Who CARES

For a brief moment I thought that Mitch McConnell might put aside his Machiavellian politics and do what is right for the country. And for a brief moment maybe he did! When the extent of the economic crisis the country was facing became evident in mid-March, Congress passed a $2 trillion emergency measure in a matter of days with relatively little rancor. McConnell, uncharacteristically, seemed to let Treasury Secretary Mnuchin take the lead in negotiating the deal with the Nancy Pelosi, and ordered his troupes to support the bill, which passed the Senate unanimously.

The broad outlines of the CARES act are surprisingly sensible. Subsidies to small businesses were absolutely essential to keep them alive and to keep their payrolls intact as much as possible. I still think it’s rather remarkable that the Republicans agreed to that in the form of the Paycheck Protection Program (PPP), insofar as 75 percent of the forgivable loans must be used to maintain payrolls. It was also somewhat surprising to me that McConnell and the Republicans went along with a significant increase in unemployment insurance benefits and an expansion of eligibility to free-lancers and contract workers. The corporate bailout portion of the CARES act was ideologically awkward for both parties, but it too was essential. The $1,200 tax refunds to be delivered to a broad swath of the public is a clunky and inefficient way to deliver relief but there was an administrative rationale for delivering emergency payments quickly.

Nevertheless, I can’t let the monumental Republican hypocrisy of all this pass without comment. When Obama took office the global financial system was on the brink and the economy was in free-fall, having contracted at an 8.4 percent annual rate in the previous quarter. Obama asked for a fiscal stimulus package totaling approximately $800 billion. He eventually got it, but without a single Republican vote in the House and only after giving major concessions to get the three Republican votes he needed to avoid filibuster in the Senate. Republicans then lambasted it as the “failed stimulus,” opposed every subsequent attempt to further stimulate the weak economy, and harped relentlessly on the “Obama deficits” right through the 2016 election. Once Trump was elected, McConnell and the Republican Party did an immediate about face on fiscal policy, passing a pro-cyclical tax cut stimulus with nary a flinch about the resulting deficits. When the current economic crisis hit with a Republican President desperate for a reelection advantage, Senate Republicans voted unanimously for the $2.2 trillion measure (the House vote is unknown as the bill was adopted by a “unanimous consent” voice vote.)

In any case we’ve seen a broader budget truce than existed during the last economic crisis. Even the Committee for a Responsible Federal Budget, whose very mission is to act as permanent deficit hawk, issued a statement suggesting that “setting aside short-term deficit concerns in order to avoid a depression” is the right thing to do. Nevertheless, I sense some residual doubt among the general public. “Can we really do this?” The short answer is, “Yes, we can.” From 1943 to 1945 the U.S. deficit averaged 23 percent of GDP and by 1946 federal debt held by the public reached 106 percent of GDP. The country did not spend the following decade bemoaning the fact that we ran huge deficits to win the war, nor did the high debt ratio seem to have a constraining impact on economic growth during the 1950s and 1960s. We currently have about an 85 percent debt/GDP ratio and it will surely reach that 1946 figure before this is all over. But we did it once and we can do it again.

Conventional economic theory holds that excessive government debt can suppress the long-term growth of the economy by “crowding out” private borrowing. However, as John Cochrane points out, the Federal Reserve is currently buying government debt faster than the Treasury is issuing it, so there is no sopping up of private savings or crowding out of private borrowers. Moreover, the Fed remits all of its profits to the Treasury, so interest payments on that debt to the Fed quickly return to the Treasury, costing the taxpayers nothing. The future effects, then, will depending on how long the Fed holds that debt and how much it ultimately sells to private investors or other governments. All of this is starting to sound a lot like Modern Monetary Theory.

Modern Monetary Theory (MMT) is a school of thought that holds that there is no real distinction between fiscal policy and monetary policy for countries that issue fiat money, and that inflation is the only constraint on government deficits financed by central bank money creation. It’s been quietly embraced by Bernie Sanders and loudly embraced by Alexandria Ocasio-Cortez, neither of whom are noted macroeconomists. I’ve been wary of it, possibly because of the biases of my conventional training. I’ve approached it much as Keynes predicted classical economists would judge his theories: “(They)….will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new.” I was in a MMT-is-quite-wrong mode until the Covid crisis descended, when I quickly shifted to a heck, it’s nothing new, let’s do it mode. And I wasn’t the only one.

If inflation is, in fact, the only constraint on federal deficits, it doesn’t seem that we have much to worry about for the time being. Quite the contrary, the deflationary pressures are getting a little scary. Ten-year Treasury bonds are now trading at yields under 600 basis points, the CPI fell by .4 percentage points in March and, in a totally mind-bending development, oil prices went negative. The way things are going, we may be praying we meet MMT’s inflation constraint as soon as possible.

The World Changes Again

When I began this blog I had recently left the New York City Comptroller’s Office. During my ten years there I had built up a list of research ideas and policy thoughts that I either did not have the time to get to, or that were too politically sensitive to be pursued under the auspices of an elected official. My intention was to follow up some of those ideas and post them here, hoping that they would accumulate to a reasonably entertaining browsing stop for people interested in similar issues, and maybe even a useful research source for somebody investigating an issue of urban economics or policy.

Then Donald Trump was elected president and much of my research agenda was rendered obsolete. Not because Trump is a detestable individual who should be nowhere near the White House, but rather because he assembled the most extremist, conservative administration in modern American history, and he had Republican majorities in the House and Senate to implement his Fox TV-brand of reaction. Many of my research and writing plans presumed a backdrop of stable government, with policy possibilities fluctuating between center-right and center-left. I might have wanted to investigate particular aspects of environmental policy, for instance, but what relevance did they retain when a climate-change denying administration sought to dismantle environmental regulations rather than improve them? Or, how might thinking about alleviating homelessness have to change when the federal government was actively trying to impede the ability of municipalities to address such problems?

Gradually a list of new research items grew, more relevant to this era of spiteful conservative government and to the period of liberal push-back that will inevitably follow. Then, the novel coronavirus changed the world again. Suddenly, the importance of repealing the caps on state and local tax deductions paled in comparison to the massive fiscal challenges states and cities will face with their economies shut down. Concern about the cost of housing in big cities shifted to concern about whether people will still be willing to live in dense urban environments. Plans to expand urban transit transform into worries over whether the riders will ever return.

By the beginning of April we had seen enough of the virus to know it was a vicious bug and that the social distancing measures were absolutely necessary. In the immediate future there will be a whole lot of death and sorrow, and much human misery in the collateral economic and social damage. Emergency efforts to mitigate the damage will preoccupy the public agenda in coming months, and the recovery of semi-normal economic life will be the policy preoccuption of the next two years or so. It will probably take much longer than that to regain the ground we have lost, especially in terms of the economic interfaces that were flowering all over urban America– the vibrant street life, the proliferating cafes and restaurants, the brimming public transportation, the large employers that were returning from their suburban exiles.

It will probably take five years or more for people to resume their pre-pandemic lifestyles–for travel to recover to the levels of 2019, for people to eat out as much, for events with large crowds to become as common as they were before. It may take a decade or more for the economic damage to be fully repaired–for new restaurants to replace vacant storefronts, for office buildings to be refilled, for the thick ecology of small business contactors to be regenerated. But I’m betting that in the long run the pandemic of 2020 will turn out to be a ditch, not a turning point. There was continuity of the economic and social trends before and after WWII, there was continuity before and after the Great Recession, and I think there will be continuity once again. The big cities will come back, small towns will continue to languish, and we’ll face all the old problems we had before.