War Footing

Last Tuesday President Trump tweeted that he was halting further negotiations between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi on an additional COVID-19 stimulus package. Almost immediately, the stock market (which President Trump puts forward as a symbol of his success) tanked by over 600 points, erasing earlier gains and closing down 376 points at the end of the day. As a result, he walked back some of his rhetoric as the reaction of almost everybody, even Republicans (especially those running for office), was negative.

He later tweeted that he favored a stand-alone bill for additional stimulus checks of $1200 for everyone. I don’t believe that stimulus is what our economy needs right now. An additional $1200 isn’t going to make me go to a crowded bar, movie theater or get on an airplane anytime soon. Of course, for some people such as wait staff, bartenders and flight attendants, these payments are a godsend. But for those that are able to work from home or are comfortably retired, such payments are superfluous and will likely go into savings accounts.

The clamor for more stimulus continues but it is overblown. The stock market (at least when President Trump keeps quiet) is soaring to dizzying heights (Tesla is trading at a price/earnings ratio of 1,084 right now and the P/E of the entire market is at historic levels nearing 30). Home prices in the suburbs are at all-time highs. A lot of the stimulus from the federal government (along with monetary easing from the Federal Reserve) is going into asset prices, not relief for people who really need it.

Fed Chairman Jerome Powell, speaking earlier in the day, had stated that a new relief package was needed saying, “At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship.” The asymmetry arises from the fact that the risks from too large a package are less than those of too small a relief package.

I agree. We need to spend whatever it takes to get us through this pandemic. We are at war with COVID-19 and our nation needs to go on a war footing to defeat this enemy. During World War Two, in fact during all our wars, the government did what it had to do in order to win. Our nation was at stake. Our people were at stake. We had to risk everything in order to survive as a country and as a people. And it is the same with COVID-19. We have to do everything we can to win. At some time in the future, some critic of the government will point out that President Trump authorized billions of dollars to produce vaccines that were of little value or were downright dangerous. But for the vaccines that work (and we will get one or more vaccines eventually) that early production of unproven vaccines will save many, many lives.

So, I agree with Chairman Powell that it is more dangerous to spend too little than to spend too much. The Republicans that are balking at spending the trillions needed to combat COVID-19 are being foolish. They are fighting the wrong war. The amount of public debt to GDP is not an existential threat right now. COVID is!

But that doesn’t mean we have to be stupid. Payments to high tech programmers working from home or to comfortable retirees are dubious. Payments to people out of work because of the pandemic are not only vital but are effective. Unemployed people will spend those payments right away on food and rent and other necessities. A tax holiday on payroll withholdings for already employed people are unfocussed and of dubious value. Benefits to employers for new employees and for bringing back furloughed workers would be of great value.

We need programs to help businesses cope with the effects of the pandemic and government ordered shutdowns. Businesses operating at 50% capacity or reliant on deliveries will need additional funding. And companies following government guidelines should be held harmless if their employees or customers get sick. That is in the national interest and not a bail-out. States and municipalities will also need help for extraordinary COVID related expenses but not blank checks. And repealing the limitation on the deduction of state and local taxes as Speaker Pelosi is insisting be included has nothing to do with COVID-19.

When operating on a war footing, free market economics don’t work. Free markets work well in normal times but during war or pandemics, price discovery breaks down. How much is a face mask or Lysol spray really worth? You can’t tell the difference between companies that were in trouble prior to the pandemic from those affected primarily by the pandemic. You have to help them all so that when the pandemic has been defeated, the country has the basic economy sufficiently intact so that the recovery can begin.

There will be people and companies that try to take advantage of the situation. War profiteering has a long and not very illustrious history. Mistakes have been made. And more will be made before we get through this war against COVID-19. There will be time afterward to correct our mistakes. Right now, we have to survive.

The war with COVID-19 will end. Probably, sometime in mid-2021. By then one or more vaccines should be widely available. Production should be sufficient that there will be supply available for other countries. By that time (assuming all the mail-in ballots have been counted) we will either have a returning president with a renewed mandate or a new president with a new mandate.

The president and the rest of us will have a lot of work to do. And if we are going to build back better (as Joe Biden says) and make America great again (as President Trump promises) there is one thing that we must do. During each of our great wars, the government spent whatever it took to win the war, piling on mountains of debt. And after each war (the Revolutionary War, The War of 1812, the Civil War, World War One and World War Two), we paid down that mountain of debt year after year.

The Founders considered the public debt as a burden on future generations and that the responsibility for repaying that debt fell to the current generation. Perhaps even more importantly, the country must maintain its ability to borrow money as a hedge to the inevitable future war or catastrophe that is sure to happen. The inability to borrow money needed to respond to a future war or catastrophe is an existential threat to our country.

I think we all know we need to do something about the mountain of public det. The question is, what to do? At over $30 trillion by the time this pandemic is defeated, the public debt will exceed GDP and the public debt obligation of each and every American citizen will rise to nearly $100,000.

I have never been a fan of a balanced budget amendment. It puts many restrictions on the government that reduce its flexibility in emergency situation, like being hit by a pandemic. But we are not talking about grownups here, we are talking about politicians. If you are in a hole, stop digging. And we are in a deep, deep hole. At least a balanced budget amendment would stop the fiscal hemorrhaging of the nation.

Secondly, we need to reform the social welfare system in the United States. The uncontrolled growth in entitlement plans has caused the federal budget to swell even though federal government employment has been flat for the last 50 years. If we cannot cut government outlays, then we will have to raise taxes and let me tell you – it’s not just going to be the rich paying their so-called fair share. It’s going to be everybody. That’s how the famed Nordic social democracies do it, the ones Bernie Sanders keeps holding up as examples of what he wants for America (don’t believe him, he really is talking about the Soviet Union). But the Nordic countries raise the bulk of their revenue from value added taxes or VAT. Value added taxes around 20% are regressive and fall hardest on the poor. And their top income tax rate starts at around $400,000 (certainly well off but not far from being a one-percenter). Meanwhile, corporations in the Nordic region only pay taxes of a little over twenty percent so that their corporations stay competitive internationally (like President Trump’s tax reform that the Democrats want to repeal).

Finally, fiscal triage and balancing public policy initiatives is a good start, but it is insufficient. We need a plan to bring the level of debt down. Economic growth will take care of some of that. As long as we don’t add new debt and economic growth continues, the debt will eventually become manageable, but it will take a long time. Our nation will remain vulnerable during this lengthy period. Once we recover from the pandemic, we will need a surtax to bring down the debt more quickly, keeping in mind that even with the surtax it will take a generation to heal our fiscal wounds.

The concept of higher taxes and less redistribution is not going to make very many people happy. But it must be done. Throwing money at income inequality hasn’t really solved the problem. There must be a better way. And higher taxes may dampen business activity, but business leaders must weigh many factors when planning operations and making investments and taxes are just one factor. The increased fiscal certainty emanating from the government would improve the business climate and offset the dampening effect of higher taxes.

It is time for us to tighten our belts so that our kids and grandkids can have a better life.