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The Macroeconomic Implications of the CARES Act

The Macroeconomic Implications of the CARES Act

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In response to the economic crisis caused by the COVID-19 pandemic, Congress has just passed a $2 trillion spending package, the Coronavirus Aid, Relief, and Economic Security Act (CARES). Although it was put together very quickly, the macroeconomic impacts of this fiscally enormous piece of legislation will be felt for years. The following commentary highlights some of its important macroeconomic implications.

Stimulus or lifeline?

Not surprisingly, CARES has been widely compared to stimulus measures enacted at the onset of the Great Recession — the Economic Stimulus Act of February 2008, the Troubled Asset Relief Program (TARP) of October 2008, and the American Recovery and Reinvestment Act of February 2009. Although the total cost of those three laws was comparable to that of CARES, the new law is differently targeted and will affect the economy differently.

One important difference is that the 2007-09 recession was largely the result of a massive shock to aggregate demand triggered by the contraction of lending and the collapse of housing prices. In this case, the initial shocks have come from the supply side, first in the form of interrupted supply chains, then as sick and frightened workers became unable to report to their jobs, and finally, the policy-induced shock of shelter-in-place orders. (See here for a detailed discussion of the difference between supply shocks and demand shocks.)

As a result, restoration of aggregate demand will not be enough to restart the economy. At least in the short run, the checks being sent out to individuals under CARES will be more important as social policy than as macroeconomic stimulus. In fact, if we go by the results of similar payments in 2008, it is likely that a substantial part of this round will go into precautionary savings, as a hedge against worsening of the crisis, or into debt repayment, which, in economic terms, is another form of saving. For many people, these payments will make the difference between moderate and extreme hardship, but they will do relatively little to induce an immediate rebound of GDP.

A further difference is that the 2008 crisis was triggered primarily by a meltdown of the financial sector. On the whole, banks have come into this crisis with much better capitalization than they had in 2007. Consequently, there is nothing in the CARES Act that is comparable to TARP, which was aimed at recapitalizing banks and other financial institutions. If trouble does again develop in the banking system (which we cannot rule out if the present crisis goes on long enough), then resolving it will require new legislation.


Effects on the deficit and debt

Although worries about the federal deficit and debt have not been central to the debate over CARES, it is still the case that a trillion here and a trillion there will eventually add up to real money. It is worth giving a little thought to how this new legislation will affect the federal debt and deficit.

The first thing to note is the highly unusual stance of fiscal policy going into the coronavirus crisis. As the president never fails to remind us, the economy, through 2019 and into the beginning of this year, was exceptionally strong. One standard measure of that strength is the output gap. The output gap is the difference between current GDP and potential GDP, which is an estimate of the level of output that can be produced in the long run without overheating the economy. According to the Congressional Budget Office, the output gap for 2019 was +0.6 percent, the strongest since the peak gap of +1.9 percent achieved at the end of the dot-com boom of the 1990s.

According to orthodox rules for fiscal policy, the government should apply fiscal stimulus when the economy is in a slump, as indicated by a negative output gap, and fiscal restraint during a boom, when the output gap is positive. Fiscal stimulus or restraint can be measured by the primary structural balance (PSB) of the federal budget, that is, the surplus or deficit, excluding interest payments and adjusted to reflect the state of the business cycle. (See this slideshow for an overview of the mathematics of debts, deficits, and the PSB.)

The following chart plots the stance of fiscal policy, as measured by the PSB, against the business cycle, as measured by the output gap, over the past 50 years. The chart shows that as orthodox rules would prescribe, the PSB moved into surplus at the business-cycle peaks of 2000 and 2007, and then into deficit during the subsequent recessions and recoveries. However, from 2017 to 2019, as the output gap closed and then turned positive, the PSB reversed course. Rather than moving into surplus, it dove further into deficit, reaching a value of -2.9 percent in 2019. An inspection of the entire chart reveals that the movement of fiscal policy toward increased stimulus as the business cycle approached a peak is unprecedented in the last half-century.


The stance of fiscal policy, in turn, has implications for the dynamics of government debt. At any given time, there is a value of the PSB that is just sufficient to hold the ratio of debt to GDP constant over time. At present, federal debt held by the public is about 80 percent of GDP, the nominal rate of interest on the debt (measured as net interest per dollar of net debt) is about 2.3 percent, and the expected long-run growth rate of nominal GDP is about 4 percent, including an allowance for 2 percent inflation. Given those numbers, a primary structural balance of -1.36 percent of GDP would be needed to hold the debt ratio constant at 80 percent in the long run.

