Well, that was an interesting month. US financial markets seemed relieved to have Election Day behind us, with the S&P 500 index recovering from its October woes to end the month up 12.1% for the year. Interest rates remain historically low, but climbed a bit, with the yield on the ten-year Treasury note flirting with 1% for the first time since March. International stocks also moved into positive territory for the year after being down since February.
Turning to more tangible matters, the pandemic surged distressingly as cold weather set in and people gathered for the holidays, contrary to the pleas of health care authorities. Unemployment declined further, but remains high, as does “U6,” a broader measure of un- and under-employment. Consumer spending remains below the February level marking the beginning of the recession.
One of my favorite economic reporters has become prone to saying “the virus *is* the economy.” I see his point: how well we do in managing the pandemic is among the top factors influencing the economy presently. I disagree, though, in that, as always, the economy is composed of people and resources.
Economics is the study of limited resources and unlimited wants. Resources are materials and labor, and wants are consumers (and government and industry, both of which are also made of people). Notice that there are people on both sides of this seesaw. The pandemic has reduced both available labor and the ability to consume, which feed each other. No job, no income, no spending, or not for long anyway given that most US households have totally inadequate savings. No spending, no consumption, no money flowing into businesses, layoffs and business closures, fewer jobs… and around it goes, like a really unpleasant carousel. Additionally, some people who want to work and might even still have jobs still can’t go to work because they are at higher risk for severe consequences of COVID-19, or they find they need to spend all day distance-schooling their kids or taking care of elders.
So what to do about that? Well, that depends on who you ask. I side with the argument that, given that consumer spending comprises over 2/3 of the US Economy, giving consumers the ability to spend is the fastest way to stimulate the economy. This is particularly true of lower-income consumers, who tend to spend just about every dollar they receive on rent, food, pharmaceuticals, etc. Additionally, given the looming eviction crisis in the US, supporting consumers could help stave off further disaster. Houselessness and housing insecurity were already at alarming levels before the pandemic.
When we give more money to consumers who are already in a position to save, they tend to save that additional dollar. (Which makes their financial advisors very happy!) Another possibility is for the government to buy stuff. Bridges, perhaps, or art for government buildings. This creates jobs too, but more slowly. It’s a great tool for longer-term stimulus, and of course, repairing or creating infrastructure. Solar farm anyone? Great plan, unlikely to pay wages this week.
Herein lies the multiplier effect. I was delighted this week to see a video assigned to my middle-schooler as homework which talked about fiscal policy and the multiplier effect. I had almost no quibbles with it (rare for someone with graduate training in Economics), so I will share it here. But the punch line is, you get more bang for your stimulus buck when people spend what they receive rather than save it.
All of this creates government debt. And herein lies a second major point of contention slowing down lawmakers in responding to our economic crisis, beyond to whom to give funds. Which does more damage? The recession or more government debt? Is it worse to let families and seniors go hungry and unhoused or saddle their children with repaying current borrowing? You can probably guess where I stand from how I stated the question. I also graduated college into the start of the tech boom, which saw the government budget surplus go so high, Alan Greenspan had to explain why eliminating Treasury borrowing completely would mess up financial markets.
For me the key point is timeline. Rent is due monthly. Kids need food several times a day (she typed, as her daughter wandered in eating a mid-morning snack). The government’s timeline is longer than consumers. In investment speak, we say their investment horizon is perpetual. And as Keynes pointed out about the rest of us, “In the long run we are all dead.”
On that cheery note, allow me to remind you all that Cultivating Wealth is here to help. Send an email or book an appointment for a check in. We wish you all a peaceful holiday season and a healthy, prosperous New Year.