Stimulus for Thought

 Let's take a look at the recent $1.9 trillion "stimulus" bill that was passed on a straight party-line vote (so much for "unity"). Let's ignore the fact that less than 10% of that staggering amount had anything to do with covid relief. Or that taxpayers in states that are fiscally responsible just paid off the accumulated budget deficits over the past two years of San Francisco and New York, without imposing any budgetary discipline on those two profligate cities. Heck, let's even overlook just the staggering size of that number to begin with: 1.9 trillion seconds is more than 60,000 years. And 60,000 years ago, the first pre-Neanderthals were just beginning to drag their knuckles across what is now the Australian outback. (They're now dragging their knuckles through the halls of Congress.)

No, let's talk about the necessity of further stimulus as relates to covid; the effectiveness of this particular package; and what would really be effective.

Let's first remember that covid did not cause a recession. Covid evoked a government response - for now let's say right or wrong - and the government response caused a recession. Some jurisdictions' totalitarian, unchecked executive mandates were more draconian than others, but nearly every state forced schools and businesses to close and put millions out of work. Even after they re-opened, they imposed restrictions on capacity and hours, and some very large jurisdictions had second shut-downs.

The initial actions took place in March 2020. In April, the U.S. unemployment rate shot up to 14.8%, by far the highest since the Great Depression (although unlike that period, last year's joblessness was concentrated in just a few sectors at the lower end of the income scale). Several states saw unemployment rates above 20%. More than 17 million people were put out of work. Initial jobless claims spiked to nearly seven million the first week of the shut-downs, and continued claims peaked at nearly 25 million in May, both far and away record numbers. U.S. GDP dropped by more than 30% in the second quarter, again the most on record.

In response, the government immediately passed the CARES Act, a $2.2 trillion relief package. The bill included $877 billion in aid for affected businesses, small and large; $340 billion for state and local governments, whose tax revenues would be decimated, but by their own actions; $154 billion for public health; and $560 billion for individuals. That latter amount included $260 billion in additional unemployment benefits, and $300 billion in direct payments to individuals earning less than a given threshold (I'll explain why the word "earning" is italicized later).

Late last year, after months of partisan stalling due to the looming election, Congress passed another round of direct payments to those same earners, totaling $920 billion (that amount also included funding for additional small business loans, vaccines, and unemployment benefits).

And now we have the $1.9 trillion package. There were other stimulus bills last year that did not include direct payments to individuals, totaling $716 billion. All tolled, the government has spent four trillion dollars of your money on covid relief. That's more than total U.S. public debt less than 30 years ago - so if you're 30 or older, it's more than the total public indebtedness was in your lifetime. And to put it further in perspective, 4 trillion seconds is more than 120,000 years ago, when the only living organism was primordial ooze (and there's still an abundance of that in Washington, too).

In all, prior to the latest bill, individuals earning up to the specified threshold (which has been the same for all three rounds of direct payments) received $1,800 each. Married couples received twice that. So our first question is this: is further stimulus really necessary?

Well, the U.S. unemployment rate is already back down to 6.2%. That's just above the post-WWII average, and roughly equal to the average from 2009 to early 2020, when the economy was expanding. Initial jobless claims are down by 90% from their peak, and continued claims are down by more than 80% (more on why ongoing claims aren't lower later). Most of the improvement in those numbers took place by the August - October timeframe, well before even the second round of direct stimulus payments. And GDP grew by a record 33% in the third quarter, more than offsetting the second quarter's decline, and ending the recession after just two quarters. That tied for the shortest recession in history.

Because of record low interest rates, auto sales and home sales are booming. Lenders are having record years, when they thought they'd be charging off massive amounts of loans. Home values are surging on the demand, leaving those who sell with more equity to spend.

Between Feb. 19 and Mar. 23, 2020, the S&P 500 plunged by 34%. It reached a new record high in August. Most recently, it is up 16% from the pre-shutdown high, and has recovered 76% from the Mar. 2020 low. The NASDAQ had more than doubled from last year's low, prior to its recent pull-back. Note that stock prices are a leading indicator of economic activity.

In conclusion, that "Super-V" recovery we were promised, materialized. Due to the unique, bottom-up nature of last year's recession, demand remained extant, so as things opened up, people resumed spending. In some cases, the pent-up demand resulted in an acceleration effect. Anecdotally, several local restaurants are seeing record sales due to dining rooms being open at 50% capacity, and take-out more than making up for the tables that are blocked. (Think about it: you can serve one table in about an hour or so, but you can pump out take-out orders as fast as you can prepare and package them.) More new restaurants have opened now than were closed. (I realize that has not been the experience in states with more draconian lockdowns.)

