Macroeconomics 102
The $2,300,000,000,000 Coronavirus Aid, Relief, and Economic Security Act was signed into law last Friday. After several days of the news pegging every change in the stock market to the passage of the bill, markets declined (DJIA -0.1%). The day prior, while the bill was still being debated in Congress and unemployment benefit claim numbers came in 5 times higher than the previous all-time high, markets shot up (DJIA +6.4%). This sequence of events reminded me of a quote from Alice in Wonderland, I’ll let you pick your favorite.
This bill is being referred to as a stimulus package or a “bailout”, but I think it’s more helpful to think of it as government spending replacing private consumer spending. When the government is enacting social distancing measures, even enforcing “shelter-in-place” policies in many places, that is going to affect consumer spending immensely. All of a sudden, no one is flying, no one is eating in restaurants, no one is going to the movies, etc. Because the government is telling people not to do these things, does it follow that the negatively affected companies deserve to get some of their lost revenue replaced with government funds? Of the $500,000,000,000 (500B) dedicated to “large corporations”, airlines alone are receiving $50,000,000,000 (50B). Another $350,000,000,000 (350B) is going to small businesses.
The next question is whether this approach is effective. With this amount of money, it’s going to be impossible to track it all, but the bill does attempt to provide some semblance of “healthy” incentives (or at least discourage perverse incentives). For example, the large corporations cannot use the funds for stock buybacks (airlines have used 96% of their free cash flow to buy their own stocks over the past 10 years), and the small businesses can only cash in if they maintain their payrolls for certain amounts of time.
The next question is what you mean by effective, I suppose… Economics can be summarized as a study of choice and its unintended consequences, and I guarantee there will be unintended consequences from the CARES Act. Will the benefits exceed the costs? We will never know. Here is some immediate evidence of these unintended consequences: mere hours after the passage of the bill, the Kennedy Center for Performing Arts told the National Symphony Orchestra it was going to stop paying them, effective this week, and they would lose their healthcare benefits starting in May. This is newsworthy because the Center *controversially* received $25,000,000 (25M) in the CARES Act, and was *clearly* waiting for the bill to be signed before they made this move. Showing solidarity, the president of the Kennedy Center, Deborah Rutter, has also suspended her own salary for the time being (her salary is $1,200,000 (1.2M) :-).
Oof. I haven’t even gotten to the fun part of the CARES Act, the $1,200 check for me! Is this a multi-day lesson?
Let’s pause for a minute and talk about music. I’m listening to Jimmy Eat World right now, a band who influenced me enormously in high school, and I have stuck with since.
Their 2004 album “Futures” seems like a good place to start…
“Why is it so hard to find a balance between living decent and the cold and real?“
“It’s just not me to wear it on my sleeve/
Count on that for sure“
Or, a few years older, from “Bleed American” in 2001.
“I’m not alone ’cause the TV’s on, yeah“
I feel like I’m letting them down by not going into more detail, but I’ll let you figure how great they are on your own, if you want to. They definitely are on my “Heart Songs” playlist. In fact, here is the link to my actual Spotify playlist…
Where was I? Oh, I’m definitely not hitting my noon deadline today.
I have heard a lot of people express concern over this stimulus package for variety of reasons, and I want to focus on one reason that is definitely misinformed. Inflation. So, we know that inflation is a decrease in purchasing power of currency as a result of an increase in average money prices. They only way to measure the “value” of a dollar is asking what you can buy with it, aka purchasing power. Inflation is measured by the Consumer Price Index, primarily, which is a different lesson entirely. Governments tend to “aim” for 2-3% inflation year-over-year, and are particularly focused on avoiding “deflation” and “hyperinflation”, which can be almost immediately disastrous. We covered this in class already, so I’m going to keep moving.
The main thing you need to understand is that our money supply is constantly expanding and contracting, there is not a set amount of money in the economy or the world. Full comprehension of this requires several more lessons, so just trust me for now. When the economy is strong and people have optimistic outlooks on the future, they spend money. They take out loans, they go on vacations, they buy things they don’t need. All this spending expands the money supply as it moves through the economy; it’s actually possible for the “monetary base”, to expand by up to a multiple of 10. When spending and borrowing slow down, the economy contracts. The economic contraction causes businesses to lose revenue, lay off workers, and often close entirely. This leads to even less spending, more contraction, and creates a cycle John Maynard Keynes called The Paradox of Thrift. The point is, we haven’t had an economic slowdown, we’ve had an economic halt. Hundreds of billions of dollars (that’s an uneducated conservative guess) have disappeared into thin air in a matter of weeks. Imagine you bought a house for $263,000, then it became worth $163,000 over night. Where did the $100,000 go? It’s not a transfer of wealth, it’s just gone.
That’s why I said the “stimulus” package is government money replacing private money. The CARES Act is not expanding the money supply, because it’s likely the money supply will contract by more than $2,300,000,000,000 by the time that cash hits people’s hands. If anything, it could help us avoid deflation—it almost certainly won’t increase inflation.
