Washington Is Here To Help
This week’s Courier Herald column:
One year ago this week everything abruptly changed. The idea of a pandemic went from an abstract concept for most of us to a top of mind, life changing event. In the interim more than 17,000 Georgians have lost their lives and one million of us – roughly one in ten – contracted the disease.
While everything stopped, life went on. We had campaigns and elections. We had protests and riots. We had a change in administrations in Washington.
Many of us were dragged kicking and screaming into the digital age as Zoom replaced in-person meetings and Netflix or Disney + replaced movies and live events. Like many paradoxes of the last year, being drawn closer together in a virtual sense still seemed to drive us apart with a loss of gatherings, personal contact, and hugs.
The government stepped in to help, and to “help”. Georgia managed to take in more tax revenues to state coffers during the pandemic than in the prior year which had included terms like “record low unemployment”.
Washington saw fit to not let the crisis go to waste, sending money to people who hadn’t missed a paycheck, saw their 401K balances continue to increase after a brief blip, and saw their personal savings rate hit record levels. Now, a year later, with much of Washington’s appropriated money yet to be spent, and much of the personal stimulus money waiting for the economy to fully re-open, another $1.9 trillion dollars is about to rain down upon the economy.
Providing our vaccines work as anticipated, most aspects of everyday life should have returned to normal or near-normal by summer. The next year will be spent dealing with the economics of reopening combined with the politics of Washington’s help.
States like New York – where the Governor sent Covid patients to nursing homes exacerbating its spread and escalating the death count – got a disproportionate share of federal aid after being deemed “hardest hit”. States like Georgia – where Governor Kemp sent the Georgia National Guard into nursing homes to aid cleaning and disinfecting – got a reduced share from prior stimulus bill…but also got strings.
Georgia, having taken more money from its citizens during a pandemic than it anticipated and than it spent, is planning to cut income taxes. The last stimulus bill appears to prohibit this. Attorney General Chris Carr sent word Tuesday that he intends to vigorously defend the state’s “core authority to implement basic tax policy”.
The messaging around the latest stimulus bill is that it will revive the economy while protecting and helping our nations’ most vulnerable and hardest hit. The latter is mostly true – at least temporarily. What we’re most likely to find a year from now is that income inequality has actually increased rather than decreased.
When these reports start to surface – coincidentally about the time there will be a push for major tax increases – remember that there was almost a full year to craft this latest bill. $1.9 billion could have spent so many different ways, and targeted more specifically to provide opportunity to those who need equity.
Instead, as fiscal policy so often does, the money is likely to arrive in the U.S. economy at exactly the wrong time. We continue to face supply shocks in electronics, autos, and many other goods. Inflation happens when too few goods are being chased by too many dollars.
The bond market is already sensing what is coming and has begun to pivot with rates climbing upward. The gamble here is that the federal reserve can contain the inflation it has tried unsuccessfully to create for over a decade. Let’s all hope we hit 1995, and not overshoot into 1979.
A final caution as we look ahead. Just as a reminder that the rising stock market of the last year didn’t represent many of the underlying conditions in the full economy, a market that takes a breather may also not fully reflect the strong economic growth that we should experience over the next couple of quarters.
The market tends to price in events well before we can see them. It priced in our current recovery and re-opening months ago. It will be interesting to watch what it prices in as Washington continues on this current path of continuous “help”.
I think you need to read more about the K-shape recovery we are in currently. Do you know anyone who makes less than $80,000? I do. The wealth gap has increased over the last year. Sure folks with a nice salary and benefits may be benefiting right now. Like office workers who were able to continue working via Zoom.
But there is another group who were not able continue working or their partner lost their income and halved the household income. . They are behind in rent/mortgage, bills, health care, etc. They have a way to go before they catch up to where they were before the pandemic.
And the economy needs a boot in the behind to get to the expected growth level. Save two birds with one stone.
Curious as to how you see income inequality rising- maybe stagnant and new structural unemployment in certain sectors hit hard by the pandemic?
As for the power to implement tax cuts, I think it’s important to help folks get into some details, because on the surface it may look like the federal government is just attempting to take away a state’s right. But, the limitation is really analogous to a contractual one, subject to the tax and spend power of the federal government. So, if GA wants the federal money, it can attach conditions to the money. If GA accepts the money, it is accepting the conditions. There’s nothing forced or involuntary, albeit constraining, and counter to the typical policy preferences. The federal government is just saying Don’t use federal money to pay for tax breaks- actually spend it! A court challenge would be interesting although dragged out, and a waste of time and money. A better strategy is legislative- now I don’t know if the bill had provisions for waivers of the bans on taxation, but if it didn’t have one already, one could be lobbied for. Of course, that may take bipartisan efforts, beginning with the actual solicitation of Democratic assistance. Humbling, perhaps, and counter to the partisan preferences of many who prefer straight-up obstruction or non-engagement, but no one will get anywhere yelling from the sidelines. I also don’t know the time limit on the taxation bans, but I tend to think that if a good and data-validated reason is had to lower taxes, there may be ways to persuasively obtain some sort of waiver.