Macro Roundup

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"...Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private....."

Amit Seru and Luigi Zingales, "Save Capitalism From the Cares Act,"Wall Street Journal, March 30, 2020, https://www.wsj.com/articles/save-capitalism-from-the-cares-act-11585608917

Save Capitalism From the Cares Act

A surreal bipartisanship prevails in Washington. Everyone wants to spend, spend, spend. Senate Majority Leader Mitch McConnell, who aggressively fought President Obama’s 2009 stimulus package, was delighted the other day to announce a fiscal stimulus more than twice as large. Democrats are pushing for more.

Are we all Keynesians now? Or have we all embraced the so-called Modern Monetary Theory, which suggests that when an economy is below its full potential, we can print money to finance any deficit without provoking inflation? No. The answer is much simpler. We are all experiencing the effects of combining a real crisis with powerful lobbying.

With 20% of Americans locked in their homes, nearly all air travel canceled, and the global supply chain disrupted, you don’t need to be a Keynesian to think the government should intervene. But that doesn’t mean the Cares Act—an acronym for Coronavirus Aid, Relief, and Economic Security—is wise. The last thing we need at this moment is a Keynesian stimulus. Since the lockdowns constrain supply, stimulating demand would lead only to a rise in prices.

Besides helping the medical effort, government intervention should offer financial help to people who can’t work, and it should preserve the production capacity of the U.S. economy. The greatest resource most companies have is their teams of employees. If they dismantle those teams because of the pause in the economy, production capacity will be lower at the end of the pandemic.

Only $377 billion of the $2 trillion package is directly targeted to this goal. These are loans to small firms (fewer than 500 employees), which are forgivable if the funds are spent on payroll, rent, mortgage interest and utilities. By using 2017 census data (the most recent available), we calculated the total expenditures in payroll, interest expenses and rents of U.S. small firms amounts to $258 billion a month. Unless the Trump administration introduces criteria for selective targeting, the money allocated in Cares will run out in a month and a half. Designing the conditions for such targeting isn’t easy, since every requirement will slow the money’s deployment and speed is of essence. Thus, we fear that the administration will soon come back to Congress with a new request for money.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector.

The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private.

There needs to be far more transparency, governance and accountability around the Fed’s deployment of trillions of dollars in the real economy. Policy makers also should make the $510 billion program for large companies similar to that for small firms, but with tougher conditions. Again using 2017 census data, we calculated the total expenditures in payroll, interest expenses and rents of all U.S. large companies to be $392 billion a month.

Yet not all large companies are idle. Amazon is doing great, and so are Google and Facebook. Overall, large businesses are likely to be hit less hard than the U.S. economy overall. Goldman Sachs forecasts a 24% drop in this coming quarter. Even if the large companies were hit in proportion to the overall downturn, the cost of replacing their wages, rents and interest would be only $94 billion a month. So the $510 billon would last almost half a year.

The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

Ed this ~ echos your questions about NYC real estate, who is going to buy all of these houses and at what price?
"...In the next two decades, as more and more baby boomers look to downsize, more than a quarter of the US homes occupied by their owner(s) will likely hit the market (Romem 2019). If the trends we document continue, the under performance of these homes on the housing market may put increased pressure on baby boomers’ savings, at the exact time that they move into retirement....Not only are large housing market corrections already underway, the combination of lifecycle effects and demographic developments means that these adjustments are likely to continue over the next decade....We combine neighbourhood-level housing market data from Zillow with detailed census information on demographics and housing structures. Figure 3 shows that since 2012 the price growth of houses with more than four bedrooms has lagged the price increases of one- and two-bedroom homes by about one percentage point per year (within the same zip code).... If the trends we document persist, they will have significant macroeconomic effects. The asset position of the middle class tends to move closely with home prices (Kuhn et al. forthcoming), and older Americans are central to these trends....We find that the homes of baby boomers have not only experienced slower price growth but have also become significantly harder to sell. Within the same county, a 1% lower demographic demand shock in a neighbourhood leads to an 11% relative decline in home sales.... Currently, Americans over the age of 55 hold almost 60% of total housing wealth, with 60-75% of their assets held in real estate.... Asset-wise, the middle class is almost completely dependent on housing, with retirement portfolios a distant second. Since many Americans in the middle class will retire within the next few years, they stand to exert demographic pressure on their neighbourhoods. This pressure might significantly affect the $16.5 trillion in real estate wealth held in these households, precisely when they will need those assets most. Covid-19 presents something of a wildcard in this context. The pandemic can reverse or accelerate these adjustments, and it is too early to tell what the wider effects of the virus may be...."

Marijn Bolhuis, Judd Cramer, "Baby boomers and the housing market on the cusp of COVID-19," Center for Economic and Policy Research, April 2, 2020, https://voxeu.org/article/baby-boomers-and-housing-market-cusp-covid-19