Paul Buchheit
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Archive for category: Economy
During the year of the COVID, global consumer and producer prices dropped fell. In some manufacturing-based economies, there was even a fall in price levels (deflation) eg the Euro area, Japan and China).
US inflation rate (annual %)
“Effective demand” as Keynesians like to call it, plummeted, with business investment and household consumption dropping sharply. Savings rates rose to high levels (both corporate savings relative to investment and household savings).
Household savings rates (% of income) – OECD
| Country | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| United Kingdom | 3.1 | 3.6 | 4.9 | 2.2 | 0.0 | 6.1 | 6.5 | 19.4 |
| United States | 6.6 | 7.6 | 7.9 | 7.0 | 7.2 | 7.8 | 7.5 | 16.1 |
| Euro area (16 countries) | 5.6 | 5.7 | 5.7 | 5.7 | 5.6 | 6.4 | 6.7 | 14.3 |
Many companies went bust and many lower income households either lost their jobs or faced reductions in wages. Higher income households maintained their wage levels, but they were unable to travel or spend on leisure and entertainment.
But now, as the rollout of vaccines accelerates across the advanced economies and governments and central banks continue to inject credit money and direct funding for business and households, the wide expectation is that the major economies will make a fast recovery in investment, spending and employment – at least by the second half of 2021.
Now the concern is that, instead of a continued slump, there is a risk of ‘overheating’ in the major economies, causing an inflation of prices generated by ‘too much’ government spending and continued ‘loose’ monetary policy.
The UK’s Financial Times echoed the voices of leading mainstream American Keynesian economists that “a strong recovery and sizeable stimulus raise the possibility of the US ‘overheating’”. Former treasury secretary Larry Summers and former IMF chief economist Oliver Blanchard both warned that the passing by the US Congress of the proposed $1.9tn spending package, on top of last year’s $900bn stimulus, risked inflation.
Summers argued that the size of the spending package, about 9 per cent of pre-pandemic national income, would be much larger than the estimate of the shortfall in economic output from its ‘potential’ by the Congressional Budget Office (CBO). That, combined with loose monetary policy, the accumulated savings of consumers who have been unable to spend and already-falling unemployment could contribute to mounting inflationary pressure. ‘Pent-up demand’ would explode, leading to 1970s-type inflation. “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” said Summers.
Summers’ view must be taken with the proverbial pinch of salt, considering that in April last year, he argued that the COVID pandemic would be merely a short sharp decline, somewhat like tourist areas (Cape Cod in his case) closing down for the winter, and the US economy would come roaring back in the summer. Two things blew that forecast out of the Atlantic: first, the winter wave of COVID (actually in the case of the US, because of lax lockdowns etc, the spring wave just continued); and second, hundreds of thousands of small businesses (and some larger ones) went bust and so business was not able to return to normal after the ‘winter break’.
Summers’ argument is also based on some very dubious economic categories. He measured the fiscal and monetary stimulus being applied by Congress and the Fed in 2021 against the “potential output” of the economy. This is a supposed measure of the maximum capacity of investment and spending that an economy could achieve with ‘full employment’ without inflation. The category is so full of holes, that economists come up with different measures of ‘potential output’, which anyway seems to be a moveable feast depending on productivity and employment growth and likely investment in new capacity.
Larry Summers reckons the Biden relief package will inject around $150 billion per month, while CBO says the monthly gap between actual and potential GDP is now around $50 billion and will decline to $20 billion a month by year-end (because the CBO assumes the COVID-19 virus and all its variants will be under control).
Former New York Fed President Bill Dudley backed up Summers in arguing that Four More Reasons to Worry About US Inflation. First, economic slumps brought on by pandemics tend to end faster than those caused by financial crises. This is Summers’ Cape Cod argument revived. And second, “thanks to rescue packages and a strong stock market, household finances are in far better shape now than they were after the 2008 crisis.” You might ask whether a rocketing stock market benefits the 93% of Americans who have no stock investments (or large pension funds). And while the better-paid may have increased savings to spend, that is not the case for lower to middle income earners. Dudley also claimed that companies have “plenty of cash to spend and access to more at low interest rates”. Again, he seems to concentrate on the large techs and finance firms that are hoovering up government money and stock market gains. Meanwhile there are hundreds of thousands of smaller companies which are on their knees and in no position to launch a big investment plan even if they can get loans at low rates. The number of these zombie companies are growing by the day.
It’s true as Dudley says that ‘inflation expectations’ are rising and that can be a good indicator of future inflation – if households think prices are going to rise, they tend to start spending in advance and so stimulate price rises – and vice versa. And it’s also true that, given the sharp fall in price inflation at the start of the pandemic lockdowns last year, any recovery in prices now will show up as a statistical year on year rise. But as you can see from this graph below inflation expectations are hardly at a level of “of a kind we have not seen in a generation” (Summers).
The other worry of the ‘inflationists’ is that the US Fed will generate an inflationary spiral through its ‘lax’ monetary policies. The Fed continues to plough humungous amounts of credit money into the banks and corporations and also has weakened its inflation target of 2% a year to a 2% average inflation over some undefined period. Thus, the Fed will not hike interest rates or cut back on ‘quantitative easing’ even if the annual inflation rate heads over 2%.
Fed chair Jay Powell made it clear in a recent speech to the Economic Club of New York (business people and economists) that the Fed had no intention of reining in its monetary easing. Powell even gave a date – no tightening of policy before 2023. This has upset the anti-inflation theorists. Gillian Tett in the FT put it: “the Fed has now taken this so-called “forward guidance” to a new level that seems dangerous. He should puncture assumptions that cheap money is here indefinitely, or that Fed policy is a one-way bet. Otherwise his attempts to ward off the ghosts of 2013 will eventually unleash a new monster in the form of a bigger market tantrum, far more damaging than last time — especially if investors have been lulled into thinking the Fed will never jump.”
The FT itself went on: “The Fed’s pledge to leave policy on hold until 2022, however, risks undermining its credibility: it cannot promise to be irresponsible. … it must watch out for any sign that inflation expectations are rising and respond to the data rather than tie itself to the mast.” Dudley echoed this view. “If the Fed does not tighten when inflation appears, it might have to reverse course quickly if it starts getting out of hand. That, in turn, could set off market fireworks.”
But are the inflationists’ warnings valid? First, they are really based on a quick and significant ‘Cape Cod’ economic recovery. But the pandemic is not over yet and the vaccines have not been rolled out to any level to suppress the virus sufficiently yet. What if the new variants that are beginning to circulate are resistant to existing vaccines so that a new ‘wave’ emerges? A summer recovery could be delayed indefinitely.
Moreover, these inflation forecasts are based on two important theoretical errors, in my view. The first is that the huge injections of credit money by the Fed and other central banks that we have seen since the global financial crash in 2008-9 have not led to an inflation of consumer prices in any major economy even during the period of recovery from 2010 onwards – on the contrary (see the US inflation graph above), US inflation rates have been no more than 2% a year and they have been even lower in the Eurozone and Japan, where credit injections have also been huge.
Instead, what has happened has been a surge in the prices of financial assets. Banks and financial institutions, flooded with the generosity of the Fed and other central banks, have not lent these funds onwards (either because the big companies did not need to borrow or the small ones were to risky to lend to). Instead, corporations and banks have speculated in the stock and bond markets, and even borrowed more (through corporate bond issuance) given low interest rates, paying out increased shareholder dividends and buying back their own shares to boost prices. And now with the expectation of economic recovery, investors poured a record $58bn into stock funds, slashing their cash holdings and also piled $13.1bn into global bond funds while pulling $10.6bn from their cash piles.
