Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

For all the suffering caused by the pandemic, one important positive effect is that it may lead to clearer thinking about government debt and deficits. To Congress’s credit, it has focused on dealing with the problem of sustaining the country through a period in which much of the economy is shut down, rather than worrying about the large deficit it will run this year, as well as the amount it is adding to the national debt. (I strongly suspect that this would not be the situation if a Democrat was in the White House. In that case, most Republicans would likely be making angry speeches feigning outrage over the burden that Obama, Biden, etc. was imposing on our children and grandchildren.)

Anyhow, the story on the deficit and debt are both simpler and more complicated than is generally imagined. The basic question with the deficit is, are we pushing the economy too hard? Specifically, the issue is whether the additional demand created by a government deficit is exceeding the economy’s ability to produce goods and services, leading to inflation.

There is an intermediate step in this story. If the Federal Reserve Board correctly sees excessive demand leading to inflationary pressures, then it may act to head off actual inflation by raising interest rates. In that case, the problem of a large budget deficit would be high interest rates in the economy. High interest rates will reduce demand by lowering housing construction, public and private investment, and consumption. High interest rates will also raise the value of the dollar, reducing net exports. This reduction in demand prevents inflation, but means that we will have less investment for the future.

Of course, the Fed may also raise interest rates out of a mistaken belief in inflationary risks, in which case the Fed was the cause of high interest rates, not the fact that the economy was being pushed beyond its limits. That was likely the case in 2018 when the Fed raised interest rates four times. As it turned out, there was very little evidence of accelerating inflation and wage growth peaked in early 2019, in spite of the extraordinarily low unemployment rate last year.

Anyhow, the immediate concern with large budget deficits is whether they are leading to too much demand in the economy, and therefore generating either high inflation or high interest rates. Ordinarily, a $2 trillion boost to demand (roughly 10 percent of GDP) would lead to a serious problem of inflation, especially with an economy operating at 3.6 percent unemployment. However, tens of millions of workers are now losing their paychecks, so consumption demand would be collapsing without the additional spending and tax cuts. The purpose of this rescue plan is to allow families to more or less keep themselves whole through a period in which large segments of the economy are shut down.

There is actually a possibility that this could lead to inflation, as people are competing for a relatively limited supply of goods and services. Thus far, there have been shortages of fairly narrow categories of items, such as toilet paper, cleaning supplies, and other items seeing unusually high demand as a result of the pandemic.

Many stores have looked to ration sales, rather than jack up prices, limiting the inflation coming from these sectors. However, that could change if the shutdowns are prolonged or if other links in the supply chain began to fray. For example, if we see a big falloff in the number of truckers willing to drive through the crisis, we may see widespread shortages of a wide range of items. That could lead to a serious problem with inflation.

However, even in this case, the budget deficit is not really the cause of the problem. We may face shortages of food, drugs, and all sorts of other items, which would result in higher prices because the government is giving people money to buy these things, but the shortages would still be there without the budget deficits. In that case, large numbers of people who are now getting unemployment insurance and other forms of income support in the shutdown period, simply would not be able to buy anything, thereby eliminating the demand and price pressure.

The additional spending in the rescue package is essentially about allowing people to pay for food, rent, and other necessities until they are able to return to work. We don’t really have any alternative unless we are prepared to see mass impoverishment. The extent to which this leads to serious problems with inflation will depend on our ability to maintain the flow of essential goods and services through a shutdown period. If we can do that, then the large deficit will not be a problem.

 

The Debt Burden on Our Children

The other part of the big deficit story is that we are adding more than $2 trillion to the debt that our children and grandchildren will have to pay off, or so the story goes. While that may sound scary, there are several points to keep in mind.

First, this is not a case of our children paying the money to us, it is a case of some of our children paying money to other of our children. At some point, everyone who is alive today will be dead.  At that point, the interest will be paid to whoever happened to inherit the bonds. So, the burden created by the debt is not really our kids paying interest on government bonds to us, the problem is that most of our kids will be paying interest to the heirs of Bill Gates, Jeff Bezos, and other wealthy people. That is not an inter-generational problem, it is an intragenerational problem.

It is also important to keep our eye on the ball. The burden of the debt, insofar as there is one, is the amount of money that we are paying out each year in interest to service the debt. In spite of our high debt-to-GDP ratio, that figure is actually quite low now, around 1.5 percent of GDP. That compares to an interest burden of more than 3.0 percent of GDP in the early and mid-1990s.

The reason the burden is so low is that interest rates are low. Also, much of the debt is held by the Fed. In that case, the Treasury is paying interest on bonds to the Fed, which then rebates it to the Treasury. That debt imposes no burden whatsoever.

An interesting guidepost in this story is Japan, which now has a debt-to-GDP ratio of close to 250 percent. Its interest burden is essentially zero, as investors actually pay the government to lend it money.

Of course, interest rates could rise in the United States, but even then, we have to ask the reason. Suppose the inflation rate jumps from roughly 2.0 percent to 4.0 percent and interest rates also increase by two percentage points. In that case, we would be paying more nominal interest, but the real value of the debt would be getting eroded at the rate of 4.0 percent annually, rather than 2.0 percent annually. The actual burden of our interest payments would be little changed.

The second aspect of this issue is that our deficit hawks are very selective on what burdens they want policymakers to focus on. The accrual of debt is only one way that the government commits us to future payments.

When it gives out patent and copyright monopolies it is also committing us to future payments, as the holders of these monopolies will be extracting rents for many years. These rents can be thought of like privately collected taxes. In effect, we are allowing Pfizer to collect a tax on drugs and Microsoft to collect a tax on software as payment for the research and development expenses they incurred to develop these products.

These rents dwarf the size of our interest payments on the debt. In the case of prescription drugs alone, the gap between the price we pay with patents and other protections and the free market price is close to $400 billion a year, or 1.8 percent of GDP. If we add in the rents on medical equipment, computer software, fertilizers, pesticides, and other chemicals, and various other areas, it likely exceeds $1 trillion annually, or 4.5 percent of GDP.

We can argue about the merits of the patent and copyright systems (I am not a fan, see Rigged [it’s free] chapter 5), but there is literally no logical basis for excluding the burdens created as a result of government-granted patent and copyright monopolies when talking about the burden of the government debt. The decision by deficit hawks not to include these rents in calculating future burdens can only be explained by political motivations, where they don’t want to bring huge rents earned by large corporations into the discussion.

