“It’s the Economy, Stupid”ByRaymond D. Matkowsky
“It’s the economy, stupid” was a phrase coined by James Carville in 1992. Carville was a strategist for Bill Clinton’s successful presidential campaign against George H. W. Bush. The phrase was directed at Clinton’s campaign workers. That was 1992. Now fast forward to 2021. The phrase is still relevant in 2021.
2020 will go down in history as the worst economy since World War II. How strong the economy will be this year will depend upon how coronavirus evolves and the effectiveness of the vaccines receiving emergency use authorizations. According to Bloomberg, the United States will emerge from the virus’s grip just in time for New Year 2022. Other countries will emerge earlier, some later. This should definitely be of a business interest. This should be of interest not only in the United States but throughout the world. The rest of the world would, most assuredly, feel the economic effects if the U.S. economy came “off the rails.”
At best right now the U.S. economy is just treading water. President Biden’s $1.9 trillion rescue package does not directly bail out people, but bails out the economy. People are just the conduit. Remember, 70% of the U.S. economy depends on people, both rich and poor. The thinking is that when recipients of federal aid increase their purchases of goods and services the GDP increases. The bill appears to be designed to bring the economy back from the pandemic to where it was projected by the Congressional Budget Office (CBO) to be in the fourth quarter of 2022.
According to the latest fourth quarter 2020 Bureau of Economic Analysis (BEA) calculations, the economy was $625 billion below that of 2019. Clearly, the bipartisan offer of approximately $618 billion is not enough. It would not bring us back to where the economy was in 2019. It, also, does not account for future losses occurring in in 2020 and 2021. Besides the information for 2020 is preliminary and is subject to revision.
Recipients of the federal aid will hopefully spend their money on the purchases of goods and services. Not all of the aid will be spent new goods and services. The savings rate has increased substantially. Debt has been paid down. You cannot blame people that are facing uncertainty, for putting money away as a protection against of future disruptions. This is just another reason why income limitations are out of place. The rich have more incentive spend their entire check. Much of everyone’s benefit will go into the economy, though.
The Biden Plan
The Biden plan can be grouped into four subclasses as follows:
1. Covid-19 containment; aid to state and local governments- $750 billion
2. Child care; Child tax credit; rebate checks;
tuition aid- $600 billion
3. Health Insurance subsidies; housing assistance;
unemployment insurance; WIC; SNAP- $400 billion
4. Grants to small businesses; loans to businesses- $150 billion
Covid-19 Containment; Aid to State and Local Governments
The bulk of the money in Biden’s plan goes to Covid-19 containment efforts and rightfully so. If we don’t get the virus under control we cannot begin to repair the economy.
Operation Warp Speed has already spent $18 billion in the rapid distribution of Covid-19 vaccines. However, the states say they need an additional $8.4 billion to support the workforce, buy equipment, setup data systems and communications. They do not have that money. As of December 2020 they have only received $200 million earmarked for those items. They are responsible for getting the vaccines to people. If they cannot complete the job, there will be no end to the pandemic. No end to the pandemic signals a continuing recession.
State revenues are collapsing. This is especially true in states that rely on income taxes. There are some states that had tax receipts greater than what was anticipated. However, this does not mean that revenue collections are booming. Most states have a sizable budget shortfall. States are reporting shortfalls ranging from $600 to $700 million. Most states have balance budget clauses written into their constitutions. Therefore, the money has to come from other items in order to keep their budgets balanced. State and local governments employ about 13% of America’s workers.
Some people have pointed to the fact that the third quarter 2020 collections were large. This ignores the fact that because of Covid-19 every state has postponed their normal tax deadline from April15th to July 15, 2020.
State and local governments have already laid off 1.3 million public workers. More are to come. Eliminating personnel is largest and fastest way to shore up battered budgets.
Child Care; Child Tax Credit; Rebate Checks; Tuition Aid
Child care is a necessity to get workers back into the workforce. The Child Tax Credit is part of child care. If proposals pass, the Child Tax Credit would be raised temporarily to $3000 from the present $2000. Along with rebate checks and tuition aid, the goal is to get more money into people’s hands so they could spend it more freely.
Tuition aid, alone, should allow workers to get higher paying jobs that would increase tax receipts both for federal and state governments.
Health Insurance subsidies; Housing assistance; Unemployment Insurance; WIC; SNAP
An abrupt end to the $600 unemployment bonus, which the federal government pays for, would reduce household incomes and consumer spending at a time when the economy is still suffering the economic ill-effects of the pandemic.
Some workers are said to be earning more on unemployment insurance than they would normally, but again we are bailing out the economy, not workers. Workers are only the conduit. As of February 11, 2021, first time unemployment claims have barely improved. The need is still there.
In many cases, people that have lost their jobs have also lost their health insurance. People without health insurance put a strain on the economy and state budgets.
Grants to Small Businesses; Loans to Businesses
The Paycheck Protection Program (PPP) didn't save enough small business jobs. Some economists say it was a $600 billion failure. The U.S. government's flagship program for propping up small businesses hurt by the coronavirus pandemic had failed to achieve its main goal of saving jobs, according to economic analyses.
PPP has not restored employment to the level that was expected of it. With respect to saving jobs, the program spent much more money than the number for jobs saved. It did save jobs just nowhere near as many as was anticipated. PPP was not designed to help small business but rather their workers. There are two reasons for the failure.
First of all much of the money were given to professional, scientific, and technical service companies. 90% of their employees were not in danger of being laid off. Essentially, these companies were getting the government to pay the costs that they would have expended anyway.
Secondly, although PPP was designed to help workers, it did nothing to help small businesses. If workers did not have a business to return to then they were not collecting a paycheck. Therefore, making direct payments to small businesses makes more sense, in my opinion.
Will It Work?
Will the Biden program work? No one knows for sure. The only thing we know is that the previous programs have not stemmed the economic damage. Some efforts have been too small, actually wasted money or have gone to inappropriate places. In my opinion the Covid-19/state and local aid plus the direct loans to small businesses may. Hopefully it will. After all, it’s geared to the economy!
Of course, as of this writing nothing has been finalized. The situation in each subclass can change. Many people have many different ideas. Some feel that the program is too expensive. I have for a long time been a deficit hawk. I have been horrified by the out of control spending that both parties have approved. My belief is that it will not end well.
I am clearly not a fan of more debt. However, during World War II, no one suggested that we cut back spending. This is a war also. We must spend as much as it takes to get the virus under control, the economy back on its feet, and then worry about paying for it. It is a true race in getting enough people vaccinated so the new virus strains do not have a chance to take over and we need to start the whole process over.
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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