Covid, Recent Policy, and Supply-side Economics

Let’s suppose you get a flat tire on your new red Schwinn. You take it to the Schwinn store, and the guy starts messing with the chain on your bike. You say, why are you messing with the chain when my tire is flat? He says, I didn’t know how to fix a tire but I have a lot of experience fixing chains.

That’s how to think about monetary and fiscal policies these days. Our policymakers know about one thing and one thing only – demand. Those of you with excess education might remember taking economics and learning that a complete market analysis includes a demand curve and a supply curve. If we demand more weed and less beer, then the price of beer goes down. If the farmer brings a lot of tomatoes to market, then the price of tomatoes goes down. Sometimes the issue in a market is a change in demand. Sometimes the issue is a change in supply. Viola.

But when it comes to macroeconomic policy, we are all Keynesians, which means we think only about demand. Supply is for suckers. Jay Powell at the Fed and all those sharp tacks in Congress know nothing about supply. This makes it easy on them. If the economy slows down, get people to buy more stuff. If the economy speeds up, get people to buy less stuff. Demand, demand, demand. Easy peasy.

What's wrong with a focus on demand? It sounds intuitive. If the economy is weak, then drive interest rates to zero and give everyone a tax cut. Go back a couple of paragraphs. If the problem is your tire, then maybe fixing your chain won’t help much. The remedy ought to reflect the problem. Find a guy who knows how to fix tires! Surely, Larry, you must be smoking funny cigarettes. People today lost their jobs and they are buying less. Isn’t that a demand problem?

Yes and no. Let’s get really abstract now. Suppose X causes a change in Y and then the change in Y causes a change in Z. If you don’t like the change in Z, then what’s the best thing to do? You might say, work on Y. It is the proximate or intuitive problem. But wait, unless you change X, you are still going to get Y and Z. Ugh.

You have to go to the real source or the ultimate cause of the problem. In my example, the real cause of the problem is X. Work on X.

That’s what is happening now. A supply shock caused a change in demand and the change in the demand caused the economy to collapse. Changing demand might seem logical but you are not going to get any real progress until you deal with a critical supply shortage.

What is the supply shortage now? Simple. Covid. Covid is why stores closed. Covid is why factories closed. Covid is why we have historically high unemployment and falling incomes. All that is aggregate supply stuff. Of course, once all that hit, our desire and ability to buy stuff fell dramatically.

But just as Y is not the solution for Z, demand-oriented policies will not solve our weak economy problem. Just as a new chain might make the bicycle run better in some ways, attacking a supply problem with a demand remedy might have some remedial impacts but it won’t solve the problem.

Is this a simple ignorance problem? Do our policymakers not know about supply-side policy? No and no.

This is an ideological problem. Do you old folks recall the 1970s when we discussed supply-side problems? What did we call them ...voodoo, trickle down or Trojan horse.  Wow, if I was a supply-side policy, I wouldn’t want you calling me all those ugly names. But some folks noted correctly that supply-side policy was aimed at restoring supply! Crazy as that might sound, these name-callers noted that the supply-side was largely impacted by SUPPLY. Imagine that. A policy aimed at supply – and suppliers.

Unfortunately, suppliers are business firms. And to our name-calling friends, business firms are selfish rich folks who do not deserve to be assisted. Thus, any remedy aimed at the supply-side of the economy is immediately discounted because it BEGINS by impacting suppliers first. Dead on arrival!

How do we know business firms won’t just give a subsidy or tax benefit to rich stockholders? How do we know they will use the money to restore supply? Fair questions. How do you know that a demand-side tax cut won’t just be hoarded and not spent by households? You don’t know that either. So, what you do is fashion the policy so it is more difficult to not use it for the intended purposes.

But that is not the real problem anyway. The real problem is that some of the name-callers who won’t consider supply-side policy do it because they are driven only by distribution of income issues. To them, supply-side policy looks very nasty. To them, any policy that doesn’t begin with a remedy for distribution of income is not worth discussing.

