Donald Trump is a man who loves superlatives, which is why it’s no surprise that when it comes to what his administration plans to do to cushion the US economy from the deleterious effects of the various containment measures aimed at stopping the spread of coronavirus, the president promised something “major”.
Flanked by nearly a dozen aides and advisors including a terrified-looking Steve Mnuchin, a somber Peter Navarro and a talking mannequin called “Mike”, Trump told reporters he’s set to announce something “very dramatic” on Tuesday.
“I will be here tomorrow afternoon to let you know about some of the economic steps, which will be major”, he promised. Apparently, a payroll tax cut is in the cards. As Trump explained, he doesn’t want wage earners to “get penalized for something that’s not their fault”.
It was an odd way to describe virus containment measures. Wage earners aren’t really being “penalized”, per se. It’s true they may get hurt, but by virtue of being a virus, COVID-19 doesn’t have a sense of purpose and health officials aren’t out to “penalize” anyone by taking steps to protect the public from a pathogen – rather, they’re trying to save lives.
In any case, Mnuchin reminded the media that the proximate cause of Monday’s carnage on Wall Street (where stocks dropped the most since the financial crisis) was actually the oil price war begun on Saturday by the Saudis. He also said bank executives would be coming to the White House later this week.
“This is not like the financial crisis where we don’t know the end in sight. This is about providing proper tools and liquidity to get through the next few months”, Mnuchin chided. “The economy will be in very good shape a year from now”.
Just days ago, Mnuchin said a payroll tax cut wasn’t under discussion. That was during the same series of remarks that found the Treasury Secretary noting that “there would be no reason to halt [the stock market]”. “We have proper circuit breakers in place”, Mnuchin said last Tuesday.
Those circuit breakers were tripped on Monday. Trump’s stimulus promise was enough to get a sharp bounce out of futures, although “sharp” is now a relative term.
“Despite these being the ‘greatest’ economy and stock market ever, both appear to be ever clamoring for perpetual monetary and fiscal help”, JonesTrading’s Mike O’Rourke remarked, in a Monday evening note, adding that “the risk remains that there is still a great deal yet to play out and most of it will be on the negative side”.
Monday is hardly the first time a payroll tax cut has come up. Generally speaking, Trump is all-in when it comes to windfalls for the wealthy and corporations, but all bluff when it comes to the middle class, as we saw ahead of the midterms when he blindsided Republicans by announcing an 10% tax cut for middle-income families, a plan that unsurprisingly never materialized.
A payroll tax cut would benefit middle-earners, and it’s likely to gain traction on Capitol Hill, especially under the circumstances.
For what it’s worth, Obama’s payroll tax cuts did, in fact, do some good for families. “The median household income in 2009 was $49,777 [so] lowering the tax rate by 2% reduced the tax burden for the median family by $996”, Politifact wrote of Obama’s cuts in 2011. “As for mean household income, it was $67,976, meaning that the 2% payroll tax cut would have left $1,360 extra in the pockets of the average family”.
Nancy Pelosi and Chuck Schumer want much more, including an expansion of paid sick leave, free testing for the virus and better unemployment insurance for anyone who loses their job due to the economic fallout from the epidemic. Lawmakers already passed an $8.3 billion emergency spending bill aimed at providing for medical and public health services.
The travel and hospitality industries have issued a bevy of warnings over the past week, including from United, Southwest, JetBlue, Booking Holdings and Host Hotels & Resorts, all of which have either cut their outlook or withdrawn their guidance altogether.
Thanks to the worst plunge in oil prices since 1991, you can expect credit events in the oil patch too, something the market is clearly anticipating.
(High Yield CDX spread – note the dramatic spike)
In short, the US economy is likely headed for a recession, a reality that analysts and economists are now begrudgingly coming to terms with.
One person who has an idea about what to do to right the ship is Stephanie Kelton, the face of modern monetary theory.
“Run deficits. Run big deficits. Run MUCH bigger deficits.”, she said Monday evening, adding that “we are in the midst of a pandemic and economic deterioration, and the deficits we’ve run in prior years have ZERO BEARING on our capacity to run deficits now”.