Finally, if we are seriously talking about the burdens we impose on our children, we have to talk about the whole society we pass down. If we pay off the national debt but do nothing to slow global warming, our children and grandchildren have every right to hate us and laugh in our face if we tell them about how we paid off the debt.

Basically, the debt tells us nothing about generational equity. That is a simple point that it is long past time that we learned, and then we can teach our children.

For all the suffering caused by the pandemic, one important positive effect is that it may lead to clearer thinking about government debt and deficits. To Congress’s credit, it has focused on dealing with the problem of sustaining the country through a period in which much of the economy is shut down, rather than worrying about the large deficit it will run this year, as well as the amount it is adding to the national debt. (I strongly suspect that this would not be the situation if a Democrat was in the White House. In that case, most Republicans would likely be making angry speeches feigning outrage over the burden that Obama, Biden, etc. was imposing on our children and grandchildren.)

Anyhow, the story on the deficit and debt are both simpler and more complicated than is generally imagined. The basic question with the deficit is, are we pushing the economy too hard? Specifically, the issue is whether the additional demand created by a government deficit is exceeding the economy’s ability to produce goods and services, leading to inflation.

There is an intermediate step in this story. If the Federal Reserve Board correctly sees excessive demand leading to inflationary pressures, then it may act to head off actual inflation by raising interest rates. In that case, the problem of a large budget deficit would be high interest rates in the economy. High interest rates will reduce demand by lowering housing construction, public and private investment, and consumption. High interest rates will also raise the value of the dollar, reducing net exports. This reduction in demand prevents inflation, but means that we will have less investment for the future.

Of course, the Fed may also raise interest rates out of a mistaken belief in inflationary risks, in which case the Fed was the cause of high interest rates, not the fact that the economy was being pushed beyond its limits. That was likely the case in 2018 when the Fed raised interest rates four times. As it turned out, there was very little evidence of accelerating inflation and wage growth peaked in early 2019, in spite of the extraordinarily low unemployment rate last year.

Anyhow, the immediate concern with large budget deficits is whether they are leading to too much demand in the economy, and therefore generating either high inflation or high interest rates. Ordinarily, a $2 trillion boost to demand (roughly 10 percent of GDP) would lead to a serious problem of inflation, especially with an economy operating at 3.6 percent unemployment. However, tens of millions of workers are now losing their paychecks, so consumption demand would be collapsing without the additional spending and tax cuts. The purpose of this rescue plan is to allow families to more or less keep themselves whole through a period in which large segments of the economy are shut down.

There is actually a possibility that this could lead to inflation, as people are competing for a relatively limited supply of goods and services. Thus far, there have been shortages of fairly narrow categories of items, such as toilet paper, cleaning supplies, and other items seeing unusually high demand as a result of the pandemic.

Many stores have looked to ration sales, rather than jack up prices, limiting the inflation coming from these sectors. However, that could change if the shutdowns are prolonged or if other links in the supply chain began to fray. For example, if we see a big falloff in the number of truckers willing to drive through the crisis, we may see widespread shortages of a wide range of items. That could lead to a serious problem with inflation.

However, even in this case, the budget deficit is not really the cause of the problem. We may face shortages of food, drugs, and all sorts of other items, which would result in higher prices because the government is giving people money to buy these things, but the shortages would still be there without the budget deficits. In that case, large numbers of people who are now getting unemployment insurance and other forms of income support in the shutdown period, simply would not be able to buy anything, thereby eliminating the demand and price pressure.

The additional spending in the rescue package is essentially about allowing people to pay for food, rent, and other necessities until they are able to return to work. We don’t really have any alternative unless we are prepared to see mass impoverishment. The extent to which this leads to serious problems with inflation will depend on our ability to maintain the flow of essential goods and services through a shutdown period. If we can do that, then the large deficit will not be a problem.

 

The Debt Burden on Our Children

The other part of the big deficit story is that we are adding more than $2 trillion to the debt that our children and grandchildren will have to pay off, or so the story goes. While that may sound scary, there are several points to keep in mind.

First, this is not a case of our children paying the money to us, it is a case of some of our children paying money to other of our children. At some point, everyone who is alive today will be dead.  At that point, the interest will be paid to whoever happened to inherit the bonds. So, the burden created by the debt is not really our kids paying interest on government bonds to us, the problem is that most of our kids will be paying interest to the heirs of Bill Gates, Jeff Bezos, and other wealthy people. That is not an inter-generational problem, it is an intragenerational problem.

It is also important to keep our eye on the ball. The burden of the debt, insofar as there is one, is the amount of money that we are paying out each year in interest to service the debt. In spite of our high debt-to-GDP ratio, that figure is actually quite low now, around 1.5 percent of GDP. That compares to an interest burden of more than 3.0 percent of GDP in the early and mid-1990s.

The reason the burden is so low is that interest rates are low. Also, much of the debt is held by the Fed. In that case, the Treasury is paying interest on bonds to the Fed, which then rebates it to the Treasury. That debt imposes no burden whatsoever.

An interesting guidepost in this story is Japan, which now has a debt-to-GDP ratio of close to 250 percent. Its interest burden is essentially zero, as investors actually pay the government to lend it money.

Of course, interest rates could rise in the United States, but even then, we have to ask the reason. Suppose the inflation rate jumps from roughly 2.0 percent to 4.0 percent and interest rates also increase by two percentage points. In that case, we would be paying more nominal interest, but the real value of the debt would be getting eroded at the rate of 4.0 percent annually, rather than 2.0 percent annually. The actual burden of our interest payments would be little changed.

The second aspect of this issue is that our deficit hawks are very selective on what burdens they want policymakers to focus on. The accrual of debt is only one way that the government commits us to future payments.

When it gives out patent and copyright monopolies it is also committing us to future payments, as the holders of these monopolies will be extracting rents for many years. These rents can be thought of like privately collected taxes. In effect, we are allowing Pfizer to collect a tax on drugs and Microsoft to collect a tax on software as payment for the research and development expenses they incurred to develop these products.

These rents dwarf the size of our interest payments on the debt. In the case of prescription drugs alone, the gap between the price we pay with patents and other protections and the free market price is close to $400 billion a year, or 1.8 percent of GDP. If we add in the rents on medical equipment, computer software, fertilizers, pesticides, and other chemicals, and various other areas, it likely exceeds $1 trillion annually, or 4.5 percent of GDP.

