Washington Is Here To Help

This week’s Courier Herald column:

One year ago this week everything abruptly changed.  The idea of a pandemic went from an abstract concept for most of us to a top of mind, life changing event.  In the interim more than 17,000 Georgians have lost their lives and one million of us – roughly one in ten – contracted the disease. 

While everything stopped, life went on.  We had campaigns and elections.  We had protests and riots.  We had a change in administrations in Washington.

Many of us were dragged kicking and screaming into the digital age as Zoom replaced in-person meetings and Netflix or Disney + replaced movies and live events.  Like many paradoxes of the last year, being drawn closer together in a virtual sense still seemed to drive us apart with a loss of gatherings, personal contact, and hugs.

The government stepped in to help, and to “help”.  Georgia managed to take in more tax revenues to state coffers during the pandemic than in the prior year which had included terms like “record low unemployment”.

Washington saw fit to not let the crisis go to waste, sending money to people who hadn’t missed a paycheck, saw their 401K balances continue to increase after a brief blip, and saw their personal savings rate hit record levels.  Now, a year later, with much of Washington’s appropriated money yet to be spent, and much of the personal stimulus money waiting for the economy to fully re-open, another $1.9 trillion dollars is about to rain down upon the economy.

Providing our vaccines work as anticipated, most aspects of everyday life should have returned to normal or near-normal by summer.  The next year will be spent dealing with the economics of reopening combined with the politics of Washington’s help.

States like New York – where the Governor sent Covid patients to nursing homes exacerbating its spread and escalating the death count – got a disproportionate share of federal aid after being deemed “hardest hit”.  States like Georgia – where Governor Kemp sent the Georgia National Guard into nursing homes to aid cleaning and disinfecting – got a reduced share from prior stimulus bill…but also got strings.

Georgia, having taken more money from its citizens during a pandemic than it anticipated and than it spent, is planning to cut income taxes.  The last stimulus bill appears to prohibit this.  Attorney General Chris Carr sent word Tuesday that he intends to vigorously defend the state’s “core authority to implement basic tax policy”.

The messaging around the latest stimulus bill is that it will revive the economy while protecting and helping our nations’ most vulnerable and hardest hit.  The latter is mostly true – at least temporarily.  What we’re most likely to find a year from now is that income inequality has actually increased rather than decreased.  

When these reports start to surface – coincidentally about the time there will be a push for major tax increases – remember that there was almost a full year to craft this latest bill.  $1.9 billion could have spent so many different ways, and targeted more specifically to provide opportunity to those who need equity. 

Instead, as fiscal policy so often does, the money is likely to arrive in the U.S. economy at exactly the wrong time.  We continue to face supply shocks in electronics, autos, and many other goods.  Inflation happens when too few goods are being chased by too many dollars.

The bond market is already sensing what is coming and has begun to pivot with rates climbing upward.  The gamble here is that the federal reserve can contain the inflation it has tried unsuccessfully to create for over a decade.  Let’s all hope we hit 1995, and not overshoot into 1979.

A final caution as we look ahead.  Just as a reminder that the rising stock market of the last year didn’t represent many of the underlying conditions in the full economy, a market that takes a breather may also not fully reflect the strong economic growth that we should experience over the next couple of quarters.

The market tends to price in events well before we can see them.  It priced in our current recovery and re-opening months ago.  It will be interesting to watch what it prices in as Washington continues on this current path of continuous “help”.