As of 2019, the PSB, at -2.9 percent, was already farther in deficit than its steady-state value. As a result, the debt was already on a path toward growth even before the coronavirus crisis began. If 2019 conditions had continued indefinitely, the debt would have grown toward a steady-state value of about 170 percent of GDP.

Now, of course, the debt will grow much more rapidly, at least in the short run. Partly that is because CARES will increase the PSB as a percentage of potential GDP by several percentage points. Partly also it is because GDP itself will decrease by an unknown amount for an unknown period of time, thereby severely eroding federal revenues. However, if the economy returns to its initial long-run path of 4 percent nominal growth and if interest rates remain at recent levels, the long-run steady-state level of the debt ratio will remain unchanged at about 170 percent of GDP. We will just get there several years sooner.

The good news is that as long as the interest rate on the national debt remains lower than the growth rate of GDP, the ratio of debt to GDP will always have a finite ceiling. The theoretically possible “exploding debt” scenario, in which the debt ratio grows without limit until wiped out by default or hyperinflation, looks unlikely, based on trends of interest rates and growth that seem well-anchored.

Keep in mind that in comparing interest rates to inflation, both must be stated in nominal terms or both in real terms. Do not panic at the thought that the 2.3 percent figure given above for nominal interest payments as a percentage of GDP is higher than the widely reported real GDP growth of 2.1 percent for 2019. Nominal GDP grew by a full 4 percent last year, when inflation is figured in.

Furthermore, looking forward, a case can be made that we should be looking not at total interest payments as a percentage of outstanding debt, but instead, at the cost of financing newly issued debt. As of March 25, those rates ranged from 0.19 percent on the 1-year T-bill to 1.45 percent on the 30-year bond. Those ultra-low rates in part reflect the renewed program of quantitative easing undertaken by the Fed in mid-March, but even before that action, at the beginning of March, borrowing rates were just 0.89 percent for the 1-year T-bill and 1.66 percent for the 30-year bond.
 
The restart

From a macroeconomic point of view, the most difficult and least certain phase of the coronavirus crisis will be restarting the economy once the public-health aspects of the pandemic are tamed. CARES has some provisions that will help the restart:
  • Loans to small businesses will be forgiven if they are used to maintain payroll during the crisis. That will maintain a connection between small-business employers and their workers.
  • The Treasury is empowered to channel aid to corporations not just in the form of loans, but also “through the use of such instruments as warrants, stock options, common or preferred stock, or other appropriate equity instruments.” A lower debt burden should make it easier for companies to restart operations while still allowing the government to recoup sums advanced during the crisis.
  • Numerous changes to regulations regarding student loans, Pell Grants, work-study programs, and related forms of student aid should make it easier for students to weather the crisis and for educational institutions to resume operations once the pandemic has died down.
These provisions and others will mitigate supply-side constraints that might otherwise prevent firms from resuming their operations. However, even after those constraints are lifted, production will not be able to get back to normal without adequate demand. CARES is strictly a short-term measure. It is entirely possible that additional demand-side measures will be needed well into the recovery.

One of the dangers ahead is that unwarranted alarm over the increase in the federal deficit and debt will bring renewed calls for budget austerity. To succumb to the temptation to tighten fiscal policy before the recovery is complete would be to repeat a mistake made during the recovery from the Great Recession. That premature tightening of fiscal policy can be seen in the above chart at the point where the red PSB line moves above the blue output-gap line after 2013.

In a prescient 2017 paper, economists Alan J. Auerbach and Yuriy Gorodnichenko warned against a repetition of premature tightening during the inevitable next recession. Studying the experience of several countries during the recovery from the Great Recession, they concluded that fiscal policy “was not used to full potential, given the depth of the recession.” While cautioning that governments should not recklessly finance “bridges to nowhere,” they concluded that concerns over debts and deficits should not block appropriate fiscal stimulus. In fact, they found that “fiscal stimulus in a weak economy may help improve fiscal sustainability” rather than undermining it.


We should heed their warnings as we enter, and eventually emerge from, the onrushing coronavirus recession.

Previously posted at NiskanenCenter.org.

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Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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