One for the Record Books
To what purpose, April, do you return again?
Second April, Edna St. Vincent Millay
Longtime readers of this column are aware that April is usually the best month for federal government cash flows. Personal and corporate income tax deadlines along with estimated tax payments normally swell Washington’s coffers and usher in a half-year of relative fiscal calm. In 2019, for example, the Congressional Budget Office reported a $160 billion surplus for the month. This year, however, things are—slightly different. With the postponement of the normal April 15 filing deadline and a 15% drop in withholding, tax receipts plummeted. At the same time, ordinary refunds and special individual stimulus payments combined to total $ 235 billion. Put them together and the federal government’s net revenue operations were cash flow negative in April, an unprecedented result and truly one for the record books.
This sudden unscheduled crash in federal revenues will partially reverse itself when income and estimated tax payments resume in July. Nevertheless, Washington is headed for uncharted deficit territory. It is likely that the accumulated public deficit will approach 100% of GDP in the next year, something that wasn’t supposed to happen until at least 2030. No one really knows if the level of debt to GDP is relevant to economic performance, but it is a milestone that will get people’s attention. Almost everyone has the belief that the federal government can’t continue to send money to businesses that aren’t conducting business and workers who aren’t working.
And therein lies the problem going forward. One can easily foresee two groups of Americans emerging from the lockdown. Those who have remained employed or have steady retirement income (pensions, Social Security, etc.), will come back with their finances largely intact. To this group, extending extraordinary federal spending on businesses or the unemployed will seem like a moral hazard, rewarding those who are looking for handouts. The desire to see “normal” financial conditions among those who have suffered little (at least monetarily) will be strong—landlords will want their rents, municipalities will need their taxes, mortgage and car loan and student debt collectors will insist upon their payments.
On the other hand, those who have lost jobs in sectors that may never fully recover face an uncertain future. A few months of debt forbearance will hardly provide a longer-term solution to the lack of wage income; a low-interest small business loan is worse than useless if the owner can’t resume pre-crisis operations. Shutting off the money spigot will remove the cash flow these people need to meet their financial obligations – rent, loans, taxes, etc.—that allow them to live a normal life. It is naïve to think that the whole economy is simply going to pick up where it left off in January. And this assumes that all those thrown out of work were able to file for unemployment or that all small business owners were able to get money from the PPP and other programs. There has been a tremendous amount of economic dislocation and a bounce in equity prices will not help most of the people who will suffer from it.
History shows that recovery from severe economic dislocation requires both quick action and persistence. Our received narrative of the Great Depression is that the market crashed, the Hoover administration did nothing, and things just kept getting worse until the New Deal, which ushered in ramped up government spending and support for industry. The reality is more nuanced. After the crash in October 1929, the stock market regained its late 1928 level fairly quickly, helped by buying from a consortium of banks and brokers, and maintained it into the summer of 1930. President Hoover urged business to keep workers employed and not to cut wages; while bumping up unemployment relief and support for farm prices—farmers, who composed a large portion of the population, had been suffering for years. When it became clear that things were not turning around, the administration convinced Congress to take the unprecedented step of funding the Resolution Trust Corporation, a Treasury-backed effort to buy up failing banks and businesses. Nothing really helped, and at the same time Washington implemented the Smoot-Hawley tariff, which led to retaliatory responses from trading partners. Franklin Roosevelt and the Democrats were elected in a landslide in 1932.
The history of the New Deal is instructive as well. The new administration conducted a scattershot approach, creating a plethora of programs designed to provide employment, support existing business, and encourage borrowing. And while this provided some relief, the expense and political opposition from the established order led to cutbacks in 1936, which led to a crash in 1937. By the end of the decade things still looked grim.
My point is that there is always a push to “return to normal” after the implementation of fiscal stimulus, driven largely by people and institutions which have not suffered much from the downturn. Their arguments are abetted by the corruption and disincentives which accompany the rushed new spending. Consequently, a competent government would attempt to make sure that the relief is targeted and honestly administered; something that seems to elude the current regime. Soon “we’re all in this together” turns into “grab what you can,” eroding support for the spending. And if that happens before a recovery takes good hold, the consequences will be dire.
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