I’ll bet Mitch McConnell has Federal Reserve chair Jerome Powell tearing his hair out.
McConnell has repeatedly said in recent days that he’s opposed to any plan to provide $500 billion or so of Federal (that is taxpayer money) to state and city governments who are faced with massive budget shortfalls because of the coronavirus recession. Instead, McConnell has said, he’s in favor of allowing states and cities to go bankrupt.
So far the municipal bond market isn’t taking McConnell very seriously. Fortunately.
But it could. And if it did, we’d have a plunge in prices in that market and, most likely, the kind of market shutdown (because no one would want to make a market in those state and city bonds) that would require the Federal Reserve to intervene again. Just as it has repeatedly over the last month in other parts of the credit markets. Just as debt markets are showing some signs of stability, I’m sure Powell is thinking, McConnell opens his mouth and puts more stress on already stressed system.
But that may not–shouldn’t be–the blackest thought on Powell’s mind. McConnell’s thought is one of those ideas that could extend the coronavirus recession by months if not years.
In my Part 1 of my Special Report: “Do you have a strategy for this really dangerous stage the Bear?” I created a time line of the Great Depression. Part of what I wanted to highlight were those two occasions when politicians made totally wrongheaded decisions that extended the pain of the Depression. In 1932, the Hoover administration raised taxes, taking money out of consumers pockets just when the economy needed more demand. The theory then was that tax hikes were required to reduce the budget deficit and restore faith in the government’s finances. In that year U.S GDP contracted by another 12.9% and stocks fell another 15.15% (after dropping 47.07% in 1931.) Then in 1936, the Roosevelt administration, demonstrating that it is possible to learn nothing from the mistakes of a predecessor, raised taxes again. The action put an end to a stock market rally of 41.37% in 1935 and 27.92% in 1936. Stocks tumbled 38.59% in 1937.
McConnell’s move would be, like those two Depression-era tax hikes, an unforced error that would set the economy back just as the economy needs support. State and local workers make up about 13% of the U.S. workforce. Short of a Federal rescue, like those already doled out to the airline industry and to employers in other sectors in order to preserve jobs, states and cities would be required to cut services and cut workers. Most states constitutions require a balanced budget so states would have no choice but to lay off workers at the very moment when unemployment in the country as a whole is somewhere between 15% and 20% and may be headed to Depression highs near 25%.
All those state and city workers wouldn’t have a pay check to use even if they wanted to participate in a re-opened economy.
At least Hoover and Roosevelt had an excuse. Economic orthodoxy hadn’t yet embraced the idea that government spending should be countercyclical with the government running big deficits to prevent economic downturns from turning into economic collapses. (Or course, part of countercyclical policy is supposed to include running a surplus and reducing debt when times are flush. Guess the team behind the Trump and Bush tax cuts skipped Econ 101 that day.)
McConnell–or at least someone on his staff–certainly knows this. And should have an understanding of why forcing massive layoffs at state and local levels isn’t how you dig an economy out of a recession.
I’m sure Powell and the rest of the Federal Reserve is wondering why McConnell seems determined to shoot any economic recovery in the foot.
and, most likely, the kind of market shutdown (because no one would want to make a market in those state and city bonds) that would require the Federal Reserve to intervene again. Just as it has repeatedly over the last month in other parts of the credit markets. Just as debt markets are showing some signs of stability, I’m sure Powell is thinking, McConnell opens his mouth and puts more stress on already stressed system.
But that may not–shouldn’t be–the blackest thought on Powell’s mind. McConnell’s thought is one of those ideas that could extend the coronavirus recession by months if not years.
In my Part 1 of my Special Report: “Do you have a strategy for this really dangerous stage the Bear?” I created a time line of the Great Depression. Part of what I wanted to highlight were those two occasions when politicians made totally wrongheaded decisions that extended the pain of the Depression. In 1932, the Hoover administration raised taxes, taking money out of consumers pockets just when the economy needed more demand. The theory then was that tax hikes were required to reduce the budget deficit and restore faith in the government’s finances. In that year U.S GDP contracted by another 12.9% and stocks fell another 15.15% (after dropping 47.07% in 1931.) Then in 1936, the Roosevelt administration, demonstrating that it is possible to learn nothing from the mistakes of a predecessor, raised taxes again. The action put an end to a stock market rally of 41.37% in 1935 and 27.92% in 1936. Stocks tumbled 38.59% in 1937.
McConnell’s move would be, like those two Depression-era tax hikes, an unforced error that would set the economy back just as the economy needs support. State and local workers make up about 13% of the U.S. workforce. Short of a Federal rescue, like those already doled out to the airline industry and to employers in other sectors in order to preserve jobs, states and cities would be required to cut services and cut workers. Most states constitutions require a balanced budget so states would have no choice but to lay off workers at the very moment when unemployment in the country as a whole is somewhere between 15% and 20% and may be headed to Depression highs near 25%.
All those state and city workers wouldn’t have a pay check to use even if they wanted to participate in a re-opened economy.
At least Hoover and Roosevelt had an excuse. Economic orthodoxy hadn’t yet embraced the idea that government spending should be countercyclical with the government running big deficits to prevent economic downturns from turning into economic collapses. (Or course, part of countercyclical policy is supposed to include running a surplus and reducing debt when times are flush. Guess the team behind the Trump and Bush tax cuts skipped Econ 101 that day.)
McConnell–or at least someone on his staff–certainly knows this. And should have an understanding of why forcing massive layoffs at state and local levels isn’t how you dig an economy out of a recession.
I’m sure Powell and the rest of the Federal Reserve is wondering why McConnell seems determined to shoot any economic recovery in the foot.