We can argue about the merits of the patent and copyright systems (I am not a fan, see Rigged [it’s free] chapter 5), but there is literally no logical basis for excluding the burdens created as a result of government-granted patent and copyright monopolies when talking about the burden of the government debt. The decision by deficit hawks not to include these rents in calculating future burdens can only be explained by political motivations, where they don’t want to bring huge rents earned by large corporations into the discussion.

Finally, if we are seriously talking about the burdens we impose on our children, we have to talk about the whole society we pass down. If we pay off the national debt but do nothing to slow global warming, our children and grandchildren have every right to hate us and laugh in our face if we tell them about how we paid off the debt.

Basically, the debt tells us nothing about generational equity. That is a simple point that it is long past time that we learned, and then we can teach our children.

Neil Irwin tells us there will be fundamental changes in the world economy as a result of the pandemic. While he repeats many things that are conventional wisdom, as is often the case, the conventional wisdom is not very wise.

First, the pandemic is supposed to teach us the dangers of having foreign sources of supply, as parts of our supply chain from China shut down when it was hard hit by the virus in December and January. While this is supposed to be a key takeaway from the pandemic, it makes little sense.

We have seen major factories shut down in the United States as a result of the pandemic, most recently a South Dakota processing plant that produces five percent of the nation’s retail pork. The United States does have a huge domestic market, so it can see shutdowns in certain segments and still likely get by without severe shortages, but smaller countries absolutely need diverse sources. And, even in the case of the United States, it is helpful to have access to producers worldwide rather than being forced to just rely on domestic sources, especially since the timing and severity of the pandemic have varied greatly across countries.

The real lesson from this episode is the importance of having large stockpiles of key medical gear. The U.S. did not have adequate stockpiles because of the negligence of its government, but this issue is independent of where the items are produced.

The piece also raises the issue of U.S. companies being reluctant to invest in China because of concerns over intellectual property theft. While this is an often-stated concern, most items, like prescription drugs, can be reverse engineered without great difficulty. The U.S. will be better able to limit China’s appropriation of items to which U.S. corporations have patent monopolies or related claims if it has agreements with China requiring it to respect these rules.

In the absence of such agreements, there is no reason that China should not make copies of items like prescription drugs, medical equipment, fertilizers, pesticides, computers, and software, to which U.S. companies have intellectual property claims, and sell them freely both on their domestic market and internationally.  If the U.S. wants to protect the intellectual property claims of its corporations it will need more engagement with China, not less.

Finally, the piece does raise the importance of the dollar as the world’s major reserve currency. This is and has been a growing problem for the world economy, since it makes much of the world subject to the whims of the Federal Reserve Board and the U.S. administration. In the last crisis, dollar swap lines were extended to certain countries, and not others, for clearly political purposes. This is likely happening again today.

However, the issue here is not the importance of the dollar, but rather the reluctance of other major economic powers (e.g. the EU, Japan, and even China) to directly challenge U.S. policy. Given the erratic and arbitrary actions of the Trump administration, hopefully, they will get over this reluctance, but to date this has not been the case.

Neil Irwin tells us there will be fundamental changes in the world economy as a result of the pandemic. While he repeats many things that are conventional wisdom, as is often the case, the conventional wisdom is not very wise.

First, the pandemic is supposed to teach us the dangers of having foreign sources of supply, as parts of our supply chain from China shut down when it was hard hit by the virus in December and January. While this is supposed to be a key takeaway from the pandemic, it makes little sense.

We have seen major factories shut down in the United States as a result of the pandemic, most recently a South Dakota processing plant that produces five percent of the nation’s retail pork. The United States does have a huge domestic market, so it can see shutdowns in certain segments and still likely get by without severe shortages, but smaller countries absolutely need diverse sources. And, even in the case of the United States, it is helpful to have access to producers worldwide rather than being forced to just rely on domestic sources, especially since the timing and severity of the pandemic have varied greatly across countries.

The real lesson from this episode is the importance of having large stockpiles of key medical gear. The U.S. did not have adequate stockpiles because of the negligence of its government, but this issue is independent of where the items are produced.

The piece also raises the issue of U.S. companies being reluctant to invest in China because of concerns over intellectual property theft. While this is an often-stated concern, most items, like prescription drugs, can be reverse engineered without great difficulty. The U.S. will be better able to limit China’s appropriation of items to which U.S. corporations have patent monopolies or related claims if it has agreements with China requiring it to respect these rules.

In the absence of such agreements, there is no reason that China should not make copies of items like prescription drugs, medical equipment, fertilizers, pesticides, computers, and software, to which U.S. companies have intellectual property claims, and sell them freely both on their domestic market and internationally.  If the U.S. wants to protect the intellectual property claims of its corporations it will need more engagement with China, not less.

Finally, the piece does raise the importance of the dollar as the world’s major reserve currency. This is and has been a growing problem for the world economy, since it makes much of the world subject to the whims of the Federal Reserve Board and the U.S. administration. In the last crisis, dollar swap lines were extended to certain countries, and not others, for clearly political purposes. This is likely happening again today.

However, the issue here is not the importance of the dollar, but rather the reluctance of other major economic powers (e.g. the EU, Japan, and even China) to directly challenge U.S. policy. Given the erratic and arbitrary actions of the Trump administration, hopefully, they will get over this reluctance, but to date this has not been the case.

I wrote a piece last week giving some quick thoughts on the post-pandemic economy. I have a few more items to toss in the mix.

As I said in the last piece, I think many people will have money to spend and be anxious to spend it. For most people who kept their jobs, the $1,200 check from the government will be a pure bonus. Also, many of the unemployed will be kept whole or even come out somewhat ahead with the $600 supplement to regular benefits. (Remember, the median weekly wage for full-time workers is just $933, and many of those getting benefits were not working full-time prior to the crisis.)

Most people were not spending money on anything other than necessities during the crisis. Not only were people not going to stores, restaurants, and movies, they were also not buying cars and houses, both of which saw sharp drops in sales in March and are certain to see sharper falls in April.

This means that when we unwind the lockdowns, most likely sometime in May (I’m referring to the politics, not passing judgment as a public health expert) we will have a lot of people looking to make up for having gone two months or more without spending much money. An advantage of car and house sales is that they can generally be done in ways that are consistent with social distancing. Realtors and car dealers don’t have to come into direct contact with their clients and presumably can make do without a ceremonial handshake to seal a deal.

