President Trump signed four executive orders on Saturday. They direct the Treasury to extend the federal bonus for unemployment insurance, order the Treasury and HUD to provide temporary funds to renters and struggling homeowners, extend a payment moratorium on student loans, and defer the 6.2% Social Security tax, also known as the payroll tax.
All of the measures are controversial, not least because the orders appear to be a violation of the implicit separation of powers that gives “the power of the purse” to Congress. Seventy-five percent of the extension of the unemployment benefit will be paid out of the Federal disaster fund, leaving the other 25 percent to be paid by states that have suffered massive revenue losses since the pandemic outbreak. The extra unemployment insurance would drop from $600/week to $400/week. But the most controversial move is Trump’s abrogation of the payroll tax.
After the Washington Post reported that Trump pledged to permanently cut the payroll tax which funds Social Security and Medicare if he wins re-election in November, there was immediately chatter on Twitter that this Executive order was a first step. A poll on Twitter with over 2,300 responses showed that roughly half the respondents were concerned about the defunding of Social Security and Medicare.
How We Got Here
The first stimulus to individuals provided in the CARES Act dispensed over $550 billion dollars in direct checks and bonus unemployment insurance. The total amount of the bill was about $2 trillion, which was just over half of the total $3.5 Trillion U.S. revenues from taxes for 2019.
A second stimulus was passed by the House of Representatives on the heels of the first one in May that allocated an additional $3 trillion that included $200 billion for renters in need of assistance and mortgage relief for homeowners, $3.6 billion for election security, and more money for food assistance. The Democrats’ bill also includes $1 trillion for state and local governments with budgets destroyed by the pandemic.
The Republicans, led by Senate Majority Leader Mitch McConnell of Kentucky, proposed a much smaller stimulus package at the end of July that has no relief for states and local governments and reduces the bonus payment for unemployment by two-thirds.
These two competing visions for a second stimulus are currently being debated by the two houses of Congress.
The August 7th deadline came and went without another relief bill, and without extraordinary action none will pass as the Senate adjourns for its summer recess. Though Trump has pledged executive action to extend a federal moratorium on evictions and an extension of unemployment benefits, many people believe such a move would be too slow and too complicated to get money into the hands of people who are hanging on the edge of their own personal fiscal cliffs.
New York Times columnist and Nobel prize-winning economist Paul Krugman says Congress’s inability to pass another stimulus will bring on The Greater Recession as the 31 million people who are currently paying their bills with stimulus money stop spending. One person’s spending is another’s income, so the multiplier effect of cutting stimulus will chop off another 4 to 5 percent of GDP. And that doesn’t include the negative effect a pullback in state and local governments’ budgets will have.
The Case for Stimulus
The CARES Act stimulus bill passed unanimously in the Senate and by a unanimous voice vote in the House. The speed with which Congress acted and the size of the bill — more than twice the size of the fiscal stimulus passed by President Obama in 2009 — show how firmly the lessons of Keynesian economics were learned by policymakers after the Great Recession.
The lockdowns implemented across the country to stem the spread of the pandemic made Q2 GDP in the U.S. fall by a record 32.9 percent (annualized projection) or 9.5% in the quarter. By way of comparison, GDP fell by less than 9 percent during the Great Recession.
Without stimulus in April, many more people in the bottom three income quintiles would have been unable to pay for basic necessities, including rent and debt payments. Many small businesses also received aid from the government through the Paycheck Protection Program which was conceived as an alternative to unemployment insurance that would keep small businesses from closing and keep people employed at those companies.
The amount of stimulus was set in March to last until the end of July because at that time policymakers thought the pandemic might have receded. Unfortunately, the surge in cases in July is threatening to force local economies in the U.S. to shut down again, and without more stimulus, millions of people in the U.S. will once again be faced with dire economic hardships.
But the economy is a complex beast, and without fail, interventions have unintended consequences.
Savings Is a Two-sided Sword
A strange thing happened after the first stimulus was passed. The savings rate, as measured by the Bureau of Economic Analysis soared to 32% in April and remained elevated in May. Why did this happen?
In the first place, spending plummeted as people stayed home and avoided the usual pleasures of travel, eating out and entertainment. But the lost income of the people offering those trips, dinners and shows was replaced (in part) by fiscal stimulus.
In the second place, the highest-paid workers in the knowledge economy continued to make high salaries, but they could not spend their money on expensive costs like childcare or travel.
But that good news on savings was undercut by the wide-spread perception that everyone, from executives in the tech sector to public sector employees who have secure jobs, could be facing income and job loss if the economy were to fall off a fiscal cliff. Fear is the economy’s greatest enemy because it leads to deflation and depression.
April’s surprising savings rate was so shocking because Americans have been chronically undersaving for decades.
Starting around the turn of the century, Americans’ savings dropped by two-thirds and stayed depressed (with the exception of 2012) until this year. The already precarious situation of many Americans has been underlined and highlighted by the pandemic’s decimation of the service sector of the economy.
The current imbalance will resolve itself in one of two ways: On one hand, the government does not pass another round of stimulus for the bottom earning three-fifths of Americans. In this scenario, GDP falls quickly and we may see social unrest. No one’s job is safe, and the credibility of the country’s institutions starts to look shaky.
On the other hand, the government does pass another round of stimulus, either a lot like in the HEROES Act, or a little like in the HEALS Act, or something in the middle. In this case, the economy and many businesses could be saved until a vaccine is developed, but there will be lingering, long-term side effects.
More Stimulus, More Problems?
Without people and a government willing to act together to stop the spread of the virus, further rounds of stimulus will continue to create economic imbalances and increase the US Debt. Already the stock U.S. stock market seems to have ballooned in part due to the first round of stimulus. But if central banks pump trillions of liquidity into the global economy and deflation is defeated, we may then see inflation as people catch up on deferred spending.
After the financial crisis in 2008, central bank actions appear to have created asset inflation in housing and stock markets that have coincided with the long term decline in interest rates. We may see a similar phenomenon as the pent-up savings of the top 40 percent of earners drives up the price for big-ticket goods and services.
We may also see much higher taxes as governments from the local to the federal level recover from the losses of 2020. Depending on the outcome of the election in November, those taxes could be levied on income, capital gains and inheritance, or regressively on sales and fuel, driving up consumer prices and eroding purchasing power for many millions.
Is this a “Starve the Beast” play?
If Trump wins the election, he has said that he will try to extend the payroll tax nullification indefinitely, which would likely make Social Security insolvent in short order.
Will it be a rare opportunity to achieve the “entitlement reform” goal of some conservatives? Probably not. Even if Congress is unable to mount a defense of its prerogative to control government spending, there are many interested parties, including the AARP and the National Committee to Preserve Social Security and Medicare, will immediately take the issue to the courts.
More importantly, ending two programs that are the foundation for hundreds of millions of citizens’ retirement plans will bring a generational conflict the likes of which we have never seen.
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