drugs by many developing countries. (European countries with large pharmaceutical companies are likely to continue to oppose compulsory licensing.)
That’s for those of you who saw the Washington Post article telling us that we are committed to paying $893 billion over two years to the World Health Organization (WHO). If Trump moves to cut back or eliminate this funding it is not going to have a major impact on our budget situation.
On the plus side, if the U.S. cuts back support for the WHO, it may be better positioned to promote compulsory licensing of drugs produced by the U.S. pharmaceutical industry. This could radically reduce the prices paid for drugs by many developing countries. (European countries with large pharmaceutical companies are likely to continue to oppose compulsory licensing.)
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When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.
The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.
The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.
While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.
The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.
The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.
From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).
Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.
(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)
Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends.
When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.
The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.
The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.
While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.
The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.
The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.
From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).
Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.
(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)
Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends.
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(This post first appeared on my Patreon page.)
We have a lot of economist type people telling us how awful the economy will be once we get through our near-term shutdown period. At the risk of being accused of unwarranted optimism, I am not sure I buy the pessimists’ story.
Before saying anything about the economy, we have to outline where we think our containment efforts are headed. I will throw out my story, which people here who know what they are talking about can correct.
Let’s assume that after two months we have the coronavirus reasonably well-contained. People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personal are no longer being worked to exhaustion and beyond.
At least as important, let’s assume that we have testing fairly well advanced so that we can quickly identify people with the disease and both quarantine them and test the people with whom they have been in contact.
We can also envision that we would be able to do some quick checks, that while not conclusive, should be able to substantially reduce the likelihood of an infected person entering a public place. To give an example, my wife and I visited a doctor’s office yesterday (not coronavirus related). We had our temperatures checked before we entered and were asked a series of questions about our own health and the people with whom we had been in contact.
This sort of testing is hardly foolproof, recently infected people generally won’t have fevers, and people may not be truthful about their health or their contacts, but this sort of simple check should screen out a substantial share of the people who are infected. I would also be fairly confident that we can develop better techniques over the period of the shutdown. Anyhow, checks of this sort should allow most businesses to reopen with the requirement that they have people stationed at the door whenever the business is open, so that in principle no one can enter without going through this sort of check.
Those pushing negative views on the post-pandemic economy generally highlight the situation of heavily indebted businesses that face bankruptcy. Clearly, there were many businesses that were heavily indebted prior to the crisis, although this burden was often exaggerated by those who focused on debt rather than interest burdens. We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate.
It is also wrong to imagine that bankruptcy is the end of the world. Businesses that are otherwise viable can and do operate through bankruptcies. (Most of our major airlines have been through at least one bankruptcy.) There will undoubtedly be a huge mess sorting out unpaid bills when the lockdown period ends (look to a boon for the accounting industry). It would be helpful if states (mostly a state issue) passed simplifying rules to cover loss-sharing over the shutdown period, but the idea that large numbers of businesses will be unable to reopen due to debt simply does not make sense.
Even apart from bankruptcy, a creditor has no interest in forcing an otherwise viable business to shut down. It is better for the business to be able to operate and allow the creditor to recover some of their debt than to shut it down and hope to get a few dollars from selling the scraps.
We have seen a lot of talk about how the plunge in the stock market will pose a huge blow to households and pension funds. Most households actually have little or no money in the stock market, but the important point in this discussion is that, even with the recent plunge, the market is still (April 2) roughly 17 percent above its level of five years ago. That is not a great return, but not too much worse than investors had a right to expect. So, the idea that the drop in the market is leaving everyone destitute does not make much sense. It essentially means that they don’t have as much money as they would like.
From the standpoint of households, most should come through a two-month shutdown period in pretty good financial shape. The rescue package will do a decent job keeping most people whole, through the loans to small businesses maintaining their payroll, the relatively generous unemployment benefits, and the $1,200 per person checks. There are many people who will fall through the cracks, most importantly undocumented workers, but the bulk of the workforce should have something close to their pre-crisis income over this period.
At the same time, their spending would have been quite restricted. They have not been able to go to restaurants, movies, travel, or spend on most other items, except bare necessities. If the economy can reopen in June, we are likely to see large numbers of people rushing to do the things they could not do for the prior two months.
This means that restaurants and stores are likely to be flooded with customers. This will also be the case with car dealers and appliance stores, as people will have put off major purchases through the shutdown period. Many businesses will have difficulty dealing with a big surge of customers since they have not retained their staff, and will be forced to hire and train new workers. We are also likely to see a burst of travel as people make up for the prior two months. Also, many conventions and business trips that were scheduled for the shutdown period will be rescheduled for the late summer and fall. On the morbid side, there will be many people who will want to visit with family members after the loss of a loved one.
Will this demand be enough to re-employ all the workers now being laid off? There clearly will be a major sorting out period, but I don’t think it is possible to reach any firm conclusions.