A surge in car sales and house sales will likely send factory demand booming, as auto manufacturers will soon see bloated inventories run down. House sales guarantee a big demand for appliances, like refrigerators and washing machines. Whether U.S. manufacturers are positioned to meet this demand (it will require maintaining safe working conditions in their factories) is an open question, but if they can’t meet the demand, it will lead to a surge in imports, when new supply sources can be found.

The potential backlogs here are likely to mean that sellers will have considerable pricing power, at least for a period of time. Other businesses are also likely to see capacity constraints, accompanied by higher costs. For example, stores will likely need to limit the number of people who enter and have someone at the door doing at least minimal testing (e.g. taking temperatures at the door and asking about contacts), in order to provide some assurance of safety. The capacity constraints will be worse insofar as many businesses do not reopen.

Insofar as restaurants are able to reopen, they will also need to do some checking and likely steer people to outdoor seating and/or have customers much more widely spaced than normal. In the same vein, airlines are likely to fly with limited capacity, for example, Delta is not selling middle seats.

To me, this looks like a story where we see substantial price hikes in many parts of the economy, as businesses adjust to a world where the pandemic is somewhat under control, but far from completely contained. The growth figures for the third quarter are likely to show a sharp rebound from a second-quarter plunge, but still leave us well-below pre-crisis levels of output. This will still leave us with a serious slump and high unemployment, but a real problem with inflation.

We can work through this period if the Fed allows the economy the time to adjust to new circumstances, but there is no guarantee it will be so accommodating. I should add that it easy to envision a far worse scenario if Congress does not approve additional funds for the small business loan program and does not approve enough money for state and local governments to avoid major austerity measures. We should know whether they have come through in these areas in a week or so.

 

 

I wrote a piece last week giving some quick thoughts on the post-pandemic economy. I have a few more items to toss in the mix.

As I said in the last piece, I think many people will have money to spend and be anxious to spend it. For most people who kept their jobs, the $1,200 check from the government will be a pure bonus. Also, many of the unemployed will be kept whole or even come out somewhat ahead with the $600 supplement to regular benefits. (Remember, the median weekly wage for full-time workers is just $933, and many of those getting benefits were not working full-time prior to the crisis.)

Most people were not spending money on anything other than necessities during the crisis. Not only were people not going to stores, restaurants, and movies, they were also not buying cars and houses, both of which saw sharp drops in sales in March and are certain to see sharper falls in April.

This means that when we unwind the lockdowns, most likely sometime in May (I’m referring to the politics, not passing judgment as a public health expert) we will have a lot of people looking to make up for having gone two months or more without spending much money. An advantage of car and house sales is that they can generally be done in ways that are consistent with social distancing. Realtors and car dealers don’t have to come into direct contact with their clients and presumably can make do without a ceremonial handshake to seal a deal.

A surge in car sales and house sales will likely send factory demand booming, as auto manufacturers will soon see bloated inventories run down. House sales guarantee a big demand for appliances, like refrigerators and washing machines. Whether U.S. manufacturers are positioned to meet this demand (it will require maintaining safe working conditions in their factories) is an open question, but if they can’t meet the demand, it will lead to a surge in imports, when new supply sources can be found.

The potential backlogs here are likely to mean that sellers will have considerable pricing power, at least for a period of time. Other businesses are also likely to see capacity constraints, accompanied by higher costs. For example, stores will likely need to limit the number of people who enter and have someone at the door doing at least minimal testing (e.g. taking temperatures at the door and asking about contacts), in order to provide some assurance of safety. The capacity constraints will be worse insofar as many businesses do not reopen.

Insofar as restaurants are able to reopen, they will also need to do some checking and likely steer people to outdoor seating and/or have customers much more widely spaced than normal. In the same vein, airlines are likely to fly with limited capacity, for example, Delta is not selling middle seats.

To me, this looks like a story where we see substantial price hikes in many parts of the economy, as businesses adjust to a world where the pandemic is somewhat under control, but far from completely contained. The growth figures for the third quarter are likely to show a sharp rebound from a second-quarter plunge, but still leave us well-below pre-crisis levels of output. This will still leave us with a serious slump and high unemployment, but a real problem with inflation.

We can work through this period if the Fed allows the economy the time to adjust to new circumstances, but there is no guarantee it will be so accommodating. I should add that it easy to envision a far worse scenario if Congress does not approve additional funds for the small business loan program and does not approve enough money for state and local governments to avoid major austerity measures. We should know whether they have come through in these areas in a week or so.

 

 

A Washington Post piece that noted the lack of disclosure requirements in the current round of bailouts referred to efforts to force disclosures in the last bailout. It only noted a suit by Bloomberg to force the Fed to make disclosures:

“During the global financial crisis, the Federal Reserve refused to turn over to reporters the records of some of its emergency bank lending. Bloomberg, the media company, sued for their release and, in a case that went to the Supreme Court, won three years later.”

There were also major disclosures as a result of an amendment that Bernie Sanders got attached to the Dodd-Frank financial reform bill. Sanders’s amendment had the support of a number of very conservative Republicans, which together with more progressive Democrats gave Sanders the ability to force Dodd to include the amendment in the bill.

A Washington Post piece that noted the lack of disclosure requirements in the current round of bailouts referred to efforts to force disclosures in the last bailout. It only noted a suit by Bloomberg to force the Fed to make disclosures:

“During the global financial crisis, the Federal Reserve refused to turn over to reporters the records of some of its emergency bank lending. Bloomberg, the media company, sued for their release and, in a case that went to the Supreme Court, won three years later.”

There were also major disclosures as a result of an amendment that Bernie Sanders got attached to the Dodd-Frank financial reform bill. Sanders’s amendment had the support of a number of very conservative Republicans, which together with more progressive Democrats gave Sanders the ability to force Dodd to include the amendment in the bill.

That’s for those of you who saw the Washington Post article telling us that we are committed to paying $893 billion over two years to the World Health Organization (WHO). If Trump moves to cut back or eliminate this funding it is not going to have a major impact on our budget situation.

On the plus side, if the U.S. cuts back support for the WHO, it may be better positioned to promote compulsory licensing of drugs produced by the U.S. pharmaceutical industry. This could radically reduce the prices paid for drugs by many developing countries. (European countries with large pharmaceutical companies are likely to continue to oppose compulsory licensing.)

