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.”


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4 thoughts on “Vacuous Shell Game

  1. A pretty succinct summary of what we face. Biden is charged with first stabilizing the existing system and fighting a public health crisis in his first 12 months. The latest package is best described as a bridge to help the population get to the other side of the virus. Real stimulus awaits infrastructure, education aid/reform, climate change intiatives and a whole host of other changes. The USA lost 4 years to address these challenges.

    1. “The USA lost 4 years to address these challenges.”

      I agree but I place the number at most of the years since the second Gulf War. We stopped actively taking care of ourselves as a nation about then. While some would consider ACA to be an exception to this whole in our progress as a nation, overall it got pretty well offset.

  2. …chart “Midlife Crisis” from figure 2.1, page 30 of the hardcover edition.

    I reserve the word haunting to describe the effect that the book “Coming Apart” has on me, still, to this day.

    I was just looking up synonyms to haunting to try to find the word that describes the effect “Deaths of Despair” has on me. On my first reading, I stared at Figure 2.2. I was just staring at figure 2.2 again. “Deaths of Despair” is unlike any other non-fiction book I’ve read in the last 10 years. I don’t have the word to describe it.

    For casual readers just passing through, be sure to take a look again at the scale on the “Midlife Crisis” chart. The mortality rate is not a smudge between 250 and 300 that could be explained by a guest on a Hoover Institution Youtube interview. The mortality of non-White Hispanics is about 170% of what it reasonably should be.

    This is a Titanic demographic insight ignored in the media, and in both the Democratic and Republican establishments. There are no edge reforms to regulation, taxes, or benefits, that turn this trend. The solution is a change in our economic system. In the meantime, is this allowed to happen, and this is extraordinarily cynical, even for me, because this is how we deal with surplus labor in the American system?

  3. If we’re going to rebuild the economy with better paying jobs, that will require people educated with new skills and a broader base of knowledge. So, starting with young children we’re going to have to start stressing the importance of applying themselves and acquiring the education necessary to get one of the well paying jobs. Or we won’t put much of a dent in the ‘deaths of despair’.

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