So Fed and central bank money has not caused in inflation in the ’real economy’ which continued to crawl along at 2% a year or lower in real GDP growth, while the ‘fictitious’ economy exploded. It is there that inflation has taken place.
This is where the ’Austrian school’ of economics comes in. They see this wild expansion of credit leading to ‘malinvestment’ in the real economy and eventually to a credit crunch that hits the productive sectors of the ‘pure’ market economy. This view is expressed by that bastion of conservative economics, the Wall Street Journal. So while the Keynesians worry about overheating and inflation in true 1970s style, the Austrians worry about a credit/debt implosion.
In contrast, the exponents of Modern Monetary Theory (MMT) are quite happy about the Fed injections and the government stimulus programs. Modern Monetary Theory exponent Stephanie Kelton, author of The Deficit Myth, when asked whether she was worried about the stimulus bill causing inflation, said: “Do I think the proposed $1.9 trillion puts us at risk of demand-pull inflation? No. But at least we are centering inflation risk and not talking about running out of money. The terms of the debate have shifted.”
But neither the Keynesians, the Austrians nor the MMT exponents have it right theoretically, in my view. Yes, the Austrians are right that the expansions of credit money are driving up debt levels to proportions that threaten disaster if they should collapse. Yes, the MMT exponents are right that government spending per se, even if financed by central bank ‘printing’ of money will not cause inflation, per se. But what both schools ignore is what is happening to the productive sectors of the economy. If they do not recover then, fiscal stimulus won’t work and monetary stimulus will be ineffective too.
Take the proposed $1.9 trillion stimulus package. Even assuming the whole package is passed by Congress (increasingly unlikely) and then implemented, the stimulus is spread over years not months. Moreover, the paychecks to households will more likely end up being used to pay down debt, bump up savings and cover rent arrears and health care bills. There won’t be much left to go travelling, eat in restaurants and buy ‘discretionary’ items.
Moreover, as I have argued in many previous posts, the Keynesian view that government spending delivers a strong ‘multiplier’ effect on economic growth and employment is just not borne out by the evidence. Sure, government handouts to households and investment in infrastructure may generate a short boost to the economy. But raising government investment from 3% of GDP to 4% of GDP over five years or so cannot be decisive if business sector investment (about 15-20% of GDP) continues to stagnate. Indeed, as government debt grows to new highs (in the case of the US, to over 110% of GDP) even if interest rates stay low, interest costs to GDP for governments will rise and eat into funds available for productive spending. And with corporate debt also at record highs, there is no room for debt heavy corporations to cope with any reversal in low interest rates.
The problem is not inflationary ‘overheating’; it is whether the US economy can ever recover sufficiently to get close to ‘full employment’. The official US unemployment rate may be ‘only’ 6.7% but even the statistical authorities and the Fed admit that it’s probably more like 11-12% and even worse if you include the 2% of the labour force that has left the labour market altogether.
The problem is the profitability of the capitalist sector of the US economy. If that does not rise back to pre-pandemic levels at least (and that was near an all-time low), then investment will not return sufficiently to restore jobs, wages and spending levels.
Last year, G Carchedi and I developed a new Marxist approach to inflation. We have yet to publish our full analysis with evidence. But the gist of our theory is that inflation in modern capitalist economies has a tendency to fall because wages decline as a share of total value-added; and profits are squeezed by a rising organic composition of capital (ie more investment in machinery and technology relative to employees). This tendency can be countered by the monetary authorities boosting money supply so that money price of goods and services rise even though there is a tendency for the growth in the value of goods and services to fall.
During the year of the COVID, corporate profitability and profits fell sharply (excluding government bailouts and with the exception of big tech, big finance and now big pharma). Wage bills also fell (or to be more exact, wages paid to the many fell while some saw wages rise). These results were deflationary. But the central banks pumped in the money. US M2 money supply was up 40% in 2020. So US inflation, after dropping nearly to zero in the first half of 2020, moved back up to 1.5% by year end. Now if we assume that both profits and wages will improve by 5-10% this year and Fed injections continue to rise, then our model suggests that US inflation of goods and services will rise, perhaps to about 3% by end 2021 – pretty much where consumer expectations are going (see graph above).
That’s hardly ‘generation high’ inflation. And the view of Jay Powell and new Treasury Secretary Janet Yellen is “I can tell you we have the tools to deal with that (inflation) risk if it materializes.” Well, the US monetary and fiscal authorities may think they can control inflation (although the evidence is clear that they did not in the 1970s and have not controlled ‘disinflation’ in the last ten years). But they can do little to get the US economy onto a sustained strong pace of growth in GDP, investment and employment. So the US economy over the next few years is more likely to suffer from stagflation, than from inflationary ‘overheating’.
Then-candidate Joe Biden at the Democratic National Convention on August 20, 2020. | Win McNamee/Getty Images
The proposal isn’t just about boosting the economy — it’s about helping people.
There’s been a lot written over the past few weeks about whether President Biden’s $1.9 trillion economic “rescue” package is too small or too big. But an equally important question — and one that underpins the size debate — is what the package should do: Should it be targeted as efficiently as possible to stimulate an economic recovery, or provide quick relief to as many people as possible?
Economists on the stimulus side argue the package should focus on filling the giant hole Covid-19 has left in the US economy. Under this view, a boost in federal spending should maximally and efficiently make up for decreases in other spending as jobs, incomes, and tax revenues fall.
Those on the relief side say the package should be seen more as a relief bill — what economist Noah Smith described as “retroactive social insurance.” Consider the difference between how the government typically responds to a recession versus a hurricane: While the goal with a recession is typically to target spending as efficiently as possible to maximize the recovery, the goal with a hurricane is to make people whole again — even if the spending involved isn’t maximizing, say, economic multipliers. Smith and others argue the package should be more like a hurricane response.
Both sides have good arguments. Covid-19 has obviously battered the economy, with 10 million fewer jobs compared to the year before, shrinking GDP last year, and downward trends in various other metrics. But there’s a good chance much of this will bounce back once the pandemic ends — so what’s needed isn’t so much getting the economy back to “normal” (only the end of Covid-19 can fully do that), but broad economic relief to Americans who are suffering now.
Biden’s response to all of this: Why not both? As he put it last week, “It’s not just the macroeconomic impact on the economy and our ability to compete internationally; it’s people’s lives. Real, live people are hurting, and we can fix it.”
Understanding Biden’s overall proposal in this light makes sense of what can seem like a grab bag of progressive priorities. Some ideas might seem inefficient or excessive for stimulus but make a lot of sense for relief, and vice versa.
For example: Some economists have argued the $1,400 checks should be cut off for Americans with incomes above $75,000 because they’re less likely to spend the money — so they’re less likely to truly stimulate the economy. Some other economists, like Claudia Sahm, disagree, pointing to empirical evidence that the money likely will be spent within months.
But even if the checks-are-inefficient-stimulus crowd is right, the $1,400 checks still can provide another value: peace of mind. The higher-income beneficiaries (who still aren’t exactly rich) may not spend the money as quickly or efficiently as their lower-income counterparts, but the checks still offer support and a safeguard after a year of uncertainty.
Similarly, the bill’s full cost of $1.9 trillion might seem too large for an output gap — the difference between the economy’s current state and potential — estimated at $600 billion or less. Setting aside very reasonable questions about how the output gap is calculated (it seems BS-y to me, as a non-expert), the overspending could be justified if it’s partly for relief, not just stimulus meant to fill the exact hole of the output gap.
On the flip side, the $350 billion in aid to state and local governments may not offer immediate, direct relief to Americans. But it could help stimulate the economy by letting states and localities avoid cuts and even increase their own spending.