That’s for those of you who saw the Washington Post article telling us that we are committed to paying $893 billion over two years to the World Health Organization (WHO). If Trump moves to cut back or eliminate this funding it is not going to have a major impact on our budget situation.

On the plus side, if the U.S. cuts back support for the WHO, it may be better positioned to promote compulsory licensing of drugs produced by the U.S. pharmaceutical industry. This could radically reduce the prices paid for drugs by many developing countries. (European countries with large pharmaceutical companies are likely to continue to oppose compulsory licensing.)

When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.

The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.

The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.

While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.

The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.  

The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.

From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).

Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.

(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)

Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends.  

When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.

The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.

The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.

While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.

The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.  

The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.

From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).

Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.

(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)

Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends.  

(This post first appeared on my Patreon page.)

We have a lot of economist type people telling us how awful the economy will be once we get through our near-term shutdown period. At the risk of being accused of unwarranted optimism, I am not sure I buy the pessimists’ story.

Before saying anything about the economy, we have to outline where we think our containment efforts are headed. I will throw out my story, which people here who know what they are talking about can correct.

Let’s assume that after two months we have the coronavirus reasonably well-contained. People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personal are no longer being worked to exhaustion and beyond.

At least as important, let’s assume that we have testing fairly well advanced so that we can quickly identify people with the disease and both quarantine them and test the people with whom they have been in contact.

We can also envision that we would be able to do some quick checks, that while not conclusive, should be able to substantially reduce the likelihood of an infected person entering a public place. To give an example, my wife and I visited a doctor’s office yesterday (not coronavirus related). We had our temperatures checked before we entered and were asked a series of questions about our own health and the people with whom we had been in contact.

This sort of testing is hardly foolproof, recently infected people generally won’t have fevers, and people may not be truthful about their health or their contacts, but this sort of simple check should screen out a substantial share of the people who are infected. I would also be fairly confident that we can develop better techniques over the period of the shutdown. Anyhow, checks of this sort should allow most businesses to reopen with the requirement that they have people stationed at the door whenever the business is open, so that in principle no one can enter without going through this sort of check.

Those pushing negative views on the post-pandemic economy generally highlight the situation of heavily indebted businesses that face bankruptcy. Clearly, there were many businesses that were heavily indebted prior to the crisis, although this burden was often exaggerated by those who focused on debt rather than interest burdens. We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate.

It is also wrong to imagine that bankruptcy is the end of the world. Businesses that are otherwise viable can and do operate through bankruptcies. (Most of our major airlines have been through at least one bankruptcy.) There will undoubtedly be a huge mess sorting out unpaid bills when the lockdown period ends (look to a boon for the accounting industry). It would be helpful if states (mostly a state issue) passed simplifying rules to cover loss-sharing over the shutdown period, but the idea that large numbers of businesses will be unable to reopen due to debt simply does not make sense.

Even apart from bankruptcy, a creditor has no interest in forcing an otherwise viable business to shut down. It is better for the business to be able to operate and allow the creditor to recover some of their debt than to shut it down and hope to get a few dollars from selling the scraps.

We have seen a lot of talk about how the plunge in the stock market will pose a huge blow to households and pension funds. Most households actually have little or no money in the stock market, but the important point in this discussion is that, even with the recent plunge, the market is still (April 2) roughly 17 percent above its level of five years ago. That is not a great return, but not too much worse than investors had a right to expect. So, the idea that the drop in the market is leaving everyone destitute does not make much sense. It essentially means that they don’t have as much money as they would like.

From the standpoint of households, most should come through a two-month shutdown period in pretty good financial shape. The rescue package will do a decent job keeping most people whole, through the loans to small businesses maintaining their payroll, the relatively generous unemployment benefits, and the $1,200 per person checks. There are many people who will fall through the cracks, most importantly undocumented workers, but the bulk of the workforce should have something close to their pre-crisis income over this period.

At the same time, their spending would have been quite restricted. They have not been able to go to restaurants, movies, travel, or spend on most other items, except bare necessities. If the economy can reopen in June, we are likely to see large numbers of people rushing to do the things they could not do for the prior two months.

This means that restaurants and stores are likely to be flooded with customers. This will also be the case with car dealers and appliance stores, as people will have put off major purchases through the shutdown period. Many businesses will have difficulty dealing with a big surge of customers since they have not retained their staff, and will be forced to hire and train new workers. We are also likely to see a burst of travel as people make up for the prior two months. Also, many conventions and business trips that were scheduled for the shutdown period will be rescheduled for the late summer and fall. On the morbid side, there will be many people who will want to visit with family members after the loss of a loved one.  

Will this demand be enough to re-employ all the workers now being laid off? There clearly will be a major sorting out period, but I don’t think it is possible to reach any firm conclusions.

First, hopefully, most workers will have the option to return to their former employers. This will likely be the case where employers had the foresight to keep workers on their payrolls. In cases where they laid-off workers, when they reopen, most will likely be looking to hire roughly the same number of workers that they laid off.

The qualification is that many businesses may have found more efficient ways to do things. This is productivity growth, which is ordinarily a good thing, but perhaps not just now. Some businesses may also not reopen if they were already marginally profitable and/or the owner(s) were getting tired of running a business. On the flip side, if restaurants, stores, airports and other public places all have to hire workers to test and question people before they can enter, this will be a major new source of employment.  

It is also likely that some people who were in the workforce in the pre-crisis period will decide not to come back to work. This is especially likely to be the case with older workers who were nearing retirement anyhow. There were 11.6 million employed people between the ages of 60 and 64 before the crisis and 10.8 million over age 65. If 5.0 percent of the former and 10.0 percent of the latter decide to leave the labor force, that would mean 1.7 million fewer potential workers than before the crisis.

I don’t have any simple way of determining how this nets out, but I think it’s important to realize that the stories of weak near recession or even depression economy are not well-founded. It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand. Hopefully, the Fed would move cautiously in its response, recognizing this as a one-time jump that will soon be eroded as more capacity on line. But Jerome Powell probably won’t be calling me for advice, and it’s possible to envision a stop-start scenario where the Fed zig zags on interest rates, responding to the immediate economic data.

Of course, we could see a much worse recovery scenario than I have outlined here, especially if we are unable to control the spread of the disease. If we still lack adequate testing two months from now, and we still see the number of cases spiraling out of control, then we would be seeing a much worse scenario. I have no expertise on the likelihood of the different paths of the pandemic, but I would hope the one I have outlined is at least plausible.

