The Aftermath: the future is now

We left on a two-month vacation the day after Presidents Day – February 18.  At the time, there were only 25 cases of Coronavirus reported in the U.S.  Like most of you, we were caught flatfooted by the pandemic and its astounding spread.  A graphic in the online New York Times tells the tale.  China’s delay in recognizing the disease and its effects led to millions of people leaving Hubei province, many carrying the virus, over two months.  Nine hundred per month were destined for New York now the epicenter of the crisis in the U.S. 

As I write this, the Senate has approved a $2 trillion stimulus package to keep the economy on track during the Coronavirus crisis.  In a post last week, I suggested now is not the time to worry about fiscal deficits.  Let’s focus on keeping people healthy first.  But the virus and our response to it will have some long-lasting effects – some good, some bad, some ugly. 

The Good

The future is now!  Trends predicted to take shape over the next decade or two have taken root overnight.  We are telecommuting and teleconferencing at work.  Similarly, universities have moved coursework online, shedding expensive infrastructure and adopting a model I predicted in 2015.  Will there be a snap back to the old model, or will there be a shift to a new way of working and learning? 

Traffic is lighter just about everywhere.  Demand for fuel has dropped dramatically (I paid $1.99/gallon the other day).  That means reduced emissions and stress on our infrastructure.  Will work at home become a lasting effect of the crisis?  

No one will be denied healthcare because of a lack of insurance during this crisis.  Bernie Sanders points to the need to nationalize healthcare like, you know, Italy… um, maybe not a good idea.  And, Republicans are unlikely let go of their objections to any solution.  It is perhaps Joe Biden’s incremental approach to reforming Obamacare that might lead to the best outcome.  Will that lead to universal coverage?

Crisis response has necessitated that government regulations pretending to protect us have been set aside to, well, protect us.  FDA has eased up on guidelines for testing drugs and manufacturing ventilators, and companies are repurposing without the obstacle of licensing rules.  Will the crisis cause us to question the need for all those regulations? 

 

New York Governor Andrew Cuomo

Governors are stepping up to respond according to the needs of their individual states. Wyoming doesn’t need what New York needs. So, there is a renewed focus on the effectiveness of regional and local response.  States have powers not afforded to the federal government according to Constitutional experts.  Only states have police power to enforce quarantines or compel vaccinations, for example.  Will governors finally press the point and take back authority they have abdicated to Washington? 

The Bad

In the last twenty years, we have consistently been failed by our institutions of government. The 9/11 attacks revealed a weakness in national intelligence, particularly the CIA.  Hurricane Katrina placed the failures of FEMA at center stage.  The Great Recession was caused primarily by banking regulators not doing their jobs.  And, now there’s COVID-19 which has revealed the soft underbelly of our ability to protect our citizens from a pandemic.  Meanwhile, congressional politicians can’t seem to set aside their dysfunctional behavior for the sake of the nation.  

The era of free trade, that was nailed into place by China’s entry into the World Trade Organization, has restructured supply chains so that we no longer have the manufacturing capacity to make critical supplies.  Meanwhile, China is providing Europe with masks, gloves and other medical supplies.  It sounds like an echo of the Marshall Plan. It’s another way in which we have abdicated our role in global leadership. 

The Ugly

This ain’t the 1950’s, a time when the nation was led by a war hero whose minimalist approach to governance resulted in the paydown of war debt while maintaining a balanced federal budget, the construction of the interstate highway system and the inception of NASA.  No, Democrats, we aren’t going to raise marginal tax rates to 90%.  And, no, Republicans, we aren’t going to shrink government to balance the budget.  Bipartisanship in the 21^st Century means more government spending and debt not less.  That’s how the coronavirus stimulus went from $1 trillion to $2 trillion in the course of a week.  

A former business partner suggested a scenario I deem likely.  Likely because of the way in which the nation’s institutions responded to the financial crisis a decade ago.  The first round of QE or Quantitative Easing by the U.S. Federal Reserve Bank in 2009 was viewed as a positive step toward getting investors to invest and get the economy moving again.  In this process, the Fed purchased U.S. Treasury bonds and mortgage-backed securities to keep interest rates low and encourage the acquisition of assets.  Low interest rates help those who can invest in stocks and real estate but they penalize savers and retirees.  

