The Economy

Bringing the ‘Stimulus’ Back to Stimulus

President Donald Trump talks to reporters as Senate Majority Leader Mitch McConnell (at right) and other senators listen following a closed Senate Republican policy lunch meeting to discuss the response to the coronavirus on Capitol Hill in Washington, D.C., May 19, 2020. (Yuri Gripas/Reuters)
If huge sums of money must be dispensed, let’s at least target them properly.

As of press time, legislators are deep into strategizing and posturing around their desired ends for an additional “stimulus” package to provide relief to the American economy, and to those in the economy most affected by the pandemic and the measures taken in response to it. The $2.2 trillion price tag of the CARES Act has been deemed insufficient by virtually all parties, a few GOP senators possibly the exception. The White House, led by Treasury Secretary Steven Mnuchin, chief of staff Mark Meadows, and President Trump himself, have signaled their own wish-list items. House Democrats actually passed their HEROES Act bill in the House over two months ago. That came with a $3 trillion (plus change) price tag. The bill was never taken up by the Senate, but it provided a marker for what Democrats are looking for in the next bill. Senator McConnell is preparing to present his first draft, though building consensus in the Senate is not proving easy either.

A sensible expectation is that a bill will end up getting passed, and it will end up costing more than the $1 trillion the Senate has targeted but less than the $3 trillion the Democrats have targeted. Equally sensible is the expectation that this will not get done easily, that the debate could stretch well into August, and that the final bill will be riddled with pork and other customary evidence of political unpleasantries. While now is not the time to make a stand in favor of a more idealistic American politicking, the truth is that the stakes are quite high here. The argument baked into a Keynesian view of economics (whether explicit or implicit) is that greater fiscal support from the government is needed in a time of deep economic contraction such as this, and that the more we can soften the short-term blow, the less the long-term pain will end up being. History is filled with examples of this simply not being true, with government interventions and the distortions caused by them leading to more long-term damage than short-term good. And somewhere in the universe (including my own house) there remains a remnant who fear the impact of long-term excessive indebtedness on future economic growth.

A future piece will need to deal with both of these issues — the unintended consequences of interventions, and the price tag. But for now, let’s just accept the political reality that some form of a fourth stimulus bill is coming, and that its price tag is going to have a “t” in front of it — as in “trillion.” Within the range of options that may be included in such a bill, it behooves fiscal conservatives to advocate for the best possible measures to be included, and advocate against the most damaging ones.

If we are going to get an expensive stimulus/relief bill, it seems desirable that it should be structured in a way that most effectively aids those struggling their way through the current crisis while facilitating economic growth. Direct payments to taxpayers, indiscriminate and untargeted, offer little in the way of “multiplier effect” to economic growth, and provide as much support to those not suffering as to those who are suffering. However much the total stimulus bill ends up costing, too much of what’s spent will be direct payments, substantially diluting the ability of the package to assist in securing the objectives I list above.

By contrast, the PPP program has been shown to deliver the sort of multiplier effect we should be looking for. PPP’s implementation was controversial in that a minuscule percentage of the total committed dollars may have initially gone to certain companies that provided media fodder for outrage and critique (e.g., large companies, public companies, name-brand companies, etc.). But at the end of the day, the PPP program successfully distributed hundreds of billions of dollars in just weeks to millions of U.S. businesses with a goal of keeping people on payrolls. Where there were deficiencies (too narrow a window to spend the funds, too high a percentage to be used for payroll, etc.), they were adjusted and corrected in subsequent amendments to the legislation. An extended PPP for companies that had already been given one bite of the apple would be a good idea under select conditions. While current talks are centering on the size of the company and the revenue hit it has taken, a more targeted and efficient PPP 2.0 would do the following:

First, reserve eligibility for businesses that can establish a clear and government-created impediment to their business. Restaurants and fitness centers that were ordered to shut down are pretty good examples. The distinction here is that general distress from the pandemic can indirectly be rationalized by every business (or nonprofit). But where there was a local, state, or federal dictate that led to the business distress, it is far more reasonable to seek a government-backed solution.

