Who Needs Free Candy?

Global equities (figure below) will be happy to see the curtain close on this week, not because anything went wrong, but rather because the rally seems to be losing some of its joie de vivre. Better to escape safely into the weekend than risk an “accident” with the casino open.

Stimulus is moving ahead stateside. Legislation providing for nearly $600 billion in assistance was advanced by the House Ways and Means Committee, which green lighted $1,400 stimulus checks and monthly tax credits for households with kids. A hodgepodge of House committees are working towards piecing together a version of Joe Biden’s full proposal. A vote in the House on the package of measures is expected later this month.

The money is coming. But where will it go? Hopefully into the checking accounts of the middle class and the mouths of the poor. I mean, not literally on that latter bit. You can’t eat money although, as Pablo Escobar is rumored to have learned, you can burn it to keep your family warm when you’re on the run (no one knows if that famous story is actually true, by the way).

Bloomberg cited the Urban-Brookings Tax Policy Center in their coverage, noting that at least as far as the stimulus checks and child tax credits go, “about two-thirds of the benefits would go to households making up to $91,000 a year” with just 11% trickling up to the top 20% of taxpayers.

Ideally, almost none of the direct monetary benefits would go to the top 20% of taxpayers, assuming there’s not a solid rationale for giving people with plenty, more. Presumably, that’s wasteful, to the extent those benefits could be doled out to the poor and lower-middle class.

But getting this “right” is much more difficult than critics make it sound. “Just give to the people who need it,” is the habitual refrain from the peanut gallery. Now if only we had a reliably accurate catch-all definition of “people who need it” we could just disburse the benefits accordingly. Unfortunately, it’s not that simple. “When it comes to free money, are you a person who needs it?” isn’t a checkbox on any tax forms. And if it were, everyone would check it. This is like asking a room full of first-graders “Who needs free candy?” Well, everyone, of course!

The quandary is as follows. A durable fiscal impulse is seen as necessary to break the cycle wherein central banks are forced to perpetually shoulder the burden of sustaining economic momentum, with the inevitable result being financial asset bubbles and widening inequality. Paradoxically, though, clumsy fiscal stimulus may be serving to inflate some of those bubbles even further.

“There is recognition even in financial media that central banks are institutional ‘stonk’-bubble blowers,” Rabobank’s Michael Every wrote Friday. “There is matching recognition that the solution for reflation lies with fiscal, not monetary policy,” he added, noting that,

Yes, we are likely to see a major short-term fiscal boost –in the US alone– with suggestions the White House’s stimulus package could be worth many thousands of dollars for the average US family – for a year. Then the old crunch comes back again unless US labor has magically gained power over global capital. How, exactly?

This all suggests that if fiscal fervor (as it were) recedes with the virus sometime later this year, we’ll likely end up right back in the same old conjuncture, with everyone (save Progressives) becoming some kind of fiscal hawk. Meanwhile, the economy will remain nowhere near full employment even on an economist’s definition, let alone real full employment, where that means that literally everyone who wants a job has one.

In the meantime, it seems as though too many Americans have come to believe they can make a living trading stocks. They can’t. That won’t work for long. I can promise you it won’t. And to the extent fiscal stimulus is encouraging that among people who have either been rehired or found a new job that pays enough to cover monthly expenses plus providing some respectable level of disposable income, we’ll need to tweak the parameters going forward.

Obviously, that’s not a reason to ditch fiscal stimulus. America is just years behind the curve when it comes to answering basic questions that government used to care about a half-century ago. Questions like: “How do we ensure everyone can live a dignified life?” “How do we ensure that children aren’t experiencing poverty?” “How do we improve the safety net?” “If we want to provide some kind of pseudo-UBI that acknowledges everyone doesn’t need it, how do we ensure it gets to the right people?”

These questions should have been answered decades ago. Instead, America spent most of that period creeping further down the road to supply-side insanity, while simultaneously sacrificing society at the alter of unbridled, unchecked capitalism. Now, the US is trying to answer basic questions in the middle of a pandemic — i.e., under extreme duress. Usually, decisions made under extreme duress aren’t the best decisions. But they have to be made, by definition. That’s part and parcel of being under duress.

In any event, how about markets? “The only data of note [Friday] was U. of Michigan consumer confidence numbers, and there’s also the prospect of a long weekend in the US and, of course, Chinese Lunar New Year quietness,” AxiCorp’s Stephen Innes said. “A continuation of the range trading beckons… until something significantly changes.”


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7 thoughts on “Who Needs Free Candy?

  1. The answer is obvious: more fiscal spending powered by higher taxes on high-income earners — incl. raising marginal rates on the top brackets, lifting the cap on withholding, closing the carried interest loophole, and flipping the charitable deduction so as not to reward the wealthiest for warehousing their wealth. A high-tax regime worked to create a more equal and prosperous America in the ’50s and ’60s — and woud have the same effect in the 2020s. Will the American public buy it? If Joe Biden’s approval ratings are any indication, one would have to say yes. Unfortunately, for forty-plus years we’ve had an entire political/media apparatus dedicated to a completely different set of policies — lower taxes on the wealthy, less government spending, greater income inequality. The mob is getting restless. Policymakers need to act quickly.

    1. These are great points and would make great strides towards balancing the economic equation amongst the classes. I think the concern is going to be the people who continue to believe that taxing the rich hurts them because they dream of being rich and if they somehow get rich through “hard work”, they don’t want to be impacted by high taxes. This of course rarely ever translates into reality but, that doesn’t stop millions from dreaming.

      I think the other side of this that needs to be put into motion soon is the always promised and never delivered infrastructure restoration that we desperately need. Again, hearkening back to the 50’s and 60’s we undertook massive infrastructure initiatives that generated massive employment opportunities. I think this is the answer to how we don’t go back to status quo when stimulus runs out. There are so many infrastructure projects across the country that badly need to be implemented, getting those projects going is how you return to full employment.

      1. I think that both higher taxes and infrastructure spending are absolutely critical but those are backwards looking solutions, fixing problems that have been building for 40 years or more but we’ve got even bigger problems now. We need to do them and fast, like yesterday fast but within this year before Democrats burn out their current control.

        But we also need serious fiscal policy to address the elephant in the room. A $15 minimum wage is a start but it’s barely an answer to the reality businesses are actively wage fixing unless you’re say a CEO or VP. Obviously making businesses pay their employees more is beyond dead in the water so let’s just start providing a basic universal income. Businesses get the advantage of more demand and people get to live. We need to invest in education and higher education while also cutting the profit motive out of education. Every adult and child should be getting $20k per year tax free pegged to inflation. We should provide student loan forgiveness in full and you could even just make all education costs past or present tax credits. That would be an easy way to distribute it and nobody could complain “but I just paid mine off!”.

        Then you would see a massive amount of demand generated and skyrocketing corporate profits and maybe then you could start turning up the interest rates to encourage people to save and get out of this mess once and for all.

  2. Instead of supply-side economics we should use a moniker that is more descriptive of what it does to the dynamic between classes. I proposed tinkle down economics with occasional references to the yellow liquid.

  3. H, Once again you have outdone yourself. Unfortunately I feel like shouting from the rooftops that supply side economics is the worst. I know that none of the people who could hear wouldn’t know what I was talking about. I will admit that I bought the lie originally when Reagan started it. But by the end of his second term I already saw that is was getting a few people getting very rich. Fast forward 30+ years and the foreseeable results have happened a couple thousand people are very rich, and a lot of other people wondering where their next meal is coming from.

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