Anyhow, my main point here is that I don’t believe the folks predicting a bad recession following our period of shutdown have really thought through the picture carefully. This matters for policy now as we discuss plans for a new spending bill. Since we don’t know the economy will be suffering from a shortfall in demand, generic spending is not advisable at this point.

At the same time, there are needs that should be addressed. We certainly need to spend more ensuring adequate supplies of medical equipment, protective gear, and training more medical personal to help in the crisis. (In the last category, we can quickly train people to do mundane tasks like changing bedding and cleaning surfaces that will free up time for more highly-trained medical professionals.) State and local governments are seeing an unprecedented collapse in revenue at the same time they seeing an explosion in demand for their services. They need far more money than was appropriated in the last bill.

These should be our priorities. If we want to spend more, it should be in our areas where more spending would be valuable whether or not the economy needs stimulus, such as clean energy, child care, and conservation. But we definitely should not commit ourselves to large amounts of spending for the sake of spending. That definitely made sense in the 2008-2009 recession, it is not clear it does now.

(This post first appeared on my Patreon page.)

We have a lot of economist type people telling us how awful the economy will be once we get through our near-term shutdown period. At the risk of being accused of unwarranted optimism, I am not sure I buy the pessimists’ story.

Before saying anything about the economy, we have to outline where we think our containment efforts are headed. I will throw out my story, which people here who know what they are talking about can correct.

Let’s assume that after two months we have the coronavirus reasonably well-contained. People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personal are no longer being worked to exhaustion and beyond.

At least as important, let’s assume that we have testing fairly well advanced so that we can quickly identify people with the disease and both quarantine them and test the people with whom they have been in contact.

We can also envision that we would be able to do some quick checks, that while not conclusive, should be able to substantially reduce the likelihood of an infected person entering a public place. To give an example, my wife and I visited a doctor’s office yesterday (not coronavirus related). We had our temperatures checked before we entered and were asked a series of questions about our own health and the people with whom we had been in contact.

This sort of testing is hardly foolproof, recently infected people generally won’t have fevers, and people may not be truthful about their health or their contacts, but this sort of simple check should screen out a substantial share of the people who are infected. I would also be fairly confident that we can develop better techniques over the period of the shutdown. Anyhow, checks of this sort should allow most businesses to reopen with the requirement that they have people stationed at the door whenever the business is open, so that in principle no one can enter without going through this sort of check.

Those pushing negative views on the post-pandemic economy generally highlight the situation of heavily indebted businesses that face bankruptcy. Clearly, there were many businesses that were heavily indebted prior to the crisis, although this burden was often exaggerated by those who focused on debt rather than interest burdens. We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate.

It is also wrong to imagine that bankruptcy is the end of the world. Businesses that are otherwise viable can and do operate through bankruptcies. (Most of our major airlines have been through at least one bankruptcy.) There will undoubtedly be a huge mess sorting out unpaid bills when the lockdown period ends (look to a boon for the accounting industry). It would be helpful if states (mostly a state issue) passed simplifying rules to cover loss-sharing over the shutdown period, but the idea that large numbers of businesses will be unable to reopen due to debt simply does not make sense.

Even apart from bankruptcy, a creditor has no interest in forcing an otherwise viable business to shut down. It is better for the business to be able to operate and allow the creditor to recover some of their debt than to shut it down and hope to get a few dollars from selling the scraps.

We have seen a lot of talk about how the plunge in the stock market will pose a huge blow to households and pension funds. Most households actually have little or no money in the stock market, but the important point in this discussion is that, even with the recent plunge, the market is still (April 2) roughly 17 percent above its level of five years ago. That is not a great return, but not too much worse than investors had a right to expect. So, the idea that the drop in the market is leaving everyone destitute does not make much sense. It essentially means that they don’t have as much money as they would like.

From the standpoint of households, most should come through a two-month shutdown period in pretty good financial shape. The rescue package will do a decent job keeping most people whole, through the loans to small businesses maintaining their payroll, the relatively generous unemployment benefits, and the $1,200 per person checks. There are many people who will fall through the cracks, most importantly undocumented workers, but the bulk of the workforce should have something close to their pre-crisis income over this period.

At the same time, their spending would have been quite restricted. They have not been able to go to restaurants, movies, travel, or spend on most other items, except bare necessities. If the economy can reopen in June, we are likely to see large numbers of people rushing to do the things they could not do for the prior two months.

This means that restaurants and stores are likely to be flooded with customers. This will also be the case with car dealers and appliance stores, as people will have put off major purchases through the shutdown period. Many businesses will have difficulty dealing with a big surge of customers since they have not retained their staff, and will be forced to hire and train new workers. We are also likely to see a burst of travel as people make up for the prior two months. Also, many conventions and business trips that were scheduled for the shutdown period will be rescheduled for the late summer and fall. On the morbid side, there will be many people who will want to visit with family members after the loss of a loved one.  

Will this demand be enough to re-employ all the workers now being laid off? There clearly will be a major sorting out period, but I don’t think it is possible to reach any firm conclusions.

First, hopefully, most workers will have the option to return to their former employers. This will likely be the case where employers had the foresight to keep workers on their payrolls. In cases where they laid-off workers, when they reopen, most will likely be looking to hire roughly the same number of workers that they laid off.

The qualification is that many businesses may have found more efficient ways to do things. This is productivity growth, which is ordinarily a good thing, but perhaps not just now. Some businesses may also not reopen if they were already marginally profitable and/or the owner(s) were getting tired of running a business. On the flip side, if restaurants, stores, airports and other public places all have to hire workers to test and question people before they can enter, this will be a major new source of employment.  

It is also likely that some people who were in the workforce in the pre-crisis period will decide not to come back to work. This is especially likely to be the case with older workers who were nearing retirement anyhow. There were 11.6 million employed people between the ages of 60 and 64 before the crisis and 10.8 million over age 65. If 5.0 percent of the former and 10.0 percent of the latter decide to leave the labor force, that would mean 1.7 million fewer potential workers than before the crisis.

I don’t have any simple way of determining how this nets out, but I think it’s important to realize that the stories of weak near recession or even depression economy are not well-founded. It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand. Hopefully, the Fed would move cautiously in its response, recognizing this as a one-time jump that will soon be eroded as more capacity on line. But Jerome Powell probably won’t be calling me for advice, and it’s possible to envision a stop-start scenario where the Fed zig zags on interest rates, responding to the immediate economic data.