First, hopefully, most workers will have the option to return to their former employers. This will likely be the case where employers had the foresight to keep workers on their payrolls. In cases where they laid-off workers, when they reopen, most will likely be looking to hire roughly the same number of workers that they laid off.
The qualification is that many businesses may have found more efficient ways to do things. This is productivity growth, which is ordinarily a good thing, but perhaps not just now. Some businesses may also not reopen if they were already marginally profitable and/or the owner(s) were getting tired of running a business. On the flip side, if restaurants, stores, airports and other public places all have to hire workers to test and question people before they can enter, this will be a major new source of employment.
It is also likely that some people who were in the workforce in the pre-crisis period will decide not to come back to work. This is especially likely to be the case with older workers who were nearing retirement anyhow. There were 11.6 million employed people between the ages of 60 and 64 before the crisis and 10.8 million over age 65. If 5.0 percent of the former and 10.0 percent of the latter decide to leave the labor force, that would mean 1.7 million fewer potential workers than before the crisis.
I don’t have any simple way of determining how this nets out, but I think it’s important to realize that the stories of weak near recession or even depression economy are not well-founded. It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand. Hopefully, the Fed would move cautiously in its response, recognizing this as a one-time jump that will soon be eroded as more capacity on line. But Jerome Powell probably won’t be calling me for advice, and it’s possible to envision a stop-start scenario where the Fed zig zags on interest rates, responding to the immediate economic data.
Of course, we could see a much worse recovery scenario than I have outlined here, especially if we are unable to control the spread of the disease. If we still lack adequate testing two months from now, and we still see the number of cases spiraling out of control, then we would be seeing a much worse scenario. I have no expertise on the likelihood of the different paths of the pandemic, but I would hope the one I have outlined is at least plausible.
Anyhow, my main point here is that I don’t believe the folks predicting a bad recession following our period of shutdown have really thought through the picture carefully. This matters for policy now as we discuss plans for a new spending bill. Since we don’t know the economy will be suffering from a shortfall in demand, generic spending is not advisable at this point.
At the same time, there are needs that should be addressed. We certainly need to spend more ensuring adequate supplies of medical equipment, protective gear, and training more medical personal to help in the crisis. (In the last category, we can quickly train people to do mundane tasks like changing bedding and cleaning surfaces that will free up time for more highly-trained medical professionals.) State and local governments are seeing an unprecedented collapse in revenue at the same time they seeing an explosion in demand for their services. They need far more money than was appropriated in the last bill.
These should be our priorities. If we want to spend more, it should be in our areas where more spending would be valuable whether or not the economy needs stimulus, such as clean energy, child care, and conservation. But we definitely should not commit ourselves to large amounts of spending for the sake of spending. That definitely made sense in the 2008-2009 recession, it is not clear it does now.
(This post first appeared on my Patreon page.)
We have a lot of economist type people telling us how awful the economy will be once we get through our near-term shutdown period. At the risk of being accused of unwarranted optimism, I am not sure I buy the pessimists’ story.
Before saying anything about the economy, we have to outline where we think our containment efforts are headed. I will throw out my story, which people here who know what they are talking about can correct.
Let’s assume that after two months we have the coronavirus reasonably well-contained. People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personal are no longer being worked to exhaustion and beyond.
At least as important, let’s assume that we have testing fairly well advanced so that we can quickly identify people with the disease and both quarantine them and test the people with whom they have been in contact.
We can also envision that we would be able to do some quick checks, that while not conclusive, should be able to substantially reduce the likelihood of an infected person entering a public place. To give an example, my wife and I visited a doctor’s office yesterday (not coronavirus related). We had our temperatures checked before we entered and were asked a series of questions about our own health and the people with whom we had been in contact.
This sort of testing is hardly foolproof, recently infected people generally won’t have fevers, and people may not be truthful about their health or their contacts, but this sort of simple check should screen out a substantial share of the people who are infected. I would also be fairly confident that we can develop better techniques over the period of the shutdown. Anyhow, checks of this sort should allow most businesses to reopen with the requirement that they have people stationed at the door whenever the business is open, so that in principle no one can enter without going through this sort of check.
Those pushing negative views on the post-pandemic economy generally highlight the situation of heavily indebted businesses that face bankruptcy. Clearly, there were many businesses that were heavily indebted prior to the crisis, although this burden was often exaggerated by those who focused on debt rather than interest burdens. We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate.
It is also wrong to imagine that bankruptcy is the end of the world. Businesses that are otherwise viable can and do operate through bankruptcies. (Most of our major airlines have been through at least one bankruptcy.) There will undoubtedly be a huge mess sorting out unpaid bills when the lockdown period ends (look to a boon for the accounting industry). It would be helpful if states (mostly a state issue) passed simplifying rules to cover loss-sharing over the shutdown period, but the idea that large numbers of businesses will be unable to reopen due to debt simply does not make sense.