Second, allow companies with a high level of rent expense (as a percentage of overhead) to use the funds for payroll or rent — not subject to a minimum payroll threshold. The most obvious examples are restaurants, where a high portion of revenue is owed to the landlord. The benefit down the capital chain here could potentially save the taxpayers significant money. As it stands now, a lot of restaurants are (a) not paying rent and (b) going to go out of business. Landlords not receiving the rent are very likely not paying their mortgages. And the banks not receiving the mortgage payment cannot fund the investor pools that likely have bought rights to the aforementioned mortgages. Someone is going to be left holding the bag.

Right now, that someone is “the capital markets,” which means the Fed will end up picking up the tab. By plugging the capital hole at the source, with the restaurant that has lost revenue, not only do the immediate actors get paid (landlords, banks, investors), but the restaurant can continue in operation. The alternative is a tenant not paying rent, a lengthy period of vacancy, and the perpetuation of a negative trickle-down effect. What the current PPP failed to address adequately was the situation for those many businesses (restaurants, hotels, retail shops) that had nothing for their employees (who would in any event generally have been eligible for unemployment benefits supplemented by a generous federal contribution) to do, because their business had been shut down. But the financial blow represented by the rent that had accrued during this shutdown would not be something they could not bounce back from even when reopened. A modified PPP with much more latitude to use the funds to defray rent would obviously act as a form of landlord support (no bad thing, for the reason I noted above), and, insofar as it would make it much easier for businesses to survive this, would also operate as backdoor sales-tax support for state and local governments (no bad thing either, given their financial problems). In short, one of the largest multiplier effects the bill could generate would be a revised PPP that facilitates businesses keeping up to date on rent.

If current reports are correct that the idea of a payroll-tax cut is being abandoned, a second-best measure would be to offer incentives and credits to business for business investment. Unemployment checks and direct payments to taxpayers may or may not be enough to maintain strong enough consumer demand to make a dent in this economic contraction, but whatever the consumer can do, there will be a severe risk of a W-shaped recovery if business investment falls to too low a level. The 2017 tax law providing a five-year window for companies to take an immediate and full deduction on expenditure on relatively short-lived assets was a good start, but extending the time and the scope of this break is now called for. The benefits to the U.S. economy would outweigh the cost of the broadened tax deduction.

Expanding such deductibility to the full range of investment in equipment, research-and-development costs, and so on, and extending this for five additional years, would represent a modest down payment, given the significant business investment it could set in motion. To take one example, capital expenditure has fallen sharply in the energy sector. Changing the tax code in this way would encourage companies to deploy investment capital and lead to a commitment of resources that would generate an immediate return and provide a clear pathway to growth well into the future.

Putting investment capital to work is key in helping pave the way to a sustained recovery. The uncertainty created by the COVID moment has changed the basis in which risk/reward calculations are made and thus dimmed the financing outlook for many projects and ideas that need funding. I can think of nothing that would incentivize the unlocking of investment capital into new ideas and projects more than a capital-gains-tax holiday. Staggering amounts of capital are kept in projects with less enticing future growth prospects thanks to the disincentive created by the way a realized gain would trigger a capital-gains-tax liability. A 2020/2021 holiday would spur a wave of capital investment and support the development of new businesses, new developments, new projects, and new opportunities — the very thing a post-COVID economy is going to need the most. The current capital-gains-tax burden forces capital to stay where it is; a capital-gains-tax holiday would move capital, and it would move it to its most rational home.

Finally, while I am sure direct aid to states is a foregone conclusion, there simply must be commitments and strings associated with the money. The amount that a state would be eligible to receive should be directly linked to the harm to that state arising out of COVID. It should not be a convenient way for states with deeply troubled finances to exploit the pandemic for their own well-being. And the funds should be structured as forgivable loans, but states must be held accountable for how the funds are used, make commitments for greater funding of their underfunded pension liabilities five years from now, and so on. Just as businesses have to satisfy certain conditions to qualify for forgiveness of their PPP loans, metrics can be devised to ensure that the good citizens of Indiana and Texas are not bailing out irresponsible choices made in California (to take a totally random example).

Something this big and complicated is going to be messy, and it is not going to be perfect. But the few do’s and don’ts suggested herein would go a long way to leveraging a better outcome. We live in a time when many of our “first principles” are long abandoned. Before we give another $2 trillion to $3 trillion of future generations’ money away, let’s see what basic economic principles we can deploy to influence the decisions that are about to be taken.

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