Providing both federal stimulus and relief during a recession isn’t new. Past stimulus bills have done both to some degree. But the unique contours of the coronavirus recession have made the need for both even clearer.
Sign up for the Weeds newsletter. Every Friday, you’ll get an explainer of a big policy story from the week, a look at important research that recently came out, and answers to reader questions — to guide you through the first 100 days of President Joe Biden’s administration.
Black Americans have been shut out of stability at every turn.
Among Dee’s friends, talking about money is considered impolite. But that’s not really what stops her. “Most of my peers are white,” she says, “and I get very angry about the systemic inequality evident in our situations, and their seeming obliviousness to it.”
Dee’s family has been middle-class and college-educated going back three generations, “since Black people reasonably could be,” she says. Her maternal grandparents were the children of sharecroppers in the South, migrated north as adults, got graduate degrees, and, unlike millions of Black Americans who were unable to secure mortgages at the time due to racist housing covenants and lending practices, bought a home.
Homeownership was, and remains, the beating heart of wealth accumulation for the American middle class. Our society privileges homeowners in everything from the tax code to the availability of home equity lines to membership requirements for neighborhood associations. You buy a place, that place grows in value, and either you trade up to a bigger place or you keep it until you can pass it down to your kids or your kids get the money from its sale. Stability gives birth to even more stability.
That’s not what happened with Dee’s family. “My grandparents were bludgeoned every time the economy took a downturn,” Dee recalls, in part because of the legacy of redlining and the devaluation of property in Black neighborhoods. “They ended up losing their house. They had enough to live on, but no wealth.” The same happened to her parents. She says they were “destroyed” by the 2008 housing crisis, which disproportionately affected Black homeowners, many of whom, because of longstanding discriminatory lending practices, believed subprime mortgages were the best financing option available to them. Dee’s grandparents managed to make ends meet, but their retirement savings were drastically diminished, and they’ll eventually require some subsidization from Dee.
“Having everything ‘right’ and still living with precarity, literally living paycheck to paycheck, is deeply upsetting”
But Dee, 41, has been struggling for years to find something approximating financial security in her own life. She lives in the Hudson Valley, north of New York City, with her partner and two kids. She and her partner make around $200,000 a year. At more than three times the national median household income, this sounds like a big number, but every month, they found their resources depleted. Before the pandemic, they were allocating most of their money toward their mortgage, child care, and student loans. They’d been putting money into their kids’ 529 college savings accounts, but otherwise the focus has been on credit card and student loan debt, which they’ve just started to be able to actually pay off. These days, they’re no longer paying expensive child care bills, but there’s a real threat that Dee’s partner’s job could disappear at any moment, at which point they would immediately start drowning in debt.
Dee describes herself as frustrated and so very, very angry. “Having everything ‘right’ and still living with precarity, literally living paycheck to paycheck, is deeply upsetting,” she says. Which is why her extra income is going toward her kids’ college savings: to prevent them starting their lives already behind, the way she feels she did. The hole Dee dug in search of middle-class stability for her family is so deep that she’d realistically need to double, even triple her income to pull herself out and have enough to stabilize her parents as well.
She doesn’t have a ton of hope that will happen. “I live in America,” she says. “There is no support for middle-class families, and there is no targeted support for those who have suffered from systemic racism. It’s getting harder and harder to maintain a middle-class life.”
Dee’s story is illustrative of just how different the hollowing of the middle class can feel, depending on your race and family history. Unlike many white middle-class Americans who find themselves bewildered by the prospect of going financially backward from their parents, Dee watched as her family’s best-laid plans for a steady, middle-class future were foiled, again and again, by economic catastrophes in which losses were disproportionately absorbed by Black Americans.
As economists William Darity Jr., Fenable Addo, and Imari Smith recently explained, “for Black Americans, the issue may not be restoring its middle class, but constructing a robust middle class in the first place.” For families like Dee’s, the stability of the middle class has always been a mirage. And you can’t hollow out what’s never actually existed.
A foundational myth of the American dream is the potential of the individual, wholly unbound by context. Parental income level, race, education, access to resources as a child, health, location — positive or negative — all become incidental. The idea is that in America, land of opportunity, you excel on your own merits.
This is a lie, of course. When we talk about class status in America, we still largely focus on current status instead of intergenerational familial legacy; on income, rather than our access to wealth, which “serves as a reservoir that a family can tap into when its income flow is disrupted,” according to economist Ngina Chiteji. Wealth can absorb the blow of a recession, a lost job, or a medical catastrophe. Family wealth makes it easier for future generations to buy homes, and makes it less likely that they’ll accumulate debt. If Dee’s grandparents and parents hadn’t been so thoroughly destabilized by various recessions, her student debt load might be significantly lower or nonexistent today.
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Wealth begets wealth. It makes it easier to launch a business or take a career risk. It’s correlated with better health outcomes, lower child mortality, longer life expectancy: everything you’d expect from a solid home life and access to health care. Because of intersecting racist policies and practices — redlining, continued segregation in schools, hyper-surveillance and brutality by law enforcement, and the policing of Black bodies, just to start — wealth has been far more difficult for Black Americans to accumulate.
In 2016, the median net wealth for white families was $171,000. For Black families, it was $17,000. Black people currently hold less than 3 percent of the nation’s total wealth, even though they make up 14 percent of the population. In 2002, the typical white child’s grandparents’ net worth was eight times bigger than the average Black child’s. Take away home equity, and 93 percent of white children’s grandparents have positive wealth. That’s only true for 73 percent of Black children’s grandparents. Even when Black Americans reach an income level that situates them in the middle class, there’s still a matrix of discriminatory systems that make it difficult for them to gain the stability — the wealth — that theoretically accompanies middle-class existence.
Jasmyne, 29, works for a nonprofit in Los Angeles. She grew up in the South and attended the same HBCU as her husband, a first-generation college student who now works in STEM. Together, they pull in $192,000 a year, which, according to the Pew middle-class calculator, places them in the upper echelon of incomes in the area. But Jasmyne believes placing her, or anyone else, within a particular class is tricky.
“I consider anything above the average US salary to be middle class, but with a whole slew of caveats,” she says. “For example, my husband and I earn middle-class salaries, but we also have significant student debt and often have to support family. We live in an expensive city, so what seems high [for housing costs] in our hometowns is pretty average here. He is saving for retirement, but I haven’t even begun.”
Until very recently, Jasmyne’s mother lived with them; she’d tapped out her retirement savings, so Jasmyne and her husband helped cover her bills while she got financially secure. “I only know of one other couple that has had to navigate that under the age of 30,” Jasmyne says, “and we will likely have to revisit that living arrangement as she ages.”
Part of Jasmyne and her husband’s burden is shared by hundreds of thousands of other millennials and Gen X-ers, regardless of race, who have found themselves providing a safety net for their parents. But that need is not evenly distributed across the middle class. In the mid-2000s, 36 percent of middle-class Black people had a parent living below the poverty line, as opposed to only 8 percent of the white middle class; according to one 2006 study, Black middle-class Americans are 2.6 times more likely to have a low-income sibling than those in the white middle class. People in situations like Jasmyne’s have a higher probability of becoming the primary source for the “reservoir” of stability for their extended family — which in turn makes it more difficult to save, or invest, or set up the financial infrastructure that will ensure that you won’t need help from your children later in life.