Am I saying we should not be worried about distribution of income? NO! We should be. We should be spending a lot of our money on solving Covid. Covid is the supply shock. If we solve that problem, then XYZ and most other things will be solved! We know now that lower income people are getting decimated by Covid. With money on Covid, we solve distribution of income AND the economy.

Otherwise, our policies should be aimed at both short- and long-run economic growth. We should forget about demand. If we resolve supply constraints, then the demand constraints will be solved as well. With companies expanding and more people being employed, demand will rise accordingly.

Trickle down, blah blah blah. In 2020, if you want to help people, then work on market opening initiatives that minimize negative health impacts and put some gas into the engine. Let the economy return using sensible policies to control Covid. Try to directly stimulate demand, and you will get very little lasting benefit to the economy.

Everything About Masks

Relevant examples:

If a baby poops a lot, then it should wear a diaper to protect others. If a baby is near other babies who poop a lot, then the other babies should wear diapers. Thus, all babies should wear diapers.

Some women prefer to wear undies. Other women prefer to not wear undies. Should all women wear undies?

Before 2020 we knew a lot about masks.

          In French, the word masque means to hide or protect the face.

          In China, masks were thought to originate in ancient religious ceremonies. Some masks were meant as thank-yous to deities and others were worn to ask for protection from Donald Trump.

          Masks were used in Greek theater to accentuate character and emotion.

          In ancient Korea, masks were worn by soldiers and their horses.

          During Mardi Gras in New Orleans, masks are worn so no one knows who is the drunken fool behind the mask. Keeping the mask on during and after sex insures your mate will never know your identity after Mardi Gras.

The Lone Ranger and robbers wore masks to hide their identities.

Vigilantes and the KKK are known to wear masks to frighten others and to conceal their identities.

All kinds of masks – surgical mask, oxygen mask, welding mask, gas mask, ski mask, catcher’s mask, football helmet face mask, fencing mask, hockey goalie mask, underwater mask, ski mask, carnival mask, wrestler’s mask, masquerade ball mask.

An article in the Journal of the Royal Society of Medicine says there is no strong evidence to support the claim that surgical masks protect either health professionals or their patients.

When I had my tonsils out at the age of 3 I recall the surgeon wearing a mask. 

After March of 2020, we know a lot more about masks.

Mask choice: Bandanas, scarves, handmade face coverings, disposable masks, vented masks, face shields, panties.

Glasses fog up wearing masks.

Have a portfolio of masks.

Remembering to bring your mask.

Wash your mask.

Talking to people/servers with masks.

Servers behind plastic shields.

Talking to people and you can't tell if they are smiling or frowning. 

If you cannot tell if someone is smiling should you hand over the contents of your cash register? 

Without smiling what happens to Serotonin and other neurotransmitters?

When should you wear/not wear a mask: outside, inside, 5 feet away, 7 feet away, windy day, air conditioning, near people talking loudly, near people who sneeze a lot, near people who look sleazy.

Why do some people talk so loud in public?

Masks make your ears look funny.

Masks irritate your face. 

Should you wear a mask when driving in your car alone or when standing in the middle of a desert?

Mask wearing tips – cover your mouth and nose together, make sure you cover your whole nose not just the tip, don’t leave your chin exposed, don’t wear it loosely but don’t strangle yourself either, don’t cover your eyes or your ears.

Don’t use your mask mistakenly as a handkerchief.

How many masks should you have? Will Tide clean them?

Wear a mask that associates yourself with America and/or all good, caring, thoughtful, well adjusted, educated, beautiful people.

Don't wear a mask because you are a curmudgeon. 

Wear a mask that shows you are a solid Democrat, Republican, or member of a local gun club.

Wear a mask with either rabbits or kittens on it.

Should you wear a mask when drinking JD?

That’s all I’ve got. Did you ever think people would talk about masks so much?

Macroeconomics in 2020

I was invited to give a Zoom talk about the economy to a group of friends from my gym here in Seattle. So I thought, why not kill two birds with one stone? (To my pet-friendly friends, that is figurative, I will not kill any birds with any stones.) Why not write out what I want to say at the Zoom on my blog?

