The Big Problem With Coronavirus Economic Bail-Out Plans: Any Of ‘Em

They’d pile a trillion dollars—and that’s just for starters—on top of a national debt that’s already topping a trillion dollars annually

December 20, 2017: “We broke every record. It’s the largest–I always say the most massive–it’s the largest tax cut in the history of our country.” Now the chickens are coming home to roost.

So the Twitter arguments we keep seeing about stuff like is it better to give Americans $1,000 all at once or $2,000 or $500 each month for a longer period of time really doesn’t matter that much. Or that if Mitt Romney’s proposal (the $1,000 one) goes through it’ll suddenly mean Republicans “own” Democrats on Universal Basic Income.

What does matter is whatever the government does do—and it has to do something big, fast—the U.S. economy will be buried under debt for years, maybe decades.

Threats to cuts in things like Medicare and Social Security will no longer be subjects for debate. They’ll be inevitabilities.

Even if people get a small or large monthly check in the mail one time or a bunch of times. We don’t want to sound like we’re critical of that: it’s a great idea right now because any money the federal government can quickly get directly to consumers will be spent and not wasted. And spending is how businesses stay alive. But in the long-term, those gigantic piles of debt start looming larger.

And in that dystopian landscape, starting up any big new federal programs that involve spending a lot of money up front (which pretty much all do), will be pretty impossible.

And for what? To bail out cruise ship operators? We realize that means saving jobs, but why should poor management and long records of health problems be rewarded? But even that’s a little unfair.

Because most of the depth of the hole the U.S. government is inevitably going to be digging itself into is the result of a grand experiment by Trump and Republicans: giving (mostly) corporate America a $1.5-trillion tax break back at a time when the economy was booming and they really didn’t need it except as “rocket fuel”, as Trump put it, to make it boom more.

That’s roughly equivalent, or actually even more, than what the White House and Congress is thinking of giving out today, in the midst of what will probably be one of the most disruptive economic events in American history. (We were about to say “unexpected” but unexpected always eventually happens; that’s why you try not to go out and do foolish things in the meantime.) The decline in tax revenues coming in to the Treasury that resulted from those tax breaks (along with ballooning federal spending), in turn has already directly resulted in the biggest annual budget deficits ever.

And that’s before the government starts printing money (which thankfully it can do) to combat the economic effects of Coronavirus.

In order to believe those tax cuts to industry and wealthy individuals back then would really pay off, you really did have to believe nothing bad or unexpected could ever happen to the American economy. (Or at least until the next Presidential election was over and done with and you’d won.) And maybe Trump really believed that. Just like banks and brokerages believed real estate prices in this country could never really go down before the Great Recession a little over a decade ago. Yet here we are…

Now, a lot of the reason the U.S. came out of that Recession was Bush’s folks, and then Obama’s folks were extraordinarily innovative and nimble. Matched with a strong will. And that was against a Republican-controlled Congress that didn’t want to give either President nearly as much money as they thought they needed for their plans to work, because…wait for it…they were too worried about the impact of blowing up the budget deficit.

The fact that those economic measures worked, including some controversial ones like bailing out the auto industry, and insurance giant AIG, and the economy recovered, might start making you think that those Republicans were right to force some restraint. But there’s also evidence less money up top slowed the pace of recovery from what it otherwise would’ve been. And more importantly, pretty much nobody—including Republicans—is calling for any kind of restraint now. Heck, Republican Walter Jones, the only member of Congress to vote against the Bush economic stimulus plan, the Obama economic stimulus plan, and the Trump tax cut, just passed away not too long ago.

The recovery from the previous Recession was not without its flaws either in that a lot of the rebound concentrated among an ever smaller, and richer, segment of the population. People who lost their homes when the real estate market collapsed, probably didn’t get them back.

The current administration has yet to show much of that innovation or nimbleness. As we’ve previously argued, only the Federal Reserve has so far come up with any creative emergency solutions, some of which have been truly unprecedented (to the point that a lot of our readers have been wondering if the Fed really does or should have the power to do all it’s doing). And yes, since it’s the U.S. central bank, it is beholden to the banking system and vice-versa. But that doesn’t only mean it wants bankers to stay fat. It’s job involves keeping consumers healthy too. But there’s only so much the Fed can do, and most of that involved short-term fixes. A couple of months at most.

Put that up against an economy that is likely to shrink this quarter by its biggest percentage ever (that’s one record Trump won’t be boasting about), and unemployment already skyrocketing, and those are impossible headwinds for the Fed to fight alone.

And remember a couple of days ago when we told you it’d be a huge negative sign if a money market mutual fund “broke the buck“? That means the value of the uninsured but usually considered very safe investment, which is designed to always stay at $1, cannot. Well, as we write this the Fed seem to be pulling out all the stops to prevent that very thing from happening, including buying faltering assets from those funds.

Naming Jerome Powell to Chair the Federal Reserve also back in 2017

Let’s try to end on a bright note. A few things have been happening in financial markets that are not terrible for Americans. The dollar has been strengthening this week against many foreign currencies, especially the British Pound, where it’s at a 35-year high. This is something Trump normally rails against as giving other countries an unfair advantage in trade. But right now a strong dollar could really help increase Americans’ buying power. That is, as long as supply chains don’t break down, people in this country should be able to buy more goods for less in the coming weeks and months. And the U.S. may need to rely on goods from countries that already seem to be recovering from the virus or weren’t impacted as much. And a strong dollar makes those goods cheaper. Why is the dollar strong in the middle of an economic meltdown? Because U.S. Treasury Bills are still seen as the safest investment in the world, and in order to buy them, overseas investors need to buy dollars. It might be good for the President to take some tariffs off though, since despite what the President says, those are paid for by the American public.

Another potential positive: the savings rate in this country is pretty high right now compared to the last couple of decades. 7.9% according to the St. Louis Federal Reserve Bank. That could mean at least some families and some small business owners have a little bit more of a buffer than they normally would, even as the government’s been going for broke. Part of that is a remnant of the last recession, because since then it’s been harder for people to borrow money, so they’ve gotten into the habit of saving more. At the same time, those numbers may be misleading. Because just as the economic rebound of the past decade has disproportionately benefited people who were already wealthy, the relatively high savings rate also seems to be concentrated among those who have a lot of money. According to investment firm Goldman Sachs, the 20% of Americans with the highest incomes save 12% of their income. It’s not trickling down. And mid and lower income families don’t have much cash in the bank to tide them over, if any at all.