Vacuous Shell Game

The Fed takes center stage this week, and it’s probably not a stretch to suggest that Jerome Powell and his colleagues are at least somewhat pleased at the prospect of a unified Democratic government.

While Joe Biden’s stimulus plan still faces an uphill battle, Democratic control of the Senate obviously helps. Had Mitch McConnell retained his grip, getting another large proposal through the legislative process would have been impossible.

Bringing recalcitrant GOP lawmakers onboard won’t be easy, but I’d reiterate a simple point. Republicans should consider that their base isn’t just corporations, wealthy people, and budget hawks. Also in the mix is the downtrodden, white working class, who vote Republican ostensibly on social, “identity” issues. Donald Trump marshaled their anger and, lest anyone should forget, they’re dying. Literally. From COVID, yes. Like everyone else these days. But also from suicide, alcohol abuse, and drug overdoses, a trend that accelerated on some metrics over the last two decades. (Notably, that trend largely spared African Americans until the fentanyl epidemic went into overdrive starting somewhere around 2013.)

The figure (above) is from “Deaths of Despair,” by economist Anne Case and Nobel Prize winner Angus Deaton. I’ve cited it before.

It’s important because some of the factors that explain why middle age, undereducated white Americans are dying at relatively high rates from suicide, alcohol abuse, and drug overdoses, are socioeconomic. The disappearance of good-paying, blue collar jobs and the substitution of less rewarding work (e.g., driving for Uber), erodes people’s sense of self-worth. Hollowed-out, left-behind communities offer little in the way of solace, as the sense of camaraderie that once accompanied the presence of, say, a large manufacturer, long ago gave way to depressing (and sometimes wholly desolate) landscapes dotted with Dollar Generals and strip malls.

It would be absurd to suggest that simply passing Biden’s first stimulus plan will fix this situation. But opposing a $15 minimum wage and standing in the way of more direct payments isn’t going to do anything to bolster Republicans’ standing with already irritated Trump voters, many of whom worshipped the former president precisely because he purported (however implausibly) to represent the people I spoke about above. Late last year, Trump warned the GOP that blocking larger direct payments to households was a political “death wish.” He was, in part, referring to his base.

Powell’s Fed and Yellen’s Treasury are explicitly aiming to address societal inequities and inequality of opportunity. Cynics rightly note that the Fed (under Yellen) was indirectly responsible for exacerbating inequality by failing to admit that the asset price inflation they were stoking did more harm than good past a certain threshold. In an interview released Friday, Paul Singer suggested central banks were unaware of these dynamics. That’s not true. They were aware, it’s just that i) they saw no choice but to persist given fiscal policy remained confused and inadequate, and ii) they seemingly failed to appreciate just how much more efficient the transmission mechanism is from monetary largesse to asset price inflation versus how (in)effective monetary accommodation is vis-à-vis engineering outcomes in the real economy.

In any case, Republicans in the Senate would be advised to save the pretensions to fiscal rectitude and budget rigor for the next fight — which is coming, by the way, with Biden’s eventual infrastructure push. Trump explicitly backed a $1.8+ trillion stimulus package right up until Election Day and, in case you forgot, the $2,000 figure for direct payments came from him, when his Twitter account was still operational. While facts (in general) are sometimes lost on his base, those two likely aren’t.

All of that to say that the GOP should think long and hard about whether it makes sense, politically, to stand in the way of more stimulus.

Powell will be asked this week to weigh in following an FOMC statement that will just reiterate what we already know — namely that the economy faces enormous uncertainty centered around the virus, and that monetary policy will remain extremely accommodative for the foreseeable future. A day later, the market will get a look at the first read on Q4 GDP, which economists reckon will print 4.2%.

“In light of the error bands around data forecasts in the midst of a global pandemic, we’d be remiss not to acknowledge US rates will be less sensitive to a downside surprise than might otherwise have been the case,” BMO’s Ian Lyngen and Ben Jeffery wrote Friday. “For context, an as-expected level of growth to cap the year would still put the size of the nominal US economy -1.7% shy of the peak in 2019, to say nothing of the fact that in real terms the gap would be -2.4%,” they added. “The unknown drag from renewed restrictions and lockdowns layers in a meaningful degree of uncertainty for the initial read and therefore holds the potential to be a tradable event if nothing else.”

Obviously, the labor market has lost momentum. Jobless claims are back near 1 million, December payrolls showed the first decline since April, and retail sales are falling. Buoyant PMIs aside, more stimulus is obviously necessary and, speaking (again) to the narrative above, the US economy is just a vacuous shell game at this point. The promise of a good-paying job with benefits in an industry where labor has some measure of power is so elusive as to be non-existent. It might as well be written off. It’s a part of the country’s economic history, not a description of how the economy functions in the 21st century. The modern US economy is just as I described it late November:

A disproportionate amount of economic activity is accounted for by consumption that takes place at restaurants, bars, cafes, coffee shops, and retail stores. The people doing the eating and the shopping are, by and large, not making much more than the people serving the food and stocking the shelves, precisely because they are the same people (in an economic sense). That’s not sustainable. It’s circular to the point of absurdity. The people providing the services for meager wages are in most cases the same people consuming them when they’re not providing them.

The pandemic disrupted that model by shutting down the services sector. The economy subsequently collapsed, driving nearly everyone to the brink of insolvency. Why do you think it’s so important that the federal government provide rental assistance, for example? One reason is obviously that we don’t want the one in five renters who are behind to become homeless. Another reason, though, is because in many cases, their landlords need that rent money or they might become homeless too.

That latter bit is hyperbole, but you get the point. This whole thing is a house of cards. At some point, elected officials will need to come to terms with that and work towards building a more sustainable economic model. Frankly, it’s too late to do that in piecemeal fashion.

In the meantime, though, we’ll all pretend. And that’s the irony of the GOP characterizing Biden’s $1.9 trillion proposal as some kind of hugely “expensive” plan. In reality, it’s little more than a Band-Aid. COVID laid bare the fragility of the system, but it also presented a health crisis so acute that overhauling the economy had to take a backseat. After all, if everyone dies, the sustainability of the economy will be irrelevant.

Other data on deck stateside this week include regional Fed surveys, consumer confidence, and more housing market temperature checks, which are almost sure to register “fever.”

Oh, and look for Powell to emphasize that recent “taper” talk notwithstanding, “now is not the time to talk about an exit.”