The Dangers Of Deficit Dogmatism And The Courting Of Disaster

What do we know now that we didn’t know coming into this week? Not much, really.

The GOP’s virus relief plan isn’t really a “plan”, per se. It’s actually a hodgepodge of different bills which Senate Republicans would have you believe constitute a single piece of legislation when considered together.

No matter your partisan affiliation, it was virtually impossible to come away from Monday thinking Republicans were on the same page. And, in case you were inexplicably inclined to believe Mitch McConnell managed to corral the troops, Ted Cruz explicitly said it’s “likely” that “a number of Republicans” will come out “in opposition to this bill”. By “this bill” he was not referring to the Democrats’ HEROES Act, or any other piece of legislation put forth by Nancy Pelosi. Rather, he was referring to the GOP’s own proposal.

Read more: How About $200 And A Get Well Soon Card?

As if that wasn’t enough, media reports suggest at least some Senate Republicans are irritated with Mark Meadows and Steve Mnuchin for caving to too many Democratic demands.

In addition to cutting extra federal unemployment benefits from $600/week to $200/week over a two month (scoff) “transition period” during which states will implement a system that facilitates payments totaling 70% of unemployed workers’ previous wage (see the linked post above for the details), the GOP plan calls for another round of direct payments to those making $75,000/year or less; $105 billion for schools, with some of the funding tied to reopening; protection against COVID-related lawsuits for businesses, schools, and other entities lasting through October of 2024, provided those entities make a “reasonable” effort to adhere to public health guidance and avoid “gross negligence”; $16 billion for testing; and enhancements to the Paycheck Protection Program. There are a variety of other proposals buried in the legislation, including $1.75 billion for a new FBI headquarters, but those are the pillars, as it were.

To be clear, something will get passed. And whatever that something is will cost more than the $1 trillion limit Senate Republicans are effectively looking to impose. But GOP opposition to their own set of bills casts considerable doubt on how smooth (or not) this process will be. It seems possible that some lawmakers will keep pressing the idea that “urgent” proposals can be prioritized and pushed through quickly, while leaving a larger package to further negotiations. A piecemeal approach would only underscore D.C. gridlock and American political dysfunction.

Chuck Schumer on Tuesday said eviction protection is not part of the GOP’s proposal. That is a problem that is perhaps underappreciated. I discussed it a bit last week. “Continued economic hardship is having serious implications for housing security”, Apartment List said, in a research piece dated July 8. “For the fourth straight month, a historically high number of renters and homeowners were unable to pay their full housing bill”. Specifically, the percentage of Americans unable to make a full, on-time housing payment stood at 32% in the first week of July, according to the site. Advisory firm Stout Risius Ross says almost 11 million renters may be evicted between now and Thanksgiving.

That kind of precarity, combined with the realization that until there’s a safe and effective vaccine, the economy is unlikely to get back to normal, means coming up short on a relief package is a chance no politician on either side of aisle should be willing to take. The GOP is courting disaster, and, as ever, it’s not clear lawmakers understand (or care to understand) the actual economics behind any of this.

For example, regular readers may recall that since the onset of the pandemic, I’ve used data from Homebase to assess the state of small businesses. Well, Yale researchers utilized the same data to evaluate the GOP claim that the extra $600/week in unemployment benefits disincentivized workers. Not surprisingly, they found that claim to be false. From Yale:

A new report by Yale economists finds no evidence that the enhanced jobless benefits Congress authorized in March in response to the COVID-19 pandemic reduced employment. 

The report addresses concerns that the more generous unemployment benefits, which provide $600 per week above state unemployment insurance payments, would disincentivize work.

The researchers assessed this claim using weekly data from Homebase, a company that provides scheduling and timesheet software to small businesses throughout the United States. The findings suggest that, in the aggregate, the expanded benefits neither encouraged layoffs during the pandemic’s onset nor deterred people from returning to work once businesses began reopening. 

[…]

The researchers found no evidence that recipients of more generous benefits were less likely to return to work. They also found that workers who received larger increases in their unemployment benefits relative to their wages did not experience greater declines in employment after the CARES Act was enacted. 

The report found that workers receiving larger increases in unemployment benefits experienced very similar gains in employment by early May relative to workers with less-generous benefit increases. People with more generously expanded benefits also resumed working at a similar or slightly quicker rate than others did, according to the report.

“The data do not show a relationship between benefit generosity and employment paths after the CARES Act, which could be due to the collapse of labor demand during the COVID-19 crisis,” said Joseph Altonji, the Thomas DeWitt Cuyler Professor of Economics in the Faculty of Arts and Sciences, and a co-author of the report. 

Got that? There is “no relationship” between those benefits and workers’ propensity to return to their jobs. Yale found “no evidence” for Republicans’ claims in this regard.

That isn’t surprising. The idea that the extra benefits are disincentivizing large numbers of unemployed Americans from going back to work was always questionable at best, and laughably simplistic at worst.

For many workers, the combination of federal and state benefits simply doesn’t match their old wage (it depends on the sector). And, even for those who might be making more to stay home (to be fair, Goldman’s estimates suggest the average laid-off worker did indeed “earn” a comparable amount while being out of a job), it does not necessarily follow that they would choose that reality for themselves.

The idea that most jobless Americans would prefer to remain jobless as long as their nominal wage is comparable, ignores all manner of considerations, including health benefits, 401(k) matching, and the loss of dignity that goes along with being unemployed.

“We’re sympathetic to critiques the original plan created a disincentive for certain front-line service sector employees to return to work simply because they were making more while unemployed [but] the relevance of consumption to the pace of growth in the US suggests scaling back the additional transfers risks a second wave hit to personal spending”, BMO said Tuesday.

Some in the GOP surely appreciate these dynamics. As such, one is left with the distinct impression (and I’m being generous here) that some Senate Republicans are just trying to score points by parroting what, on the surface, seems like a common sense assessment about a connection between enhanced benefits and the psychology of the jobless.

The problem is, there is no such connection right now, according to Yale. And, given the concerns I mentioned above, such a connection isn’t likely to show up in future studies either.

What will start showing up, though, are declines in consumer spending and, likely, evictions, if the next relief package falls short. That, in turn, would imperil more businesses, pressure the finances of landlords, and on up the chain, until the entire system cracks.

This harkens back to an April note from Deutsche Bank’s Aleksandar Kocic. “The truth is simple”, he wrote. “A surprisingly large segment of the population is practically one paycheck away from some kind of insolvency”.

“In the absence of a major disruption, the system is capable of moving along by collecting small installments of rent (‘clipping the coupons’) from a large segment of the population”, Kocic went on to say, before warning that “if an exogenous shock disrupts the fragile order of these cashflows, there is a chain reaction of collective insolvency ready to sink the entire system”.

The prospect of that chain reaction helps explain why banks provisioned for more than $33 billion in losses during the second quarter.

In March and April, the US was teetering on the brink of Kocic’s collective insolvency scneario, and thanks in no small part to the (necessary and entirely predictable) reinstatement of lockdowns across a number of states in the Sun Belt (and beyond), the country may soon find itself back on the precipice.

The bottom line for Congress: this isn’t the time for deficit dogmatism.

Especially not when virtually every other developed nation (including Germany, the bulwark of fiscal discipline) is opening the spigots and loosening the purse strings.

As long as other developed countries are similarly beset, and likewise unleashing massive amounts of stimulus, the US can afford to do the same.

Worries about the dollar losing its reserve currency status due to monetary and fiscal policy ignore the reality that choosing an alternative entails picking from lesser currencies issued by governments who are deploying the exact same policy mix.

Above are the facts. Everything else is just noise.

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