There’s no room to mess up, no room for catastrophe
Keisha, who’s 33 and lives in Atlanta with her husband, expressed something similar. As an IT specialist in the transportation field, she makes around $95,000, and her husband brings in $50,000. She was the first person in her family to go to college, and currently pays $450 a month in student loan debt. The other big monthly payments in their lives are $2,000 on their mortgage and $1,500 toward paying down their credit card debt. They’re saving very little every month, usually somewhere between $50 and $100.
In many ways, Keisha thinks her situation is similar to her parents’: Growing up, her family was always “comfortable,” but with “the feeling that if income stops, then that would change very quickly.” The difference, Keisha says, is that her parents had a much larger support network — and they were making less money. “It was understandable for them to need help occasionally, as opposed to myself and my spouse, who don’t have children and make higher salaries. I feel like people in my situation are held to a different standard.” There’s no room to mess up, no room for catastrophe. It’s hard to knit your own social safety net when you’re the safety net for so many other people as well. (This is also true of many immigrant families — something this series will address in the months to come.)
If you focus on an individual’s finances, it’s easy to isolate and judge bad decisions: They shouldn’t have taken out that loan or relied on that credit card or filed for bankruptcy. In my first article on the hollow middle class, I opened with the story of Delia — a middle-class teacher in New Jersey, covering her parents’ bills and struggling to put money aside in part because she was still paying for both of her daughters to attend private school. Delia explained why private school felt so important to her: She saw it as her girls’ ticket out of their small hometown, a place where she felt trapped by the financial ramifications of her parents’ bad decisions. Readers were incredibly antagonistic toward that choice. One man went so far as to send me a 2,000-word breakdown of all that was wrong with how Delia was spending her money. “There was no comments section on the piece,” he wrote, “but she needs to know.”
Keisha feels anxious and stressed about money, particularly about her debt, every day. She doesn’t feel comfortable talking to her peers about it, so she turns to online forums for support and commiseration. “It’s embarrassing to be in a bad financial situation,” she says. “Even if you can explain away why or how you got into the situation, talking about it still invites extra judgment that you’re somehow irresponsible or that you’ve mismanaged your money, instead of talking about the things that are outside of your control.”
A middle-class salary does not exclude Black Americans from higher stress levels than white Americans in their same income bracket, or a higher likelihood of incarceration
This attitude is wrong when it comes to any person’s financial situation, but it’s particularly wrong when it comes to a person who’s part of a group that’s been historically and systematically marginalized. As sociologists Melvin Oliver and Thomas Shapiro contend in their groundbreaking examination of Black and white wealth disparities in America, the legacy of chattel slavery — low wages, segregation, poor schooling — has “sedimentized” racial inequality. Within that hierarchy, Black wealth falls to the bottom, while explicit and implicit modes of white privilege keep white wealth buoyed to the top.
Darity, Addo, and Smith argue that the Black middle class is best understood as “a subaltern middle class.” Its members may be economically privileged among Black communities, but no amount of money can insulate them from marginalization or the everyday exhaustion of navigating America as a Black person. The authors point to wide-ranging data that underlines as much: A middle-class salary does not exclude Black Americans from higher stress levels than white Americans in their same income bracket, or a higher likelihood of incarceration. If you’re a Black woman with a graduate degree, the chances that your baby will die as an infant are higher than for a white woman without a high school degree. And the more educated you are, the more racism you’re likely to encounter in the workplace.
Dealing with that racism? Combating it, confronting it, attempting to hedge against it? It can cost a lot of money. In Black Privilege: Modern Middle-Class Blacks With Credentials and Cash to Spend, sociologist Cassi Pittman Claytor interviewed dozens of members of what she calls the “modern Black middle class.” One of these interviewees, Sharon, grew up in a tony suburb, attended an elite college, and works as an advertising account manager pulling in somewhere between $75,000 and $99,000 a year. But whenever she tries to consume in accordance with her income level, she’s surveilled. As she tells Claytor, “Because I’m black, they think I’m going to steal something.”
For some, countering stores’ racist surveillance means, well, buying things. Cultivating relationships with salespeople, becoming valuable customers. Proving, again and again, that they are middle-class — an assumption that is granted without a second thought to most white customers. Tasha, who works as an attorney, tells Claytor that she tries to subvert the problem by opening store credit cards. “I can be like, ‘I’m a cardholder, I’ve been a loyal customer since whatever year. … Like I’ve always shopped here.’ You can pull up my card savings. You see the amount of money I spend.”
That’s a ton of purchases just to be taken seriously as a Black consumer, and even then, people might think you’re buying what you can’t afford or that you’re careless with money. Keisha, the IT specialist, tells me that an appliance in her home recently broke down, so she called a company for repairs. Instead of telling her the price, they quoted her the monthly payment for financing. “I’m not sure if that assumption was based on our race or the poor state of the appliance, which hadn’t been serviced in several years, but I’m always wondering in the back of my mind: Is it because I’m Black that you’re making this assumption?”
As a result, Keisha often finds herself overcompensating. “Instead of saying to the repairman, ‘You’re right, I cannot afford this $3,000 repair, I’d like to hear about your financing,’ I end up posturing as if I can absolutely afford it and asking for the total price.” She hates it, but she also wants to disabuse people of whatever negative image they might have of Black people. “It’s like the stereotype that Black people don’t tip. Even if the service was terrible, I never tip below 25 percent,” Keisha says.
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Many of Claytor’s interviewees — who work in fields ranging from the arts to finance — are the only Black employee, or one of a handful of Black employees, in their workplaces. The burden of representation falls on them, and they police their own appearances accordingly, often at significant cost. “Jackie Robinson syndrome,” in which Black employees feel they must groom and conduct themselves as exemplars, runs rampant: “For the sake of their careers, they try to be more ‘put together’ than their white counterparts and take far more care of their appearance,” Claytor writes. “They describe wearing dress pants when their white colleagues are wearing khakis. While they are sure to wear clothing that is always clean and pressed, they describe white colleagues as wearing clothes that are wrinkled and have holes.”
It takes a lot of racial privilege to wear whatever you want in the workplace. It also costs a significant amount of money — and time and concern and stress — to counteract others’ preconceptions. Darryl, a bank associate, tells Claytor that he developed a secondary, unspoken dress code for himself. He shaved off his goatee, and because he’d chosen to keep his hair in cornrows, he felt the need to dress in a way that offset it: always “neat” and “nice.” His white coworkers might come in with “some dingy-ass, dirty-ass t-shirt, or a sweater with a hole in it” — an unthinkable option for a Black man in so many workplaces.
Several women in Black Privilege describe straightening their hair instead of wearing braids, to decrease the likelihood, in one woman’s words, of looking “too quote-unquote ethnic and angry black woman, Black Power-esque.” Tasha, the woman who developed the strategy of shopping places where she’d opened up a line of credit, worked in a firm where the majority of employees were white women. She was always vigilant — in attitude and appearance — to never give her employers a reason to avoid hiring Black women in the future. Vigilance is exhausting. It breaks the body down. And it’s yet another invisible cost for members of the Black middle class to bear.
“What is often not acknowledged is that the same social system that fosters the accumulation of private wealth for many whites denies it to blacks,” Oliver and Shapiro wrote back in 1995, “thus forgiving an intimate connection between white wealth accumulation and black poverty.”
Recall Dee’s frustration and disinclination to talk about her own money problems with her white peers: It’s hard to have a conversation about wealth when the mechanisms, policies, and societal practices that may have helped one family maintain stability were used to prevent another family from ever achieving it. Not because they weren’t as hardworking, not because they were “worse with money,” but simply because they were Black.
