Elliot Eisenberg’s annual Graphs and Laughs presentation was delivered virtually on Nov. 17, and given the kind of year 2020 has been, there were more graphs than laughs. One of the things that is definitely not funny is the snag in delivering a fourth round of stimulus to form a bridge between the present and the near-future date when the COVID-19 vaccine is more widely distributed beyond front-line health care workers and vulnerable seniors.
In his presentation sponsored by State Bank of Cross Plains, Eisenberg notes the U.S. economy is losing momentum after the COVID-induced crash and the recovery that followed when the economy reopened. While it’s still growing, that growth is slowing down for several reasons, but primarily because most of the low-hanging economic fruit has already been picked and the surge in positive COVID-19 tests is causing governors to reissue shelter-at-home orders or guidance.
As a consequence, more restaurants are either permanently or temporarily closing and the number of new unemployment claims are creeping back up. Last week, jobless claims increased for the second consecutive week, with 778,000 Americans filing for unemployment. Nationally, more than 6 million people now are receiving unemployment benefits, a metric that had been declining in previous months, and personal income growth also is declining.
Since most of the original stimulus money will be exhausted by year’s end, Eisenberg says some targeted stimulus is needed in the $600–$750 billion range to get the economy through the next several months and avoid another recessionary dip. A double-dip recession is not a lead-pipe cinch without additional stimulus, but inaction certainly raises that risk, Eisenberg notes. “I would like to see fiscal stimulus carry us through,” he states. “We know there will be a vaccine and there will be more vaccines that come through.”
Both the Trump administration and Congressional leaders in both parties appear to acknowledge this, but they haven’t exactly been moving at warp speed in hammering out the details, especially in the post-election fog where President-elect Joe Biden has been given the green light to begin the transition, President Trump has yet to formally concede, and we won’t know until Jan. 5 which political party controls the U.S. Senate.
Based on post-election comments from Peter Navarro, assistant to the president and director of the Office of Trade and Manufacturing Policy, the administration is pursuing a “top off” on the Paycheck Protection Program, which are the small business loans that propped up the economy during the initial months of the pandemic. It is also seeking more relief for individuals, such as the $1,200 checks authorized as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a boost in unemployment compensation.
A bipartisan group of senators has tried to restart stalled talks with a $908 billion COVID-relief package that will last until April, but until the leadership groups reengage, nothing much will get done.
Time is running short and both houses of Congress might have to extend their schedules for a special vote on stimulus. The House of Representatives is scheduled to end the year on Dec. 10, and the Senate closes shop on Dec. 18. Then there is the little matter of a Dec. 11 deadline to avoid a government shutdown, which will require both houses to vote on a bill to fund the government for a specified period of time.
Fundamental strength
Other parts of Eisenberg’s economic crystal ball are more encouraging, especially in nonexistent inflation and the continuation of historically low interest rates.
On inflation and interest rates, Eisenberg explained the Fed’s new thinking. Dating back to the 2008 financial crisis, Fed Chairmen Ben Bernanke, Janet Yellen (Biden’s choice for treasury secretary), and current Chair Jerome Powell have set 2% core inflation as the target. The inflation rate was below that for several years, and when it started to creep back up, the Fed started raising interest rates again in 2018, only to see the housing market weaken. It had to walk those rates back in 2019, the housing market recovered, and inflation never came back.
“So, the Fed is changing its entire outlook now,” Eisenberg notes. “They are going to behave very differently toward inflation.”
For those who believe the 25% growth in the money supply to accommodate fiscal stimulus will start an inflationary cycle, Eisenberg urges calm and makes a point about monetary velocity, which refers to the rate at which money is exchanged in an economy. At the moment, that velocity is not particularly high. “If I give you $100, and you stick it in your pocket and forget about it, is that $100 doing any good for anybody? No,” he notes. “If money is not spent or invested, it’s not good for anything, and that’s exactly what has happened. This money is effectively not being used. It’s hanging around.
“Unless this starts to turn around, the central bank can push all the money it wants into the economy,” he adds. “But if it’s not being taken up in investments and loans and spending and so on, there is no inflation. As a result of this, the Fed will keep rates lower for longer. This is my prognosis. We’re going to have interest rates that essentially go nowhere.”
The Fed used to raise rates when the economy reached full employment, which now is considered to be around 4% unemployment. Its reasoning was that when the unemployment rate falls, wages go up. As wages go up, firms charge more for their products and services in order to recoup the increased wages they are paying their workers. The Fed once assumed that wage inflation would result and rates would have to be raised, but in the most recent recovery, “We didn’t see inflation because of that,” Eisenberg notes, and so the Fed has changed its tune.
“The Fed now says it’s not going to raise interest rates until we actually see inflation,” Eisenberg says. “We’ve got to see inflation moving meaningfully above 2% before we get off the dime and start to address inflation by raising rates.”
Boxed-in Biden
In terms of government policy, when it appeared as though the 2020 election would produce a blue wave and sweep Democrats into office up and down the ballot, candidate Joe Biden planned to increase government spending by about 3% of gross domestic product over the next decade. So, out of $200 trillion in GDP over a decade, he would take $7 trillion and spend it in five or six different categories, and he would get the money primarily by raising taxes on the wealthiest 5% of Americans — those earning more than $400,000 per year. Capital gains taxes were going to go up, payroll taxes were going to stay the same up to $400,000 and then start hitting higher-income people, and income taxes were going to go up on the wealthiest earners.
However, Biden’s victory did not produce Congressional coattails. While they still have a majority in the House, the Democrats lost seats and will have a slender majority in that chamber. Pending the outcome of the Georgia runoff elections for the U.S. Senate, the best Democrats can hope for is a 50-50 tie in the Senate with Vice President-elect Kamala Harris casting any tie-breaking votes. That’s why Eisenberg does not foresee any significant changes in tax and fiscal policy.
With small majorities in each chamber, you cannot expect expansive legislative agenda items. Even though the Georgia Senate runoff election is being billed by Republicans as a fight to save America from a ruinous left-wing agenda, Eisenberg believes the die is already cast for the two parties to play ball between the 40-yard lines. “If your majority is one seat, and you have to have your entire caucus there with you to do it, it’s very hard,” Eisenberg notes. “One senator can kill the plan.”
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