Why Joe Manchin’s Objection To $2,000 Stimulus Checks Matters: Is He 2021’s ‘Dutch Boy At The Dike’?

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Yes, the Dutch boy who saved his city by plugging a hole in the dike with his finger, crying out, “Haarlem shall not be drowned while I am here!” is fictional, but recent reports call him to mind.

The $2,000 check plan

On Friday, President-elect Joe Biden announced at a press conference plans to spend considerably more money in the form of

“a multitrillion-dollar relief package that would boost stimulus payments for Americans to $2,000, extend unemployment insurance and send billions of dollars in aid to city and state governments,” as reported at the Washington Post.

The report cited the importance of the $2,000 checks as a fulfillment of a campaign promise:

“Biden has made new stimulus checks a central promise, specifically telling Georgia voters that they would be getting $2,000 payments if Democrats won Senate runoff elections in the state this week. . . .

Sen. Bernie Sanders (I-Vt.) said in a statement Friday that ‘the working class of this country was promised that they would receive a $2,000 direct payment. … We must keep that promise.’”

But the proposed $2,000 checks would be sent to far more than simply the “working class.” While there’s no official definition of “working class,” it implies people who are struggling, living paycheck-to-paycheck. (U.S. News says reports that lower-middle class income reaches up to $53,413; middle-class, to $106,827; and upper-middle class, to $373,894; with everyone above being simply “rich.”) In contrast, the House proposal gives the full benefit to singles with incomes of $75,000 and couples with incomes of $150,000, and a married couple with 3 children could have income as high as $350,000 before the cash is fully phased out, according to the Committee for a Responsible Federal Budget.

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What’s more, this is by no means trivial spending: this boost from $600 to $2,000 would cost an extra $400 billion above the amount already being spent on the $600 checks.

And Sen. Joe Manchin of West Virginia, now labelled the “most conservative Democrat,” who is already on record opposing efforts to eliminate the legislative filibuster, has voiced his opposition to these nontargeted checks. On Sunday’s State of the Union, he told host Jake Tapper that he supports “helping people that really need help,” not those who would just put the cash in the bank. “That’s not who we are,” he said, instead supporting targeted spending towards those in need as well as infrastructure spending.

What’s so wrong with these checks?

As it happens, I have every now and again taken to Twitter to express my consternation with the $2,000 per person spending proposal, and plenty of folks have replied with a simple justification: “other unworthy people got money, so now it’s our turn.” They cite bailouts for airlines, or the bank bailouts in the Great Recession (prompting a debate about whether the funds were truly a “bailout” when they were paid back in full), or the Trump tax cuts, which were calculated as a total cost of $2.3 trillion (after an initial pricetag of $1.8 trillion), but this over 10 years, rather than all in one fell swoop.

But nowhere was there serious analysis that promoted $2,000 per-person checks as an appropriate tool for boosting the economy. To be sure, there are forecasts that federal spending, in total, will increase GDP. For example, immediately after the Georgia runoff elections’ results were known, Goldman Sachs raised its economic forecast for 2021 to a projected 6.4% increase in GDP, and a drop in unemployment to 4.8% at the end of 2021, compared to its prior projection of 5.2%. Even prior to plans for boosted spending, the Committee for a Responsible Federal Budget forecast that the spending in the December covid bill (that is, the $600 checks, the more moderate Unemployment Insurance boosts, and other provisions) would increase personal income dramatically:

“We estimate the fiscal support alone will increase income in the first quarter of next year to 11 percent above pre-pandemic levels. Incorporating the likely economic boost, it would lift income to 13 percent above pre-pandemic levels. Despite the recession and pandemic, personal income would be higher than any time in American history.” (Emphasis in original.)

What about inflation?

All this spending is expected to grow inflation; what’s more, economists are cheering it on.

At Bloomberg (reprinted at Yahoo), Brian Chappatta writes that one measure of inflation expectations increased to its highest level since 2018, and Chicago Fed President Charles Evans reacted by saying, “I welcome above 2% inflation. Frankly, if we got 3% inflation, that would not be so bad.” Chappatta also cited John Hollyer, global head of fixed income at Vanguard Group,

“If they’re successful, nominal interest rates are lower, hopefully generating somewhat higher inflation at or slightly above 2%, and that enables stronger nominal GDP growth, which over the course of 10 years or more could lead to a deleveraging as we essentially grow our way out of the debt,”

and cited fellow Bloomberg columnist John Authers, calling this “something close to market Nirvana.”