The recovery is in full swing. GDP growth for 2021 was forecast to be more than 5%, which is very strong, even before this last round of payments. Thus, we can conclude that further stimulus was unnecessary.

So why do it?

First, politicians love to spend money, because it isn't theirs, and they believe it makes them look magnanimous, like they actually care about any of us. And second, they're buying votes. But with the voters' money. So think of it as a forced campaign contribution, to candidates you'd never contribute to.

On to our second question, then: how effective will this "stimulus" be?

Herein lies the reason that I italicized the word "earning" above: if you were "earning" the same amount you were earning before the government shut everything down, you didn't need a stimulus payment. Of the first round of payments last March, a third was saved, a third was spent, and a third was used to pay down debt. If you saved your payment or used it to reduce debt, you didn't need it in the first place. You had enough to live on. And if you spent it on a new big-screen TV, or some other discretionary item, you didn't need it. Only if you spent it on necessities, because you'd lost your job or suffered a reduction in earnings, did you need your stimulus check as a direct result of the government response to covid.

So in other words, more than two-thirds of that first stimulus payment was squandered. Oh, you could argue that the one-third that was spent stimulated the economy, and you'd be right, up to a point. But you can't stimulate the sales of a business you've forced to close, no matter how much money you give its patrons.

As for the boost in unemployment benefits, that was indeed helpful. However, the Curmudgeon's First Rule of Perverse Incentives is that any incentive offered, unless very carefully structured, will create unintended consequences that will lead to bad behaviors that may offset the very benefits created by the incentive. We've seen this with executive bonuses many times, in many industries.

With unemployment benefits, the incentive may be not to go back to work. When things did open back up, many Americans were making more on unemployment than they would be working, so why work, and take a pay cut? This isn't laziness, it's sound economic decision-making. So the unemployment piece should never have been structured to provide extra income over and above that which was lost. It should be income replacement insurance, just like short-term disability insurance coverage. And that's why continued claims have not fallen as much as initial claims, in part.

As further evidence that the stimulus was misdirected, we can look at the Personal Saving Rate. It was 7.6% in Jan. 2020. It soared to a record 33.7% in April. (And by record, I mean about twice the previous record.) It declined to 13.4% by year-end. And it jumped back up to 20.5% in January, on the second round of stimulus (which was smaller than the first, so it makes sense that the spike would be lower).

So what can we expect from this third round? Well, the individual payments are larger than either of the first two rounds. However, they will go to fewer people, as the income cap phase-out was tightened considerably. So the total will be about 75% of the total for round one. Also, it's expected that, with higher gas prices, more than a third of this round will be spent. And, with higher interest rates, more than a third will be used to reduce debt, as credit card interest rates are increasing. But, with the saving rate already north of 20%, we'll likely see a spike to 30% or more again.

That is not in and of itself a bad thing. My own research on long-term cycles in the stock market indicates that long-term bull cycles (stock prices generally rising) begin when the saving rate is historically higher than average. Capital drives growth.

However, it is a clear indication that most of the stimulus was misdirected in terms of actually compensating Americans for what their federal, state and local governments have done to them in response to the pandemic.

So what would be more effective? When I was a CEO, I always told my employees that bringing problems to my attention had no value, because I could see the problems for myself. However, bringing me solutions was of high value. So herewith, I offer my solution:

OPEN THE HELL UP.

Open every restaurant, every movie theater, every bar. Don't limit capacity, and don't limit hours. Open churches for in-person worship. Allow as many fans to attend concerts and sporting events as want to buy tickets. Open cruises and other travel. Yes, people will still get sick. But people have always gotten sick. And people got covid even when things were shut down, even when they wore masks, even when they stayed home.

Many more people ate out, traveled, didn't wear masks, and never got sick. Remember, 30 million Americans have gotten covid. But 300 million Americans haven't. Life happens, and illness is part of life. Besides, between natural infection and vaccination, we're rapidly approaching herd immunity, if we're not already there. So don't condition it on vaccines or test results. Open. Up.

What created the perceived need for stimulus? Closing businesses down and placing restrictions on businesses and people. So what's the most stimulative thing that can be done? To re-open those businesses, and remove the restrictions. Anything else is a band-aid on a tumor.