When we talk about the middle class, we have to be precise about which part of the middle class we’re talking about. I didn’t do that as well as I should have in the first piece in this series; I wanted to use subsequent pieces to dive deeper, but that was a poor excuse. In introductions, in headlines, in tweets, and in conversations with friends, we should be specific. Over the past 40 years, the middle class has hollowed out for white Americans, undercutting the foundation of the belief system so many expected to inherit as their own. That is a categorically different experience from reaching the middle class and realizing just how much work and time and diligence and luck it will take for others like you, even your someday children, to reach that same point.
It’s hard to have a conversation about wealth when the mechanisms, policies, and societal practices that may have helped one family maintain stability were used to prevent another family from ever achieving it
It’s not just that so many white Americans were born on third base, as the old saying goes, and think they hit a triple. It’s that they don’t understand that for centuries, Black Americans were not even allowed in the ballpark. Worse than that, they were treated as tools of the game that is American capitalism, never the beneficiaries. When they were begrudgingly allowed on the playing field, they were hobbled, again and again. Called cheaters, given bad calls, left with the worst equipment, all but a small section of the stands rooting against them.
If, as a Black American, you somehow managed to distinguish yourself, the understanding was that it only happened because someone let you on the field when another player was actually better. Other players were powerful enough that they could help their kids get on the team, even if they’re not that talented. Your kid could be a superstar, and still, she has to go through everything you went through, deal with all the same bullshit, beat all the same opponents, just because she’s a Black kid. The game is rigged against you: actively invested in keeping those in power still in power. It’s a bad baseball analogy, but baseball is as American as you can get.
So how do you actually fix that game? You can acknowledge that reparations, whether in the form of lump payments, preferential lending terms, universal free college, or any other number of potential iterations, are not radical. They are a recognition of historical, enduring inequality, economic and otherwise, and an attempt to restore a modicum of the stability systematically denied to Black families.
For the middle class as a whole to solidify, Congress and the Biden administration will have to dramatically rethink the costs, from child care to higher education, that are pulling families out of the middle class and into debt, and preventing millions of others from reaching the middle class in the first place. But unless they want that solidified middle class to be a white echo of what it was before, reparations must be a part of that solution.
This is more true than ever amid the Covid-19 pandemic: Black people are more likely to work in “essential” jobs, but also more likely to work in industries that cut or laid off workers during the pandemic. Last month alone, 154,000 Black women dropped out of the job force while white women actually gained jobs. More than one out of every 750 Black Americans has died of Covid-19, and Black people have died from the disease at 1.5 times the rate of white people. A Johns Hopkins study from August showed that Black people have nearly double the infection rate of white people, a statistic for which the full implications are still coming into focus as we learn more about the long-term effects of the disease.
As Nikole Hannah-Jones wrote for New York Times Magazine last summer following the killings of George Floyd, Breonna Taylor, and Ahmaud Arbery, “race-neutral policies simply will not address the depth of disadvantages faced by people this country once believed were chattel. Financial restitution cannot end racism, of course, but it can certainly mitigate racism’s most devastating effects. If we do nothing, black Americans may never recover from this pandemic, and they will certainly never know the equality the nation has promised.”
One of the simplest arguments for reparations, I found on Reddit. “Reparations isn’t free money to blacks,” one user wrote. “It’s a bill owed to blacks.” For slavery, and the economy that was built upon it. For World War II, and the benefits the vast majority of Black GIs did not receive for it. For redlining, and all the home equity lost because of it. For police brutality and mass incarceration and Covid-19, and all the time and life and promise they have stolen. The tab goes on for so long that it’s impossible to imagine its end. That doesn’t mean it doesn’t need to be paid. Quite the opposite: It means it must be.
If you’d like to share your experience as part of the hollow middle class with The Goods, email annehelenpetersen@vox.com or fill out this form.
During the year of the COVID, output, investment and employment in nearly all the economies of the world plummeted, as lockdowns, social isolation and collapsing international trade contracted output and spending. And yet the opposite was the case for the stock and bond markets of the major economies. The US stock market indexes (along with others) ended 2020 at all-time highs. After the initial shock of the COVID pandemic and the ensuing lockdowns, when the US stock market indexes plunged by 40%, markets then made a dramatic recovery, eventually surpassing pre-pandemic levels.
It is clear why this happened. It was the injection of credit money into economies. The Federal Reserve and other major banks injected huge quantities of cash/credit into the banking system and even directly into corporations through the purchase of government bonds from the banks and corporate bonds; as well as through direct government-backed COVID loans to businesses. Interest rates on this credit fell towards zero and, with so-called ‘safe assets’ like government bonds, interest rates even went negative. Bond purchasers were paying governments interest in order to buy their paper!
Much of this credit largesse was not used to keep staff in pay and employment or to sustain corporate operations. Instead, the loans have been used as very cheap or near zero-cost borrowing to speculate in financial assets. What is called ‘margin debt’ measures how much of stock market purchases have been made by borrowing. The latest margin debt level is up 7.7% month-over-month and is at a record high.
Marx called financial assets, stocks and bonds, ‘fictitious capital’. Engels first composed this term in his early economic work, the Umrisse; and Marx developed it further in Capital Volume 3 (Chapters 25 and 29), where he defined it as the accumulated claims or legal titles, to future earnings in capitalist production; in other words, claims on ‘real’ capital, ie capital actually invested in physical means of production and workers; or money capital, cash funds being held. A company raises funds for investment etc by issuing stocks and/or bonds. The owners of the shares or bonds then have a claim on the future earnings of the company. There is a ‘secondary’ market for these claims, ie buying and selling these existing shares or bonds; a market for the circulation of these property rights.
Stocks and bonds do not function as real capital; they are merely a claim on future profits, so “the capital-value of such paper is…wholly illusory… The paper serves as title of ownership which represents this capital.” As Marx put it: “While the stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises…; this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises.” The capital “exists only in the latter form“, while the stock or share “is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it”.
Investors (speculators) in financial markets buy and sell these financial assets, driving prices up and down. If cash (liquidity) is flush, share and bond prices can rocket, while banks and financial institutions invent ever new financial ‘instruments’ to invest in. As Marx put it: “With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this ‘money-capital’ is purely fictitious.”
The central banks become key drivers of any financial asset boom Again, as Marx put it some 150 years ago, “Inasmuch as the Bank issues notes that are not backed by the metal reserve in its vaults, it creates tokens of value that are not only means of circulation, but also forms additional – even if fictitious – capital for it to the nominal value of these fiduciary notes, and this extra capital yields it an extra profit.” The creation or ‘printing’ of money by central banks provides the liquidity for speculation in the stock and bond markets – as we have seen in the year of the COVID.
Marx reckoned that what drives stock market prices is the difference between interest rates and the overall rate of profit. As profitability fel in 2020, what kept stock market prices rising was the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world. ‘Quantitative easing’ (buying financial assets with credit injections), has doubled and tripled in this year of the COVID. So the gap between returns on investing in the stock market and the cost of borrowing has been maintained.
But here is the rub. The share price of a company must eventually bear some relation to the profits made or the profits likely to be made over a period of time. Investors measure the value of a company by the share price divided by annual profits. If you add up all the shares issued by a company and multiply it by the share price, you get the ‘market capitalisation’ of the company — in other words what the market thinks the company is worth. This ‘market cap’ can be ten, 20, 30 or even more times annual earnings. If a company’s market cap is 20 times earnings and you bought its shares, you assume that you would have to wait to reap 20 years of profits in dividends to match the price of your investment.
You can see from this (CAPE Shiller) graph below that, as long term interest rates have fallen, the market cap price of corporate shares relative to profits (earnings) has risen. Currently, it is at levels only surpassed in 1929 and during the dot.com boom of 2000.
