Ron Insana: Legislators ought to give an enormous enhance to Primary Road or go residence
Hundreds of unemployed Kentucky residents wait in long lines outside the Kentucky Career Center for help with their unemployment claims on June 19, 2020 in Frankfort, Kentucky. While the economic recovery has created jobs again since the lowest point of the Covid-19 crisis, millions of Americans remain unemployed.
John Sommers II
There is a contentious debate among Democratic economists spanning the Clinton, Obama and now Biden administrations centered entirely on the size and makeup of the president’s $ 1.9 trillion Covid-19 bailout plan.
At the heart of the debate is not only the size of the package, but also whether it is enough to fill what economists call the “output gap”.
The gap is the difference between growing the economy and growing under optimal conditions.
It is not a purely academic argument, although several academic articles have been published on it, along with a number of contributions in major newspapers.
The outcome of the “output gap” debate has had a big impact on Wall Street too, even if support is targeted on Main Street.
Some argue that the $ 1.9 trillion plan doesn’t have to be too big, as long as it swaps out some of the plan’s pieces to focus on public investment rather than just stimulus tests, state and local aid, and unemployment benefits.
They argue that given the unprecedented stimulus from the Federal Reserve, the $ 2 trillion CARES Act, and the $ 900 billion last approved aid package, the economy has recovered faster than expected, not to mention the historical development and distribution of vaccines.
There are also fears of the unintended consequences of too many incentives, including inflation, and concerns about financial stability.
We have seen evidence that both could or have become problems. (See Trading with GameStop and SPACs.)
As for inflation, the five- and ten-year inflation breakevens, an indicator of rising inflation expectations, rose from 0.5% in the previous year to over 2%. Bad news for bonds, good news for commodities and other “hard assets”.
The impetus historically brought to the economy has driven up consumer spending and savings – even if a large number of people remain unemployed, underemployed or have left the workforce altogether.
Go big or go home
While I agree a little with the argument that the package might be too big, I tend to join the Go Big or Go Home group, and maybe not for reasons some would expect.
(It’s not just about starting another large program full of progressive initiatives.)
First, I believe that despite the bipartisan support for these critical investments, reconstructing the Biden plan to include public investment in infrastructure would be politically impossible at this stage.
Second, I believe that before we spend on infrastructure, the nation needs a full discussion of what kind of infrastructure – beyond roads, bridges, and tunnels – is appropriate for a 21st and even 22nd century economy.
Finally, and I’m burying the lead here, are we measuring the “output gap” right?
The economy has changed extremely quickly amid the pandemic.
The Biden Plan shows that around 400,000 small businesses have permanently ceased operations.
Around 50 million Americans are food insecure, and 20 million receive public support ranging from unemployment controls to food stamps. Eight million people have fallen into poverty, a record number at record speed.
This output can be permanently lost.
How are you helping a small business that has closed its doors for good? It is not just lost wages, but household losses that will affect many families for the rest of their lives.
I think this is a critical issue. While new owners may open businesses where others once stood, previous owners may be permanently hampered by an inability to better rebuild.
In the meantime, the homework phenomenon is likely to continue, while brick and mortar retail and traditional offices face secular headwinds.
Hospitality, leisure and travel, while recovering, are not expected to return to full capacity for years, if at all.
Given the communication technology available, there is likely to be a huge glut of office space, a permanent reduction in business travel, and other major disruptions that could well last for a long time.
Against this background, how do we know whether we are spending too much or too little in order to fully benefit from the economic growth rate again?
Yes, we will recover. Yes, the rapid deployment of vaccines and therapeutics will return to some semblance or normalcy faster than some suggested.
But some “output” will be lost forever.
My own suggestion would be to increase fiscal incentives while reducing financial support to the economy.
This would reduce the risk of burgeoning money inflation and restore more normal behavior in financial markets.
We no longer need fiscal and monetary policy that work at full speed at the same time.
The Fed has largely achieved its goals of helping the economy through the pandemic.
It can remain accommodative without adding more fuel to the coming economic fire.
Interest rates can stay at zero for some time, but additional stimulus or quantitative easing can take a breather.
Yes, there will be a “tantrum” on Wall Street, but the focus of fiscal policy must be precisely on the Depression, which is landing disproportionately on Main Street.
If Main Street can fully recover sooner rather than later, Wall Street is fine. In fact, the market is telling us the bigger the package, the more likely it is that the bull market has more headroom.
Go Big, Get Bullish, or Go Home!