Of course, we could see a much worse recovery scenario than I have outlined here, especially if we are unable to control the spread of the disease. If we still lack adequate testing two months from now, and we still see the number of cases spiraling out of control, then we would be seeing a much worse scenario. I have no expertise on the likelihood of the different paths of the pandemic, but I would hope the one I have outlined is at least plausible.

Anyhow, my main point here is that I don’t believe the folks predicting a bad recession following our period of shutdown have really thought through the picture carefully. This matters for policy now as we discuss plans for a new spending bill. Since we don’t know the economy will be suffering from a shortfall in demand, generic spending is not advisable at this point.

At the same time, there are needs that should be addressed. We certainly need to spend more ensuring adequate supplies of medical equipment, protective gear, and training more medical personal to help in the crisis. (In the last category, we can quickly train people to do mundane tasks like changing bedding and cleaning surfaces that will free up time for more highly-trained medical professionals.) State and local governments are seeing an unprecedented collapse in revenue at the same time they seeing an explosion in demand for their services. They need far more money than was appropriated in the last bill.

These should be our priorities. If we want to spend more, it should be in our areas where more spending would be valuable whether or not the economy needs stimulus, such as clean energy, child care, and conservation. But we definitely should not commit ourselves to large amounts of spending for the sake of spending. That definitely made sense in the 2008-2009 recession, it is not clear it does now.

Folks probably recall that the federal government “made money” from the last bailout. Guess what? We’re going to make money from this one too.

Let’s go through the simple logic here. The federal government is by far the lowest cost borrower in the country. It can borrow right now at an average interest rate of roughly 0.5 percent. (That’s averaging short-term and long-term rates.) It is going to lend to the bailout beneficiaries at a higher rate, let’s say 4.0 percent. This means that it will net 3.5 percent annually on the money it lends out.

So, if we take the $17 billion designated for Boeing in the rescue package and assume it is borrowed for a year (it may be considerably longer), then we will make $595 million on this bailout. Sounds great doesn’t it?

But let’s step back for a second. The government can lend money to anyone in this crisis. If Boeing is borrowing from the government at a 4.0 percent interest rate, then it is because it would have to pay more to borrow in the private market. Let’s say it would cost 9.0 percentage points to borrow in the private market. This means that we effectively subsidized the loan by 5.0  percentage points (9.0 percent minus 4.0 percent). That is the same as handing Boeing $500 million on its one-year loan.

If this is hard to understand, suppose I had a home that I paid $150,000 for. Imagine that I could sell it for $250,000 on the market, but I chose to sell it to a friend for $200,000. While I still made $50,000 on the home (I got $200,000 from my friend, but only paid $150,000), I effectively gave my friend $50,000.

In this case Boeing is our friend since it is in the privileged position of being able to borrow at below-market interest rates. In the Great Recession, Goldman Sachs, Citigroup and the other big banks were our friends.

Of course, in principle, there is the risk that these businesses will go under and not be able to repay their loans. In the Great Recession that risk was essentially zero. As then-Treasury Secretary Timothy Geithner wrote in his autobiography, he was not going to allow any more Lehmans. If any of the major banks were threatened with failure, he would give them enough of the taxpayers’ dollars to keep them going. Eventually, getting below-market interest rate loans from the government, coupled with a fairly explicit government guarantee of solvency, will allow even a seriously underwater bank to get back in the black. This is the story of the 2008-09 bailouts.

Can we be assured that Boeing will be able to survive to pay back its loans? My personal bet is that, if $17 billion is not enough to get it through, there will be Round II and Round III of the rescue, so that eventually our politicians and hack columnists will be able to say that we made a profit on the bailout. 

So folks, you should be happy that we are bailing out all these big corporations. We’re going to make money on it!

Folks probably recall that the federal government “made money” from the last bailout. Guess what? We’re going to make money from this one too.

Let’s go through the simple logic here. The federal government is by far the lowest cost borrower in the country. It can borrow right now at an average interest rate of roughly 0.5 percent. (That’s averaging short-term and long-term rates.) It is going to lend to the bailout beneficiaries at a higher rate, let’s say 4.0 percent. This means that it will net 3.5 percent annually on the money it lends out.

So, if we take the $17 billion designated for Boeing in the rescue package and assume it is borrowed for a year (it may be considerably longer), then we will make $595 million on this bailout. Sounds great doesn’t it?

But let’s step back for a second. The government can lend money to anyone in this crisis. If Boeing is borrowing from the government at a 4.0 percent interest rate, then it is because it would have to pay more to borrow in the private market. Let’s say it would cost 9.0 percentage points to borrow in the private market. This means that we effectively subsidized the loan by 5.0  percentage points (9.0 percent minus 4.0 percent). That is the same as handing Boeing $500 million on its one-year loan.

If this is hard to understand, suppose I had a home that I paid $150,000 for. Imagine that I could sell it for $250,000 on the market, but I chose to sell it to a friend for $200,000. While I still made $50,000 on the home (I got $200,000 from my friend, but only paid $150,000), I effectively gave my friend $50,000.

In this case Boeing is our friend since it is in the privileged position of being able to borrow at below-market interest rates. In the Great Recession, Goldman Sachs, Citigroup and the other big banks were our friends.

Of course, in principle, there is the risk that these businesses will go under and not be able to repay their loans. In the Great Recession that risk was essentially zero. As then-Treasury Secretary Timothy Geithner wrote in his autobiography, he was not going to allow any more Lehmans. If any of the major banks were threatened with failure, he would give them enough of the taxpayers’ dollars to keep them going. Eventually, getting below-market interest rate loans from the government, coupled with a fairly explicit government guarantee of solvency, will allow even a seriously underwater bank to get back in the black. This is the story of the 2008-09 bailouts.

Can we be assured that Boeing will be able to survive to pay back its loans? My personal bet is that, if $17 billion is not enough to get it through, there will be Round II and Round III of the rescue, so that eventually our politicians and hack columnists will be able to say that we made a profit on the bailout. 

So folks, you should be happy that we are bailing out all these big corporations. We’re going to make money on it!

Many people are thinking about policy through this crisis as though the country will be largely shut down for many months. This is not going to happen. The length of this shutdown will be determined by Donald Trump, not science, and he is not going to allow a shutdown of many months regardless of what the science says.