If profits drive the share prices of companies, then we would expect that, when the rate of profit in capitalism rises or falls, so would stock prices. To measure that, we can get a sort of average price of all the company shares on a stock market by using a basket of share prices from a range of companies and index it. That gives us a stock market index.
So does the stock market price index move up and down with the rate of profit under capitalism? The answer is that it does, over the longer term — namely over the length of the profit cycle, but that can be as long as 15-20 years. In the shorter term, the stock market cycle does not necessarily coincide with the profit cycle. Indeed, financial markets can reach extreme price levels relative to the underlying profits being engendered in an economy.
The most popular way of gauging how far the stock market is out of line with the real economy and profits in productive investment is by measuring the market capitalisation of companies against the accumulated real assets that companies have. This measure is called Tobin’s Q named after the leftist economist, James Tobin. It takes the ‘market capitalisation’ of the companies in the stock market (say, of the top 500 companies in what is called the S&P-500 index) and divides that by the replacement value of tangible assets accumulated by those companies. The replacement value is the price that companies would have to pay to replace all the tangible (and ‘intangible’?) assets that they own (plant, equipment, software etc).
For the last 100 years or so, the average mean Q Ratio is about 0.78. The Q ratio high was at a peak of the tech bubble in 2000 reaching 2.17 — or 174% above the historic average. The lows were in the slumps of 1921, 1932 and 1982 at around 0.28, or 62% below average. But in this year of the COVID, Tobin’s Q has reached 233% above the mean – a new record.
Another useful measure of the value of the stock market relative to the real economy is the Buffett index. Named after famed billionaire financial investor who uses this index as his guide, it measures the money value of all stocks and shares against the current national output in the real economy (GDP). Again, this shows that in the year of the COVID, the stock market has reached record high relative to the ‘real economy’.
Indeed, financial speculators remain in total ‘euphoria’ as they continue to expect central banks to plough yet more loans and cash into the banks and institutions, along with a likely subsidence of the COVID pandemic in 2021 as vaccinations are distributed. The belief is that corporate earnings will recover sharply to justify the current record highs in stock prices.
Citi Research has a “Euphoria/Panic” index that combines a bunch of market mood indicators. Since 1987, the market has typically topped out when this index approached the Euphoria line. The two exceptions were in the turn-of-the-century technology boom, when it spent about three years in the euphoric zone, and right now.
This ‘euphoria’ index complements the views of the world’s most powerful investment bank, Goldman Sachs. Their experts forecast another 15% rise in the US stock market in 2021.
But as Marx explained, eventually investment in financial assets will have to come into line with earnings in the real economy. In the year of the COVID, profits in most corporations plunged by 25-30%.
Goldmans and other investor speculators seem convinced that profits will bounce back this year, to make sure that the price of fictitious capital does not turn out to be fictitious. But that seems unlikely. COVID-19 is not yet over and the vaccination distribution will take well into this year to reach levels of necessary so-called ‘herd immunity’, and that assumes the vaccines can also deal with the new COVID variants.
Moreover, the stock market boom of 2020 was really confined to just a few companies. In the year of the COVID, the S&P 500 index rose 18.4%, but the portfolio of FAAAM (Facebook, Alphabet, Amazon, Apple, Microsoft) plus Netflix rose 55%. The contribution of that latter group to the S&P 500’s growth was 14.35%. So the rest of the S&P companies gained only 4.05%.
Most companies lost money in 2020. And there is a swathe of businesses, mostly outside the top 500, but not entirely, which are in deep trouble. Earnings are low or negative and even with the cost of borrowing near zero, these ‘zombie’ companies are not earning enough to cover even the interest on existing and new loans. These ‘financially challenged’ zombies constitute about 20% of companies in most economies.
Even before the pandemic, the zombie companies were contributing to a significant slowdown in corporate investment levels. With so many companies in trouble, there is little prospect of a huge jump back in investment and earnings this year.
Central banks will go on providing yet more ‘liquidity’ for banks and corporations to speculate in financial markets. So fictitious capital will continue to expand – after all, as Engels first said, speculating in financial markets is a major counteracting factor to falling profitability in the ‘real economy’.
But all good things must come to an end. Probably in the second half of 2021, governments will attempt to rein in their fiscal spending and central banks will slow the pace of their largesse. Then the extreme levels of stock and bond prices relative to earnings and tangible capital are likely to reverse, like a yo-yo does when the string is pulled back to the reality of being fixed to a holder (real capital).
New investments in the U.S. by overseas businesses fell 49% in 2020.
‘Hunt for yield is on’ as deluge of stimulus sends investors in search of returns
A man in a face mask walks past closed shops in downtown Los Angeles on April 22, 2020. | Frederic J. Brown/AFP via Getty Images
The week before Biden took office, 1.4 million Americans filed for unemployment.
The day after Joe Biden’s inauguration, America’s unemployment situation looks bleak.
On Thursday, the United States Labor Department released its latest weekly jobless claims numbers, which showed that 900,000 people filed new unemployment claims the week ending January 16 — President Trump’s final full week in office. Additionally, 423,000 people filed new claims for Pandemic Unemployment Assistance (PUA), expanded unemployment insurance for freelancers, gig workers, contractors, and the self-employed.
It’s a stark indication of the economic hill the new administration has to climb when it comes to getting desperately needed help to millions of workers. Overall, 16 million people were on unemployment as of January 2 — a tough start for the year and a big hole to dig out of.
Prior to the Covid-19 pandemic, the record for weekly jobless claims was 695,000, set in 1982. Since the outbreak hit the US, however, claims have consistently remained above that, topping 6 million in the spring. While during much of last year, the situation was modestly improving, it’s begun to worsen again, with new claims rising in recent weeks.
The December unemployment report also reflects that trend: The US actually lost 140,000 jobs in the last month of the year for the first time in months. Given the current jobs deficit, the country needs to be adding jobs to speed up the recovery, not losing them. People with low-income jobs in areas such as leisure and hospitality, and women — particularly women of color — were hard hit.
“One thing that we’re seeing is that people are losing their jobs anew,” said Andrew Stettner, a senior fellow at the Century Foundation think tank.
As the pandemic has worsened in many parts of the country, so have economic conditions — you can’t fix the economy without dealing with the virus first. Stettner elaborated: “It’s definitely linked to the pandemic surge and economic restrictions in big places like California that are facing some new rounds of layoffs and furloughs on top of the usual seasonal activity.”
Biden’s team is aware of the urgency of the moment. National Economic Council Director Brian Deese said in a statement regarding the claims number on Wednesday that it is “another stark reminder” that more help for the economy is needed. “We must act now to get this virus under control, stabilize the economy, and reduce the long-term scarring that will only worsen if bold action isn’t taken,” he said.
What’s actually going on with jobless claims is a little tricky to parse
The jobless claims data this year has been a little, well, funky.
Congress waited until the very last minute to pass a second stimulus package in 2020, and Trump dragged his feet on signing the $908 billion bill. The legislation entailed more relief for unemployed workers, including tacking on an additional $300 in weekly federal payments through mid-March and extending PUA and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of regular state unemployment insurance. The latter two programs were part of the CARES Act passed in March and were set to expire in December. Because legislation to extend them came so late in the game, they sort of expired anyway.
“Congress just waited too long, so no matter what they did that week of Christmas, there was still going to be a short period of delay for people on those federal extension programs,” said Elizabeth Pancotti, a policy adviser at the advocacy group Employ America.
That this happened isn’t a surprise — experts and advocates warned for months last year that too much procrastination on extending unemployment insurance programs had the potential to push millions of workers off a financial cliff. Some states have been able to get their ducks in a row to ensure continuity, but many have not. Systems were preprogrammed to shut down in December, and they did.