Back to my former partner’s prediction:  the Fed will not only purchase the additional U.S. Treasury debt but also will write it off, he says.  In other words, since the Fed can create as much money as it wishes, they can also reduce the government’s debt with the stroke of a pen.  

Two years ago, the election of Rep. Anastasia Ocasio-Cortez made a big splash in the national news.  Among her more controversial suggestions was that the nation’s economy could be managed by Modern Monetary Theory (MMT) – the creation of money out of thin air.  There was a minor uproar in business and economic circles.  Now, under the cover of a pandemic, MMT may become the government’s tool of choice to feed our addiction to debt.  

Conservatives warn this approach will result  in hyperinflation, citing Post-WWI Germany as the relevant example.  Liberals, led by Nobel economist Paul Krugman, have pointed out that we’ve been pursuing MMT for the last ten years and inflation is low.  They’re both looking in the wrong place.  Hyperinflation hasn’t occurred in consumer prices.  It has occurred in asset prices – stocks, bonds and real estate – enriching those with the capital to invest at the expense of everyone else.  

Once the crisis has passed, we’ll applaud those who have crafted and voted for the $2 trillion package and reelect them in the Fall.  And, there will be no one to stop this juggernaut. 

WHO WILL LEAD?  

Coronavirus and the Economy

It’s hard to imagine all the economic impacts of the current Coronavirus crisis.  A recession – official or unofficial – seems likely.  (An official recession is defined as two consecutive quarters of declining GDP.)  If the crisis lasts for only three months, there will be a “Newtonian” surge (an equal and opposite reaction) in demand in the third quarter that will even out the economy for the year.  

Government can and should play a role in managing the economic crisis.  But what is that role and how should they play it? 

Generally speaking, there are two kinds of shocks the economy can experience: a demand shock and a supply shock.  The first occurs when consumers develop some fear – rational or irrational – about their near-term economic future.  In that case, they hold back on purchases, first of durable items like cars and appliances and then more routine purchases like clothing and eating out.  A supply shock occurs when there is some disruption in the supply of essential goods and services driving prices up dramatically.  The Arab oil embargo of the 1970’s is a good example.  

A demand shock often can be effectively dealt with by the Federal Reserve lowering interest rates thereby lowering the cost of purchasing durable goods.  Supply shocks are tougher to deal with as they may be caused by factors outside the government’s control.  Again, the Arab oil embargo serves as a good example.  

The US economy was stable at the beginning of the year.  When demand and supply are balanced, the economy is said to be at potential real output.  But the coronavirus response may cause both a demand and a supply shock simultaneously.  Demand is down because people are staying indoors affecting large purchases like cars and homes as well as routine small purchases.  A supply shock might occur if supply chains providing essential products are disrupted -- if, for example, workers cannot go to work in domestic factories.  In the case of a supply disruption prices will rise at a time when many Americans are out of work.  It is not straightforward to recover from a recession clobbered from both sides. This is the worst possible case because neither Fed action (monetary) nor Congressional action (fiscal) can maintain a supply chain or get people back to work.  So, the Fed can react or do nothing.  Lowering interest rates keeps unemployment low but raises prices causing inflation.  Doing nothing keeps inflation low at the expense of higher unemployment. So, the best government can do is try to lay some foam on the runway to ensure a soft landing.  

Many government and health officials have been praised for their candor, decisive action and leadership in this crisis.  We need the same degree of honesty about the economy.  There will be an economic disruption lasting three to six months.  We should not overreact.  Inflation and deficit spending will increase, and we shouldn’t be too worried about it in the short term.  Remember: borrowing is cheap right now.  So, let’s do what we need to do without too much handwringing. 

The Fed is doing the right thing by lowering borrowing costs for government and businesses.  Congress and the President are doing the right thing by providing stimulus for the near term.  The stimulus should be targeted to those who really need it: low income families and small businesses who don’t have the cash reserves to survive a sustained drop in demand.  

I have seen more than a few memes suggesting buying gift cards from local businesses and over tipping service staff.  These are all good measures we can take as citizens to flatten the economic curve during this crisis.  Let’s hope that government action can also flatten the curve of the health crisis.  

WHO WILL LEAD?