So here goes. Some of my faithful readers might be curious about my process for these posts. Be curious no longer. My process is mostly iterative. I write one phrase, maybe a whole sentence. Once it is written I wonder what might come next. If nothing follows, then I take a nap. If something follows, then I write it down and then read both sentences. And so on. This approach contrasts greatly with the idea that I might think through an issue in totality and then cleverly write it out in a consistent and forceful manner. Hmm…I wonder what I should say next?

The objective of this piece today is to present what I know about macroeconomics to a group of lady weight-lifters. I could go on and on about that topic but I fear these ladies deserve a punchline and something I can say in about 15 minutes. I am writing this draft on June 3, 2020, so whatever I might say about macroeconomics ought to reflect the fact that the world as I have always known it has turned upside down. I have studied macroeconomics since Spanky played with Our Gang. But most of what I thought I knew essentially went out the window in the last months.

Some say that experience and history form our understanding of the world today and our forecasts of the world tomorrow. Not now. I feel a little like the guy who leaves the Earth and finds himself on another planet and immediately starts looking for a Wendy’s. Surely there must be a nice cheeseburger around here somewhere. Maybe not.

Blog posts should have three points. So that is my first one. If you were hoping for a macroanalysis or a forecast today, then go to that planet and find me a double cheeseburger with fries. Economists and politicians are falling all over themselves these days to tell us what lies ahead in the economy. They agree on one thing – the US economy is in a recession right now. AGREED! That means the economy sucks pond water. That means the unemployment rate is high and rising. That means people are trying to spend less than my parents did in 1929. That means companies are going out of business left and right.

But when it comes to the future, the experts are all over the place. The Congressional Budget Office said we will not grow for 10 years. Others are focused on the alphabet when it comes to the future. A V-shaped recovery is fast while a U-shaped recovery takes a while longer before we are eating chili dogs on Coney Island. I am thinking about a double U/V/inverted W-shaped recovery but dry Martinis are involved with that so you might want to hold off on that one.

My first point? Don’t listen to all that crap. You have better things to do.

Which brings me to point 2. Point 2 is that even if you could decipher point 1, it’s all macro and in 2020, macro has almost nothing to do with you. Imagine how different 2020 is from any time you or your grandpa or grandma have ever known. What are you? A wacky millennial? Are you just graduating from college? Are you an old fart like me? Are you white privileged? A person of color? Do I need to go on?

Have you ever imagined a time like this when the world is impacting each of us so differently? Whether it is Covid or race relations or the many economic/sociological impacts of those major changes – we are not being impacted equally. In macro we talk about the average person. Today there is no average person. I love to tell the following joke about the average person. Imagine a person in his kitchen with his foot in a hot oven and his hand in the freezer. On average his temperature is just fine. Hmmm.

Summarizing. Point 1. There is no macro. Point 2. There is no macro.

Point 3 comes next. It is the coup de gras, whatever that means. If there is no macro, then there is just one thing left – it is you. You is what really matters because whatever has already happened and whatever will transpire, there is very little you or I can do to stop it. This is the proverbial rock and hard place. Things are not good, and they are not going to get better very fast. So, there you are. Rock. Hard place. You.

What can you do? What you can do is decide how you are going to live in that spot. You can piss and moan. Some people like to piss and moan. It might make them feel better. If that is you, then by all means please P&M. But please don’t do it in my soup. Some of us, even though it is tough to do, would prefer to think about good things. Maybe you like to remember when your mother used to tell bedtime stories to you. Maybe you love to hug your kids or your boyfriend. Whatever, it is possible to face tough situations with a positive mental attitude.

I hear some of you saying,Yea, Davidson you have it made. You are old and living off your fortune. You have a girlfriend who does your laundry. You have it easy. Okay, so maybe I am not suffering like others. But I will appeal to a book I read recently written by a psychologist* who was in a Nazi prison camp. He was pretty sure he would never get out. So, like a good psychologist he did a study of his fellow inmates. He concluded that those who could not find anything good to think about or plan for died in camp. Those who, despite the current deprivation and uncertainty about ever leaving it, planned for the future and lived.