Even apart from bankruptcy, a creditor has no interest in forcing an otherwise viable business to shut down. It is better for the business to be able to operate and allow the creditor to recover some of their debt than to shut it down and hope to get a few dollars from selling the scraps.
We have seen a lot of talk about how the plunge in the stock market will pose a huge blow to households and pension funds. Most households actually have little or no money in the stock market, but the important point in this discussion is that, even with the recent plunge, the market is still (April 2) roughly 17 percent above its level of five years ago. That is not a great return, but not too much worse than investors had a right to expect. So, the idea that the drop in the market is leaving everyone destitute does not make much sense. It essentially means that they don’t have as much money as they would like.
From the standpoint of households, most should come through a two-month shutdown period in pretty good financial shape. The rescue package will do a decent job keeping most people whole, through the loans to small businesses maintaining their payroll, the relatively generous unemployment benefits, and the $1,200 per person checks. There are many people who will fall through the cracks, most importantly undocumented workers, but the bulk of the workforce should have something close to their pre-crisis income over this period.
At the same time, their spending would have been quite restricted. They have not been able to go to restaurants, movies, travel, or spend on most other items, except bare necessities. If the economy can reopen in June, we are likely to see large numbers of people rushing to do the things they could not do for the prior two months.
This means that restaurants and stores are likely to be flooded with customers. This will also be the case with car dealers and appliance stores, as people will have put off major purchases through the shutdown period. Many businesses will have difficulty dealing with a big surge of customers since they have not retained their staff, and will be forced to hire and train new workers. We are also likely to see a burst of travel as people make up for the prior two months. Also, many conventions and business trips that were scheduled for the shutdown period will be rescheduled for the late summer and fall. On the morbid side, there will be many people who will want to visit with family members after the loss of a loved one.
Will this demand be enough to re-employ all the workers now being laid off? There clearly will be a major sorting out period, but I don’t think it is possible to reach any firm conclusions.
First, hopefully, most workers will have the option to return to their former employers. This will likely be the case where employers had the foresight to keep workers on their payrolls. In cases where they laid-off workers, when they reopen, most will likely be looking to hire roughly the same number of workers that they laid off.
The qualification is that many businesses may have found more efficient ways to do things. This is productivity growth, which is ordinarily a good thing, but perhaps not just now. Some businesses may also not reopen if they were already marginally profitable and/or the owner(s) were getting tired of running a business. On the flip side, if restaurants, stores, airports and other public places all have to hire workers to test and question people before they can enter, this will be a major new source of employment.
It is also likely that some people who were in the workforce in the pre-crisis period will decide not to come back to work. This is especially likely to be the case with older workers who were nearing retirement anyhow. There were 11.6 million employed people between the ages of 60 and 64 before the crisis and 10.8 million over age 65. If 5.0 percent of the former and 10.0 percent of the latter decide to leave the labor force, that would mean 1.7 million fewer potential workers than before the crisis.
I don’t have any simple way of determining how this nets out, but I think it’s important to realize that the stories of weak near recession or even depression economy are not well-founded. It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand. Hopefully, the Fed would move cautiously in its response, recognizing this as a one-time jump that will soon be eroded as more capacity on line. But Jerome Powell probably won’t be calling me for advice, and it’s possible to envision a stop-start scenario where the Fed zig zags on interest rates, responding to the immediate economic data.
Of course, we could see a much worse recovery scenario than I have outlined here, especially if we are unable to control the spread of the disease. If we still lack adequate testing two months from now, and we still see the number of cases spiraling out of control, then we would be seeing a much worse scenario. I have no expertise on the likelihood of the different paths of the pandemic, but I would hope the one I have outlined is at least plausible.
Anyhow, my main point here is that I don’t believe the folks predicting a bad recession following our period of shutdown have really thought through the picture carefully. This matters for policy now as we discuss plans for a new spending bill. Since we don’t know the economy will be suffering from a shortfall in demand, generic spending is not advisable at this point.
At the same time, there are needs that should be addressed. We certainly need to spend more ensuring adequate supplies of medical equipment, protective gear, and training more medical personal to help in the crisis. (In the last category, we can quickly train people to do mundane tasks like changing bedding and cleaning surfaces that will free up time for more highly-trained medical professionals.) State and local governments are seeing an unprecedented collapse in revenue at the same time they seeing an explosion in demand for their services. They need far more money than was appropriated in the last bill.
These should be our priorities. If we want to spend more, it should be in our areas where more spending would be valuable whether or not the economy needs stimulus, such as clean energy, child care, and conservation. But we definitely should not commit ourselves to large amounts of spending for the sake of spending. That definitely made sense in the 2008-2009 recession, it is not clear it does now.
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