But how much “deleveraging” is too much? In the same way as inflation makes one’s home mortgage relatively less costly in real-dollar terms, so, too, does inflation decrease the real amount of national debt over time. Even with compounding, however, 2% annual inflation doesn’t add up to much over Hollyer’s 10 year timeframe. So if a little inflation to decrease the real cost of the national debt a little bit is good, then why not decrease the real cost of the debt even more, with more inflation?

Remember, too, how these checks, and all the other government “covid relief” spending is being funded: not as a result of individual investors buying government bonds, but through the Federal Reserve simply printing money and using it to buy government bonds. They did this with the CARES Act and recently announced that they expect to continue this money-printing pace through the end of 2021, at a pace of at least $80 billion in Treasuries and $40 in mortgage-backed securities per month. The ostensible rationale is to keep interest rates ultra-low rather than to keep the money flowing, but does that matter?

What’s it add up to? According to Morgan Stanley’s global head of economics, Chetan Ahya, excerpted at Zerohedge, a real risk of significant inflation. Ahya cites pent-up demand due to the boosts in income from government spending, increasing government spending due to expanded efforts to remedy income inequality, and the attempt by policymakers to “run the economy red-hot,” to drop the unemployment rate as quickly as possible without regard for broader repercussions. In addition, the Fed’s determination to achieve 2% inflation, he believes, will cause them to overshoot this goal, potentially significantly so. (Zerohedge titles the article, “Five Reasons Why Runaway Inflation is Imminent According to Morgan Stanley,” which I suppose is contingent on one’s definition of “runaway.”)

So we have a mix of economists, policy-makers, and politicians arguing for spending as much money as possible, as soon as possible. As Biden characterized it, again in the Washington Post, this is all necessary “in order to keep the economy from collapsing this year, getting much, much worse.” But other Democrats’ objectives are more expansive, as, during the summer, Congressional Democrats called for legislation to add a new mandate to “reduce racial inequality in the U.S. economy” to the Fed’s traditional role of balancing low inflation and low unemployment. The Washington Post explained,

“Warren and Waters say the Fed can do more to reduce inequalities. For example, economists like Biden adviser Jared Bernstein and Janelle Jones have argued that the central bank has raised interest rates too quickly in the past, hurting the job prospects of Black and Hispanic workers, who are often the last to get hired. . . .

“Fed Chair Jerome H. Powell has spoken often about the nation’s inequalities, especially how the deep recession caused by the novel coronavirus is affecting low-income Black and Hispanic women the most. He has also overseen a pronounced shift at the Fed to worry less about inflation and focus more on getting the highest employment possible, especially for minorities, the disabled and the formerly incarcerated, groups that are normally the last to benefit from a hot economy.”

Our Hero, Joe Manchin

And into this mix comes the promise to give, from government coffers (or, really, from money printed on the printing press, or, in this day and age, simply magicked into existence), $2,000 for (nearly) every man, woman, and child, not because it’s needed, but irrespective of need, solely because it’s wanted. Again, these checks have nothing to do with whether a family has had economic setbacks. Instead, it builds on and creates a mindset that says that we all deserve government money because other people are getting it anyway. It’s a bit too much like the commercials for luxury cars at Christmastime: you’re spending so much time making others happy, you deserve something for yourself, too.

Given this backdrop, Manchin appears to be a lonely voice crying in the wilderness for some fiscal sanity, rejecting the notion that government spending somehow offers a means of getting something for nothing. Like the boy at the dike, he’s trying to push back against the growing wave of public opinion calling for more money, from a belief that the government simply has it in its capacity to give out cash — a mindset which is also responsible for demands for boosting government spending on an ever-growing wishlist, from college tuition for the young to boosted Social Security for the old, repeating the newly-discovered mantras that debts denominated in our own currency don’t matter or that the dollar’s reserve-currency status guarantees protection against high inflation. Perhaps, too, those calling to loosen or end restraints on spending have forgotten the damage inflation can cause, or simply think it’ll affect others (the rich? the old?) and leave them unscathed, or, on balance, still better off if the government spending triggering it boosts their personal finances.

But here’s the wrinkle with the Dutch boy story:

“ Not even the Little Dutch Boy could have saved the town. You see, when a dike is about to break, a finger just does not cut it. Dikes don’t typically leak—they weaken until whole sections are washed away. No finger will help when that happens.”

As always, you’re invited to comment at JaneTheActuary.com!

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