Like those in the Nazi camps – we have a choice. Whatever yours is, I hope we can find some solace and all get through this rock and hard place. No – that’s not macro.

*Man's Search for Meaning by Viktor Frankl

The Media's Self-Censors

In the Wall Street Journal today was an article The Media’s Self-Censors  with the following quote, “In the past week, the editorial page editor of the New York Times, the editor of the Philadelphia Inquirer and the editors of Bon Appétit magazine and the young women’s website Refinery 29 have been forced out by the staff and owners of their publications for offenses regarded as at odds with the beliefs of the current protests.”

I don’t usually add more than one post on my blog in a week because I know you are busy. But this one really jumped out at me.

The veteran opinion writer at the WSJ could not have been more wrong when he argued that those editors were protected by the Constitution and were unduly fired.

He is conflating private business decisions with government control and the freedom of the press. He is arguing that writer’s have constitutionally protected rights. Yes they do, but not against their own bosses. The New York Times professional who was fired was not let go by a government official but by his boss. The NY Times is a business and as a business it is free to hire and fire those that help accomplish the paper’s objectives. He even associates the roles played by these newspapers with social media platforms like Facebook and Twitter. This equivalence makes no sense.

These papers exercised the freedom to make a business decision, but it clearly did not subtract from anyone’s Constitutional right of free speech. Can’t a newspaper decide to send a consistent message through its editorials?

Taxing Corporations and the Rich

This article was published in the Wall Street Journal on Saturday, May 30, 2020 “Democrats Stick With Tax-Rise Policies as They Make Plans for 2021 Majority.”

The article is specific about how some Democrats want to solve income inequality issues, both old and new, by raising taxes on corporations and rich persons.

It makes me wonder if this is an earnest effort to help those harmed by the impacts of Covid or just another excuse to accomplish what they always want to do politically. 

In this piece today I do not want to argue what sorts of economic policy we need today to heal the many harms to the economy. I wish I knew. But I do want to remind us about where we were before Covid destroyed our economy. 

Below is a table I extracted and modified from the Congressional Budget Office. The CBO periodically projects the government budget into the future using requirements from enacted legislation and assumptions about the economy. This projection was done in early 2020 before anything was known about Covid. 

The point of the table is to show you the incredible irresponsibility of our leaders. 

Despite decades of talk about the potential harm done by government deficits (spending more than we take in taxes), the one-year deficit in 2019 goes from a little less than $900 billion to about $1.3 trillion in 2025. That's an increase of 33 percent. Clearly there is no intent to reduce annual deficits. 

This reluctance to do what is responsible, leads to a total debt increase from $17 trillion in 2019 to about $24 trillion in 2025. That's a 41 percent increase. Hmm. Our debt was too large in 2019 so we raised it by 41%. Wow. 

Was this because they expected the economy to tank? It sometimes makes sense for the government to have larger deficits to offset a weak economy. Nope, Gross Domestic Product was expected to rise by 26% in those 6 years.

Was the larger government deficit and debt the result of big tax cuts? I don't think so. Tax revenues were expected to rise by 32 percent. Corporate taxes expected to rise by 68%. 

Did it have anything to do with paying interest on the past accumulated debt? Maybe. Notice interest on the national debt is expected to rise by 50 percent. 

What about overall government spending? It appears it rose no faster than tax revenues. But here the percentages are misleading. Since spending is much larger than taxes, notice that spending increases by $1.4 trillion while revenues rise by $1.1 trillion. This difference contributed to the larger deficits and debt. 

So what? The table is all about what was expected before the Covid tornado hit us. It's water under the bridge. Maybe. What is not water under the bridge is an incessant desire by some Democrats to reduce income inequality by demanding that rich persons and corporations always pay more...and more. How much is enough? 

Is Covid an excuse to continue this bent and legislate what will become even more burdensome permanent taxes on the rich and corporations --  or is it a sincere effort to undertake the right policies to get us through Covid? 

The CBO believes that Covid will reduce the rate of growth of the US economy for 10 years.  They believe we will lose over $7.9 trillion in output. Thus the next decade could see even larger deficits and debt as Congress taxes and spends more and more. 