We know that Trump was hugely resistant to the shutdown all along. Just over a week ago he was boasting about how we would have full church pews on Easter. The idea that this could mean hundreds of thousands of additional infections and tens of thousands of deaths apparently did not enter his head.

Fortunately, some of the public health experts were able to deter his Easter Sunday plans, but it is widely reported that he is anxious to end the shutdown and get back to business as normal. After all, the shutdown is depressing the stock market.

A factor that is likely to push Trump further in this direction is the fact that several European countries are making plans to reopen parts of their economy. Both Austria and Denmark plan to end parts of their shutdown in the next couple of weeks. Undoubtedly Trump will be driven into a rage by the idea that Europe, China, South Korea, and other wealthy countries are back on their feet, while Donald Trump’s America is still in shutdown mode.

Of course, these countries have done a far better job testing and controlling the virus, which makes them better situated to reopen their economies (it may still be too soon for them), but Donald Trump doesn’t care about such details. The governors will actually make the call on reopening their states, but it is hard to imagine many red-state governors resisting the demands from Trump to reopen.

The Democratic governors of states like New York and California may be reluctant to go along, but Trump will have zero qualms about threatening them with denials of medical equipment and other resources if they don’t fall in line. Also, the Republicans deliberately starved the blue states of money in the last rescue package. The cost of remaining shut down will mean not having the money to pay the salaries of the police department, the fire department, or for the medical care of people suffering from the coronavirus.

So, when we ask how long the shutdown will last, don’t look to the rate of spread of the pandemic or what the epidemiologists say, look to Donald Trump’s anger and frustration. We will stay shut down as long as his fragile ego will allow, and not a day longer.

 

Many people are thinking about policy through this crisis as though the country will be largely shut down for many months. This is not going to happen. The length of this shutdown will be determined by Donald Trump, not science, and he is not going to allow a shutdown of many months regardless of what the science says.

We know that Trump was hugely resistant to the shutdown all along. Just over a week ago he was boasting about how we would have full church pews on Easter. The idea that this could mean hundreds of thousands of additional infections and tens of thousands of deaths apparently did not enter his head.

Fortunately, some of the public health experts were able to deter his Easter Sunday plans, but it is widely reported that he is anxious to end the shutdown and get back to business as normal. After all, the shutdown is depressing the stock market.

A factor that is likely to push Trump further in this direction is the fact that several European countries are making plans to reopen parts of their economy. Both Austria and Denmark plan to end parts of their shutdown in the next couple of weeks. Undoubtedly Trump will be driven into a rage by the idea that Europe, China, South Korea, and other wealthy countries are back on their feet, while Donald Trump’s America is still in shutdown mode.

Of course, these countries have done a far better job testing and controlling the virus, which makes them better situated to reopen their economies (it may still be too soon for them), but Donald Trump doesn’t care about such details. The governors will actually make the call on reopening their states, but it is hard to imagine many red-state governors resisting the demands from Trump to reopen.

The Democratic governors of states like New York and California may be reluctant to go along, but Trump will have zero qualms about threatening them with denials of medical equipment and other resources if they don’t fall in line. Also, the Republicans deliberately starved the blue states of money in the last rescue package. The cost of remaining shut down will mean not having the money to pay the salaries of the police department, the fire department, or for the medical care of people suffering from the coronavirus.

So, when we ask how long the shutdown will last, don’t look to the rate of spread of the pandemic or what the epidemiologists say, look to Donald Trump’s anger and frustration. We will stay shut down as long as his fragile ego will allow, and not a day longer.

 

With the economy going into a shutdown mode for at least month, and possibly quite a bit longer, we’re again hearing the cries from elite economics columnists about a Second Great Depression. These are pernicious, not only because they are wrongheaded, but they can be used to justify bad things, like giving hundreds of billions of dollars to the bankers who wrecked the economy with their recklessness during the housing bubble.

The basic and simple error made by the Second Great Depression gang is that they imagine we can be condemned to a prolonged period of high unemployment and slow growth by a single bad event. Their story is that letting the banks fail caused the first Great Depression and that we would have had round two if we let the market work its magic in 2008-09 on Goldman Sachs, Citigroup, and the rest. The uncontrolled bank failures were indeed very bad news for the economy at the start of the Great Depression, and a wave of major bank failures in 2008-09 would undoubtedly have made the initial slump worse in the Great Recession, but neither necessitated a prolonged slump.

What got us out of the Great Depression was the massive spending associated with World War II. There was no economic reason we could not have had this spending in 1931 rather than 1941, except have it focused on building roads, schools, hospitals, and other socially useful projects. We didn’t have massive spending in 1931, or 1932, or even during the New Deal, for political reasons, not economic ones.

So let’s stop the game-playing. We need good policy right now to keep people whole through a shutdown period and then to get people back to work when we reopen. Ideally, we will also be addressing long-neglected needs, like universal health care, child care, and slowing global warming, but this Second Great Depression stuff is just silly.

With the economy going into a shutdown mode for at least month, and possibly quite a bit longer, we’re again hearing the cries from elite economics columnists about a Second Great Depression. These are pernicious, not only because they are wrongheaded, but they can be used to justify bad things, like giving hundreds of billions of dollars to the bankers who wrecked the economy with their recklessness during the housing bubble.

The basic and simple error made by the Second Great Depression gang is that they imagine we can be condemned to a prolonged period of high unemployment and slow growth by a single bad event. Their story is that letting the banks fail caused the first Great Depression and that we would have had round two if we let the market work its magic in 2008-09 on Goldman Sachs, Citigroup, and the rest. The uncontrolled bank failures were indeed very bad news for the economy at the start of the Great Depression, and a wave of major bank failures in 2008-09 would undoubtedly have made the initial slump worse in the Great Recession, but neither necessitated a prolonged slump.

What got us out of the Great Depression was the massive spending associated with World War II. There was no economic reason we could not have had this spending in 1931 rather than 1941, except have it focused on building roads, schools, hospitals, and other socially useful projects. We didn’t have massive spending in 1931, or 1932, or even during the New Deal, for political reasons, not economic ones.

So let’s stop the game-playing. We need good policy right now to keep people whole through a shutdown period and then to get people back to work when we reopen. Ideally, we will also be addressing long-neglected needs, like universal health care, child care, and slowing global warming, but this Second Great Depression stuff is just silly.

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