Okay.... It’s a two-man race. So, now what?

The deadline to change my voter registration from Republican to Democrat in New York was February 14, Valentines Day.  (See “It’s Official: I’m a Democrat”) When I did so, I didn’t expect the Super Tuesday massacre.  I switched so I could vote for Bloomberg in the New York Primary.  I could still do that.  But that would be the wasted vote I eschewed when I flipped parties.  So, now what?

In a Biden vs. Sanders race, the obvious choice for me is Uncle Joe.  But why?  A review of the candidates’ websites suggests their positions on the issues are the same:  reducing income inequality, higher taxes on the wealthy and corporations, universal healthcare.

Of course, their rhetoric on the campaign trail is something different.  Sanders is a class warrior, a dogmatic politician as divisive and out of touch as the President he would like to replace.  Biden on the other hand is more pragmatic — and, it’s that word “pragmatic” that separates him from other Democrats (and Republicans).  He has a long history of working toward bipartisan agreement.  A great example is outlined in Bob Woodward’s book “The Price of Politics” in which the award-winning journalist describes the process by which the Obama White House reached a compromise with a Republican Congress on the budget and debt limit in 2010.  Woodward’s book suggests that the joint effort on the part of Republicans and Democrats to break the impasse was floundering until Uncle Joe began working  with another old Senate hand, Mitch McConnell.  A series of convos and a handshake later, we had a budget compromise that lasted for years.  

Sanders hasn’t achieved anything like Biden’s track record.  Dogmatists rarely do.  They sit in their corner certain of their righteousness and refuse to compromise.  They never have to apologize because they never do anything.  In a democratic republic that relies on bipartisan legislation to achieve lasting change, Uncle Joe is the guy.  

So, what do these candidates want to achieve?  Sanders no longer calls himself a socialist in favor of the more current label Social Democrat.  He calls for the implementation of a regime of government benefits that emulates that of Scandinavian countries:  free healthcare, free tuition, mandatory paid family leave and so on.  

In theory, I don’t have a philosophical objection to this paradigm.  In practice, I do.  (I am more pragmatic than dogmatic.)  Sanders proposals — Medicare for All, Free Tuition, Student Loan relief — would easily double the size of the federal budget.  He says he’ll fund it by taxing corporations and billionaires.  Setting aside the economic impact of those policies for the moment (and they are substantial), I have to say I don’t believe it.  Ultimately, if not immediately, he’ll come for you and me — the middle class.  Think about it this way: if the goal is to eradicate billionaires, the tax base will shrink.   So, where will he go next?

I also have a moral objection to his approach.  If we — the electorate — want government to do certain things, we should be willing to pay for those things. It’s noteworthy that the US already has a more progressive personal income tax regime than any of the EU countries.  European nations offering free healthcare and college tuition impose a Value Added Tax (which functions like a sales tax) of about 20% on sales at a retail level no matter how rich or poor you are.  In other words, all citizens pay for what they ask from government. 

Sanders sidesteps this sticky argument by declaring the system is rigged (as does Trump).  Well, yes, it’s rigged in favor of those who work hard and play by the rules.  For those who think the world owes them a living, not so much.  As someone who scrimped and saved so my kids could graduate from college without debt, I wonder why others should not have to.  As someone who has assumed risks to my livelihood by owning a business, I wonder why anyone thinks they should reap the rewards without assuming the same risk.  

I am a classical liberal not a political liberal.  I believe in a freedom agenda: free enterprise, free choice and freedom to succeed or fail on one’s own merits.  That makes me more libertarian than liberal and that’s how I have voted in the past.  So, how do I square my beliefs with the concepts of social democracy?  

What few seem to understand is that the social democracy that Scandinavians enjoy relies on free market capitalism to be viable.  The remaining candidates (sorry to see you go, Mike) would impose new limits or costs on business.  In making such proposals, they take our prosperity for granted.  Treating corporate America like something that needs to be healed, they fail to see that every surgical cut to corporate profits undermines the attractiveness of the US economy to foreign investors, reduces available capital to invest in future endeavors and threatens to leave the patient bleeding to death.  I would like to see a candidate who adopts the approach implied by the Hippocratic Oath taken by doctors: primum non nocere (first do no harm).  

WHO WILL LEAD?