“There are probably millions of families waiting on two, three, four weeks of unemployment checks that aren’t getting them,” Pancotti said.
To put this a little more concretely, the latest jobless numbers show a drop in people on PEUC — the extended benefits after the regular ones expire. That could very well be tied to that cliff at the end of the year where the program itself lapsed.
“What we have seen is that most states were not paying out PEUC benefits in early January,” Stettner said. “Most of them were waiting on the guidance [from the federal government] and new programming, and that’s why the number really went down. Some states were probably not taking claims at all or particular individuals may have been blocked. Even though you saw today’s report that 3 million people filed PEUC claims, I can guarantee you 3 million people didn’t actually get paid.”
Millions of unemployed workers are now Biden’s problem to address
The Biden administration has signaled it plans to hit the ground running, including on the economy and delivering help to American workers. The country still has 10 million fewer jobs than it did pre-pandemic, and millions more have dropped out of the workforce altogether.
Stettner said that one starting point for the administration is to try to get the programs to work better. A federal government that is firing on all cylinders can get regulations out faster and offer clearer guidance to states on how to handle the unemployed.
Biden has already put forth a framework for Congress to pass follow-up stimulus legislation that includes support for people out of work. Last week, Biden unveiled a $1.9 trillion proposal for a follow-up Covid-19 relief bill. It includes $400 a week in expanded federal unemployment insurance and extends emergency unemployment programs, including PEUC and PUA, through September 2021. Legislation will ultimately have to be drafted and written by Congress, and this is basically Biden’s opening bid.
As a starting point, the timing of Biden’s proposal is good in that it is early: Current benefits and programs are set to expire in mid-March, so there’s time for this proposal to work its way through Capitol Hill or, at the very least, for Democrats to realize Republicans won’t play ball and pivot to a different plan. The Biden administration has signaled it wants to try to pass this package through regular order, which would require 60 votes. Many Republicans are already signaling they aren’t on board with this plan, meaning Democrats could turn to budget reconciliation, which would require only a simple majority.
Another positive sign: The framework Biden put forth nods to automatic stabilizers, which would tie social safety net mechanisms (i.e., unemployment) to certain economic conditions. If such mechanisms were put in place, that would mean expanded benefits and emergency programs would be tied to the economic situation actually being better — the unemployment rate at a certain level, and the public health emergency actually over — than a random end date picked by lawmakers. The extra $600 in unemployment benefits from the CARES Act ended on July 31 for no real reason except Congress was overly optimistic about when the pandemic would subside and chose that date.
“They probably have one shot to get this right and they should really move in that direction [of automatic stabilizers] and try to lock in assistance throughout the duration of the crisis,” Stettner said. “They should have the courage … not to put an arbitrary date on this.”
Biden’s initial stimulus proposal, the American Rescue Plan, is part of what his team says will be a two-part effort on the economy. This is the “rescue” portion, and then there will be a “recovery” one to come later. But it’s not guaranteed Democrats will get a chance to do a bunch of big packages — in 2009, in the midst of the Great Recession, they only got one shot and went too small.
“When Democrats passed the recovery act in 2009, it was smaller than was necessary, and a lot of members thought there was going to be another bite at the apple. There wasn’t,” one Democratic aide recently told me. “Members who were around in that time period are very much cognizant of that lesson.”
Pancotti stressed that there are unemployment-related items not in Biden’s framework that should be — for example, funding for states to improve their unemployment insurance structures. Each state determines its own administration, and lots of systems are outdated and insufficient. Congress has provided some federal funding to help states process claims during the pandemic, and it can provide more.
“The Biden administration doesn’t call for that in the framework, but as Congress works on turning that framework into legislative text with a lot more specifics … I think that conversation will reemerge of what investments do we need to make in our systems for the things we care about to actually work,” Pancotti said. “These systems need short-term investments to make these programs work and long-term investments in reform.”
It’s inauguration day. There is a new president in the US, the most powerful capitalist economy and state in the world. Joe Biden’s four-year term begins today, as Donald Trump slinks off to his Florida estate and golf course, after saying that his “movement is just beginning”.
What is the state of the United States as Biden takes over? The COVID-19 pandemic has reaped huge damage on the lives and livelihoods of millions of Americans. Its impact has been far worse than it might have been for several reasons. First, the US government, just like the other governments, had done nothing to prepare for the COVID-19 pandemic. As previous posts have explained, governments had been warned that pathogens dangerous to human life for which there was no immunity were becoming more prevalent, leading to a wave of epidemics before COVID-19. But most governments did not spend on prevention (research into vaccinations) or on protection (robust health resources and testing and trace systems). On the contrary, governments had been cutting back on health spending, privatising and outsourcing it, and in the case of the US, operating a private health insurance system that left a sizeable minority of Americans with no protection at all, and the rest paying out huge premiums for health cover.
And in the US and other countries, like the UK, Sweden and Brazil, there was an open refusal of governments to recognise the deadly nature of the virus and to take action to save lives. For these governments, keeping businesses going, particularly big business, was more important. This attitude led to late lockdowns and social isolation measures, then ‘light’ lockdowns that did not suppress the spread of the virus ;and then too early relaxations, leading to a revival of the pandemic.
So as Biden takes his oath at the inauguration ceremony, Americans are still faced with near record levels of COVID cases and deaths. At the same time, economic activity and people mobility remains well below pre-pandemic levels. According to the latest Google mobility report, US economic activity is still some 20-25% below where it was this time last year.
Indeed, the economic cost of the pandemic during 2020 has been equivalent to 80% of US 2020 real GDP output, if you take into account the lost GDP, premature deaths, long-term health impairment and mental health.
So the outgoing US government (like many others) failed to save lives and also failed to save livelihoods. And this is particularly the case for the lowest paid, often unable to work from home, forced to work in dangerous conditions or being laid off; and that mainly means, black and other ethnic minorities, women and young people.
Overall, the US economy has shrunk by about 4-5% in 2020. That is the largest contraction since the early 1930s – or 90 years ago! Employment has fallen by over 25m, with millions now on emergency benefits, unemployment benefits or given up. Swathes of American businesses, mainly in the services sector but not just there, have been closed and will not return as the economy recovers (once the vaccinations reach enough Americans).
All the evidence suggests that there has been permanent ‘scarring’ to the economy in employment, investment and incomes. Most studies suggest that the US economy in GDP terms will not return to the levels of 2019 before the end of 2022 at the earliest, and certainly not to the levels that GDP would have reached if there had been no pandemic slump.
So there will be no V-shaped recovery as was hoped – indeed of the major economies globally, only China is achieving that. Instead, there is what I have called a ‘reverse square root’ recovery where output falls but then does not recover to the same trajectory of economic growth that was there before. That output is lost forever, as the forecast for the US from Oxford Economics below shows.
But what about the economic policy actions adopted during the pandemic slump under the Trump administration and those that are planned by Biden during 2021 and beyond? Will they not restore the US economy to ‘business as usual’?
In the last year, there has been the biggest injection in history of credit into the monetary system through Federal Reserve Bank purchases of government and corporate debt and loans to businesses. The Fed’s balance sheet has nearly doubled in one year, to reach nearly 40% of US GDP and is set to rise further this year. Has it saved businesses from bankruptcy? Well, yes to some extent, but mainly the large travel, auto and fossil fuel industries, while many small businesses are going bust.
