“Whether we like it or not the economy is getting restructured and our democratic institutions have a role to play.”
~ Sarah Miller, American Economic Liberties Project
“It is my fervent hope that we use this crisis as a catalyst to rebuild an economy that creates and sustains opportunity for dramatically more people, especially those who have been left behind for too long.”
~ Jamie Dimon, CEO J.P. Morgan Chase
The stock market may have bounced back from its March 23rd low, but that does not mean that the economy has bounced back with it. With the highest unemployment rate since the Great Depression, and more businesses going belly up everyday, the economic devastation of this crisis is far from over. Do not let premature re-openings, willfully ignorant politicians, and misplaced optimism obscure your view of what is really going on. Currently the economy is staying afloat upon a wooden raft that is disintegrating beneath it. That is to say, there are some very interesting economic trends currently taking place, which have warded off economic disaster in the short term. These trends provide us with definitive evidence of what will work best going forward, and thus give us guidance about how Congress should pursue its next round of stimulus, in order to stabilize the economy long term. But if we do not act quickly, it has all been for naught. What do I mean? It is no secret that the income inequality in the U.S. has been growing more severe for quite a while, and this crisis has the potential to make it even worse. 78 percent of Democrats polled, and 41 percent of Republicans polled see income inequality as a major problem. Out of all of the countries in the G7, the U.S. has the highest level of income inequality. This is because the wealth gap doubled from 1986 to 2016. Looking for the silver lining in this crisis: the novel coronavirus has provided the U.S. with the perfect time to address this growing issue. If we do not act now, however, the problem will only exacerbate itself and become irreparable, and thus the American dream -- being able to pull one’s self up by his or her proverbial bootstraps -- will become a thing of the past.
Let us take a look at the current economic environment – mid-crisis – and look at what is working thus far and how we can apply that understanding to larger economic issues, in order to not only climb out of our current economic predicament, but also to correct the glaring economic deficiencies of the past. That is, let us create a newer, more inclusive capitalism.
Even though, unemployment shot up from 4.4 percent to 14.7 percent in April, the personal income of Americans grew by 10.5 percent, which is the most it has risen in the entire sixty year history of that particular economic metric. This is completely thanks to the CARES Act, which not only provided Americans with a $1200 stimulus check, but it also added $600 a week to unemployment insurance. These two actions have had a tremendously positive effect on the economy.
Within two days of the stimulus package being implemented spending jumped for low income Americans by 26 percent, while only climbing by 9 percent for high income individuals. Not only that, the type of spending done by these low income Americans is exactly what the economy needs right now. These folks have been purchasing durable goods, such as furniture, cars, televisions, computers, etc. Moreover, many people who pre-crisis (pre-stimulus) were living paycheck to paycheck now finally have some extra money in their pockets. Not only are people buying more consumer goods, they have also started to invest in the stock market. In fact, people earning between $35,000 and $75,000 a year, traded stocks about 90 percent more after their stimulus check arrived. Furthermore, lower income Americans are finally starting to save money as well. This is not talked about enough, but the fact that individuals in this income bracket are finally starting to save money is good for everyone. We have already passed nearly three trillion dollars in stimulus, and when ever-increasing amounts of money are thrown around, the value of money itself has the potential to decrease dramatically. We can see this fact in the current interest rate environment. These incredibly low rates make money cheap. That is to say, the cost to borrow money is low, which in turn makes the value of money itself low.
Nevertheless, if more low and middle income Americans save their money, they are giving money its value back. By saving money they are putting an intrinsic and essential value upon it. Enough saving, will force interest savings rates to have to compete with each other, which will then in turn raise interest rates back up as a result, and thus give money a foundational value beneath it and ward off devaluation (i.e. inflation) in the mid-to-long term.
Low and middle class Americans finally have some money and they are doing all the right things with it. They are buying goods, they are investing, and they are saving. They are doing exactly what is needed for the economy to get through this difficult time, and these actions are showing us the formula for macro-economic success.
When low and middle class Americans have more money, the economy works more efficiently. What is more, since state economies have been re-opening around the country, low income Americans are much less likely to be able to work from home than their higher income counterparts. This means, lower income Americans are the one’s being put in harm’s way in order for the economy to continue to work. It is for all of these reasons, that Congress must act immediately to pass legislation in support of this valuable cohort of Americans, because only through their labor and money habits can the economy, and by extension, the American dream survive.
The re-openings have caused a record spike in new virus cases in six states. If this trend continues, it will likely have a devastating effect on consumer confidence. Treasury Secretary Mnuchin has already said that the economy will not be shut down again. In situations like this, it really does not matter what government officials say. If people are not confident enough to go out and participate in the economy, then they are essentially taking things into their own hands and shutting things down themselves. In other words, if people don’t feel safe enough to go out and participate in the economy, then it does not really matter if things are open or not, does it?