Does this look like a train wreck coming? How many decades will it take after 2030 to pay down the debt? Or will the US government declare bankruptcy? Is there no way out of this mess? Is there no other way to promote output, jobs, and incomes?

Table 1.
CBO’s March 2020 Baseline Budget Projections, by Category Actual,         2019 2025 In Billions of Dollars Revenues Individual income taxes 1,718 2,266 Payroll taxes 1,243 1,584 Corporate income taxes 230 386 Other 271 326 _____ _____ Total 3,463 4,562 Outlays Mandatory 2,734 3,700 Discretionary 1,338 1,604 Net interest 375 564 _____ _____ Total 4,447 5,868 Deficit (-) or Surplus -984 -1,306 On-budget  -992 -1,134 Off-budgeta 8 -172 Debt Held by the Public 16,801 23,694 Memorandum: Gross Domestic Product 21,220 26,653

Be Careful What You Wish For

We used to wish for a lot of things.

I hate battling the traffic every day. Wouldn’t it be nice if the traffic went away?

I hate that guy at work who talks to his girlfriends on the phone all day. Wouldn’t it be nice if I wasn’t so close to him?

I hate doing all my shopping on the weekends when there are always giant crowds at the malls. Wouldn’t it be nice if shopping could be done without traffic and parking congestion?

I hate it when my favorite restaurant has an hour wait. Wouldn’t it be nice if I could just go in and find a good table?

I hate having to decide what to wear each day. Did I wear that tie last Thursday?

I never get to see my kids and when I do it is always so hurried. Wouldn’t it be nice to spend more time with them?

I never have enough time to (fill in the blank)_________. Wouldn’t it be nice if I had time to reorganize my closets, pick all those weeds in the garden, do puzzles, make-out with my girlfriend, etc.

Enough? Point made?

It used to be very easy and vivid to describe all that was missing and/or stressful in our modern lives. The list of things was easy and large. That’s life, we would comment and agree. But then, wouldn’t it be nice if . . . 

So here we are! Our commute time is measured from the time it takes to move from the bedroom to the laptop. Traffic is measured by the number of kids you hop over to get to your laptop. Your office mates are clustered and sequestered, like you, behind walls in houses and apartments spread over the nation. Like your work, you shop with your fingers on your trusty laptop. You never have to wait in line at restaurants. Your family sees each other so much that you can read each other’s minds. You have now done every conceivable task around your house, and you have eaten your way through two belt sizes. Luckily, your sweatpants are capable of expanding easily to size 50. No one will remember how many times you wore the gray ones or even notice the gravy stains.

Clearly, we are getting what we wished for. But it’s like that guy who broke his arm and prayed to God that his arms would again be the same. So, God broke his second arm.

The lesson is that when we wish for things, we need to be more thoughtful and complete in our wishes.

But let’s face it. Nothing ever changes. The problem is not Covid-19 and it isn’t stressful lives – the problem is us. It is our nature to see the glass half empty. It is our nature—no matter how many beautiful things are going on in our lives – to focus on the negatives. 

We pray each night for our former lives to return. Why? Did we already forget how much we stressed out over calendars and traffic and jobs?

Not really, but we are always looking for that Holy Grail. And always forgetting that the Holy Grail comes with its own complications and challenges. There used to be a TV shows back in the 50s called “The Millionaire.” Apparently, if most of us jokers get a bunch of money, it always comes with problems – big problems.

So what do we do now? No one can predict and control what’s happening with health and jobs and incomes. I am not making light of Covid adjustments. But I am saying that we can’t really control those circumstances. We can, however, control our own minds and bodies. We can try to adjust to the harshest of impacts and at the same time cherish and value all the good parts of our new lives.

Hug your family. Exploit your talents. Stand near an expressway and marvel at the lack of cars. Order something from Amazon. Order burgers and tacos for pick-up, enjoy those sweat pants, kiss your Covid girlfriend.

Soon enough, the world will be full of cars zooming everywhere, parking lots with no spaces, kids going to ballet, soccer, and transcendental mediation classes. Embrace the present. Deep breaths. Enjoy. 😊