With interest rates more or less at zero and the Fed pumping yet more credit into the coffers of banks and businesses, will this largesse help to get the US economy going at a fast pace in 2021? Well, the evidence is against it. The history of what is called ‘quantitative easing’ (where it is the quantity of credit money that is injected, not reducing cost of this money in interest, that matters) has proved that it fails to restore the productive sectors of the capitalist economy. As empirical study concluded: “output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank’s programmes” and “the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than consumption and investments.” balatti17.pdf (free.fr)
Indeed, what has happened to all these credit injections is that they have been used by banks and big businesses to speculate in the stock and bond markets rather than to pay wages, preserve jobs or raise investment. After the initial panic of the pandemic in March, the US stock market has gone on an unparalleled binge.
It is now at all-time highs and, relative to earnings and productive assets, is at extreme levels. Yet with more Fed support to come, financial markets may well go rolling on up for a while longer. So all monetary policy has done is to keep businesses on life support, while boosting the wealth of the very rich.
The ineffectiveness of monetary policy to restore the US economy has meant that mainstream economists are “all Keynesians now”. The merits of increased government spending while running ‘emergency’ budget deficits are proclaimed by the IMF, the World Bank, the OECD and of course, the incoming Biden administration. Janet Yellen, the former Federal Reserve chief under Obama, is taking over as Treasury Secretary under Biden. Yellen made it clear in her testimony to US Congress where she stood. “We need to act big” because while “economists don’t always agree, but I think there is a consensus now: without further action, we risk a longer, more painful recession now – and long-term scarring of the economy later.”
Thus we have Biden’s new fiscal stimulus package to come in 2021. The main elements of Biden’s stimulus plan include payments to individuals of up to $1,400 each; more aid to state and local governments; the extension of emergency jobless benefits of $400 per week; funds to help schools and universities to reopen; financing of vaccinations, testing and tracing; more child tax credit; and raising the minimum wage.
At first sight this looks big, to use Yellen’s words, taking the total fiscal injection up to 25% of GDP. However, it is not really. First, many of these measures may not get through the US Congress despite the narrow majority that the Democrats now hold. Also, even this level of fiscal support is way short of what is needed keep 25m Americans from destitution or for local governments not to be forced into jobs and spending cuts to ‘balance their books’. Moreover, raising the minimum wage to $15 an hour would still mean that those on the minimum would be well behind average median wage. And Biden is not intending to implement this rise immediately but spread it over time.
Biden also plans a post-pandemic package that he calls “Build Back Better Recovery Plan” which encompasses $2trn in investment stimulus, much tilted towards green initiatives, with a Buy America government procurement, more investment in R&D, and infrastructure. Again, this is spread over the four-year term and adds up to about a maximum of 1% of GDP increase in government investment if fully implemented.
And here is the rub. On average, government investment to GDP in most major capitalist economies is about 3% of GDP, while capitalist investment is around 20% of GDP on average. So a revival of investment, growth and jobs in a capitalist economy ultimately depends on capitalist, not government, investment. Sure, Biden’s investment plan will ‘spill over’ into the capitalist sector, but not by much. Most recent studies show that the ‘multiplier effect’ of government spending on real GDP growth is no more than 1% point, and on average half that. So Biden’s plan would likely add, at best,1% point to the US growth, more likely half that. Given that the average growth rate of the US economy has been little more than 2% a year before COVID and even less per capita, then the Biden investment plan is not going to do much to achieve sustained and higher real GDP and employment growth over the next four years.
The problem is that the capitalist sector of the US economy is very reluctant to invest and the principal reason is that the profitability of such investment is so low. Indeed, the rate of profit of US capital is at a post-1945 low.
Sure, we hear all about the huge profits made by the likes of Amazon, Google, Netflix and the big banks during the 2020 pandemic slump, but the profits of the FAANGS are the exception to the rule. Total corporate profits (after government handouts are removed) have dropped by some 30%. And according to Bloomberg, in the US, almost 200 big corporations have joined the ranks of so-called ‘zombie’ firms since the onset of the pandemic. They now account for 20% of the top 3000 largest publicly-traded companies, with debts of $1.36 trillion. That means 527 of the 3000 companies didn’t earn enough to meet their interest payments! So there remains a significant risk of a credit crunch and financial crash down the road, perhaps in 2021, when the Fed largesse is curtailed.
And then there is the debate about the size of the public debt and inflation. US public sector debt has rocketed during the pandemic to over 110% of US GDP.
Now the current consensus view is that 1) governments have no alternative to spend more and run up their debt levels, otherwise there will be no recovery after the pandemic; and 2) it does not matter if debt levels rise because the cost of servicing those debts (interest) is really low and as real GDP recovers, government revenues will rise, emergency spending will taper off, and the cost of debt servicing will be manageable. The economy can grow its way out of the debt burden as it did after WW2.
There is no doubt that net interest on government debt is very low historically, only slightly more than 1% of GDP a year compared to a GDP growth rate of 2-3% a year ahead. But some mainstream studies are less sanguine. The Peterson Institute argues that those “who believe that rates will almost certainly not rise are too confident in their own views. The forces that have contributed to lower rates are universally difficult to predict, and, as noted above, even modest changes in rates can produce sizable movements in net interest as a share of the economy in the future.”
As the above table shows, just a 50bp rise in average interest costs on government debt would take interest costs above the likely growth rate. Moreover, if the average repayment term on government bonds falls (and it is falling), then the government would soon enter the territory of expanding debt to pay the cost and repayment of existing debt or alternatively have to make significant cuts in government spending, such as on medicare, social security or most likely, on so-called ‘discretionary spending’ like education, public services etc. It may be the debate on whether austerity is necessary or not may have been kicked down the road like the proverbial can. But the can is still on the surface of the road.
Of course, the suggestion that the US government will eventually need to stop running budget deficits and deal with rising debt has been strongly rejected by exponents of Modern Monetary Theory. MMT supporters argue that Biden can and should run permanent budget deficits until full employment is reached. There is no need to finance these annual deficits by issuing more government bonds. Because the government controls the unit of account, the dollar, which everybody must use, the Federal Reserve can just ‘print’ dollars to fund the deficits as the Treasury requires. Full employment and growth will follow.
I have discussed in detail the flaws in the MMT argument in other posts, but the key concern here is that government spending, however financed, may not achieve the necessary investment and employment increases. That’s because MMT does not take the decision-making on investment and jobs out of the hands of the capitalist sector. The bulk of investment and employment remains under the control of capitalism, not the state. And as I have argued above, that depends on the expected profitability of capital.
Let me repeat the words of Michael Pettis, a firm Keynesian economist: “the bottom line is this: if the government can spend additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.” That’s because “creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment…If US companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond ….by investing more.”
In a major slump, businesses go to the wall, unemployment rises and investment in means of production stops. Total profits fall, but the conditions have been created for a rise in the rate of profit as costs fall and the strong devour the weak. Joseph Schumpeter of the Austrian school of economists called this ‘creative destruction’, following Marx who argued that slumps eventually provide the environment for rising profitability and expansion – thus we get the cycle of boom, slump and boom.
The pandemic slump of 2020 matches that of the 1930s, so it should eventually provide a boost to profitability. But it required a world war to end the Great Depression of the 1930s. And if the Fed goes on ploughing credit into businesses to prop up the ‘zombies’ at the expense of productive investment, then the US economy under Biden will just return to the low growth, low investment, low wage growth economy of the last ten years since the Great Recession.
And if disillusionment in Biden’s policies rises, that could lay the political base for the return of something like Trumpism, which according to the Donald is “just beginning.”
Jessica Corbett, staff writer
“Congress should immediately move to pass President-elect Biden’s plan,” said Claire Guzdar of the Groundwork Collaborative. “And we can’t stop there.”