Furthermore it is actually the wealthiest Americans who are the most scared of going out. As one might guess, higher income individuals support more small businesses than their lower income counterparts, and because wealthier Americans have stayed inside, small businesses have suffered the most during the pandemic. Think about all of those small businesses that service high income individuals in their homes and neighborhoods: landscapers, contractors, pool companies, maids, plumbers, etc. Small businesses have seen a 55 percent decline in the highest income zip codes, versus only a 40 percent decline in the lowest income zip codes. Moreover, the top 25 percent of income earners have seen a 66 percent decline in credit card spending, while the bottom 25 percent are already back to pre-crisis levels. The point has been made yet again: it is the lower income individuals who are going to be the one’s to save the economy. The only way that is going to work, however, is if Congress gets involved and makes sure that these Americans are provided for.
The following are three actions that Congress should take immediately to save the economy from the pandemic’s coming devastation and create a capitalism in which everyone has a chance to be involved.
1. More Stimulus Checks
The first action that Congress should take is to provide more stimulus checks to low and middle income Americans. It should be taken as an insult to all Americans, that other countries around the world provided much more relief for their citizens than we did for ours. For instance, in Canada, citizens are getting a $2000 check each month for four months and Britain’s government is giving its citizens over $3000 a month. I thought America was the richest country in the world? Why don’t we start acting like it? With unemployment at depression levels, low and middle income Americans need money now more than ever. No economist in the world could say that the first round of stimulus checks was not good for the economy in the short term. Likewise, I would love to hear the argument against another round (or two). And I do not want to hear that we cannot afford it. If we can waste hundreds of billions of dollars on forgivable loans to businesses that did not even need the stimulus money that they received, in a program that was “particularly badly designed” according to one Nobel Laureate, then I think we can give some more money to individuals who have been the heart and soul of the recovery thus far.
That is to say, the CARES Act sought to help individuals with a stimulus check and a raise in unemployment insurance, and it also sought to help small businesses with the Paycheck Protection Program. Where the bill sought to help individuals it was a massive success and where it sought to help businesses it was an unmitigated disaster. Tell me why any billion dollar business needs taxpayer money to keep themselves afloat? Some companies even called out the fiscal irresponsibility of the program. Shake Shack, for instance, gave the money back to the government. And even though they were eligible for it, Shake Shack’s CEO stated plainly, “It doesn’t seem right to us.” Unfortunately, there are countless businesses with less of a conscience. What companies took the money? We do not know, and according to Treasury Secretary Mnuchin Americans are not supposed to know. That is interesting, it is our taxpayer money going to these businesses, and we are not allowed to know who is getting it? That is preposterous and undemocratic!
The point of the paycheck protection program was to provide liquidity to businesses to pay their monthly bills and keep their employees on their payroll. Keep in mind that with the added $600 for unemployment, any business that actually took this money was most likely hurting their workers who would likely have made more on unemployment than by staying on the company payroll. Opponents of the added $600 for unemployment claim that the extra money is a disincentive to return to work. Do these critics not realize that their criticism just highlights their own failure to understand basic economics. If as little as $600 on top of the going unemployment pay rate is enough for someone to be better off on unemployment than still on the payroll, then the real question that must be asked is why is the American worker paid so little in the first place. Perhaps now is time for people to acknowledge the income inequality in our society and try to fix it. Another round (or two) of stimulus checks, and extending unemployment benefits until wages are raised to reflect the value of workers’ effort, talent, and risk, will have a far-reaching economic impact, and may be enough to get us through this difficult time and perhaps even far beyond.
2. Cancel Student Debt
The second action that Congress should take to save the economy is to cancel student loan debt. I have heard the arguments against student debt cancellation, and I have already addressed them in my post The 5 Most Common Arguments Against Student Debt Forgiveness (& Why They Are All Wrong). I am not going to address those arguments here, however. The purpose of this writing is to show the benefit that such a congressional action would provide for the economy. It would be the most successful stimulus package our economy has ever seen. It would raise GDP by 108 billion dollars and create 1.5 million jobs a year. Understanding the impact student debt cancellation would have, Democratic presidential nominee Joe Biden said early on in the crisis that the U.S. should cancel $10,000 in student loan debt for all borrowers to help them through this unprecedented time. After Congress passed the CARES Act, the HEROES act was passed in the House, and it originally called for as much as $30,000 in student debt cancellation. Unfortunately it was scaled back to Biden’s $10,000 proposal. Nonetheless, any amount of debt cancellation will help. It seems to be the same old story, however. Like many pieces of legislation that actually intend to help low and middle income Americans, the HEROES Act was said to be “dead on arrival” in the Senate.
Recently, however, the original idea in the bill has been given new life. That is, a letter was sent to Congress, signed by nearly seventy major organizations in support of the Student Debt Emergency Relief Act, which calls for $30,000 in student debt cancellation. Thus far during the crisis, the only thing that has been done in regards to student loans is the deferment of payments until September with no interest accumulating in the meantime. What a joke! First of all, do not even get me started on the fact that interest is even collected on student loans at all. Interest is supposed to represent the return on your money in exchange for the risk taken. Student loans are the only debt in America that is (almost