The Capital Note

Well, That’s a Relief

Senator Pat Toomey (R., Pa.) during a hearing on Capitol Hill in Washington, D.C., December 10, 2020 (Alex Wong/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Relief at last (plus added waste), the wisdom (or not) of lockdowns, bubble watch, chicken sandwich mania, and an antitrust refresher.

Relief, the States, and Restraining the Fed

So, a “stimulus” package has finally been passed, although it is better understood (and justified) as a relief package, even if it contains some extras typical of what comes slouching into view every time Washington is handing out large slugs of money.

To quote Robert VerBruggen:

More than $25 million for the Kennedy Performing Arts Center! More than $100 million to Sudan, and $25 million to gender and democracy programs in Pakistan!

Such spending is insulting as well as infuriating, but, under the circumstances, it was, rightly, not enough to derail the overall package.

As a keen recycler (the planet must be saved!), now’s the time is to recycle a tweet by Fred Bauer I quoted in last week’s Capital Letter:

Hot take: The COVID aid package is not just a “stimulus” bill; it’s a *relief* bill. Businesses are struggling not because of the dynamics of the economic cycle but because of a global pandemic that has caused government entities to shut them down or restrict their business.

It’s worth noting the second tweet in Bauer’s thread too:

Saying that the solution to the economic crisis is “deregulation” misses the point. This is not a normal economy or economic cycle. When a restaurant is forcibly closed by the government, all the “deregulation” in the world won’t make a difference.

And, indeed, NR headed its editorial today on the package like this:

A Necessary Relief Bill

An extract:

The $900 billion package contains necessary relief at a time of continued uncertainty. It includes $330 billion in additional funding for the Paycheck Protection Program that will support the estimated 18.6 million workers who remained employed thanks to the first phase of the program. Even with a vaccine in the offing, widespread business closures and layoffs represent the largest ongoing economic risk of COVID-19 — there is no way for the costs in human and physical capital to be recouped after the pandemic.

Where loans do not suffice to keep workers on payroll, enhanced unemployment insurance will provide temporary relief. The $300 top-up in this bill, more modest than the $600 in the CARES Act, is an appropriate adjustment to create an incentive for the unemployed to return to work as vaccines are administered.

In contrast, the $600 stimulus checks included in the bill do little to target the economy’s pain points. With PPP and unemployment enhancements covering those who need assistance, direct checks mostly supplement incomes: The lion’s share will go towards savings and debt-servicing, neither providing relief nor spurring economic growth.

Perhaps more notable than what’s in the bill is what isn’t. Democrats repeatedly attempted to launder blue-state bailouts through COVID-19 legislation, jumping on the opportunity to paper over perennial fiscal imbalances. Republicans were right to hold the line, not only because of the moral hazard of rewarding profligate governments, but also because states and cities are poor channels for swift economic aid. Research from the left-leaning Brookings Institution finds that the economic benefits of state and local aid would not materialize until 2022, because governors and mayors are slow to spend federal grants.

Please do read the whole thing, and don’t overlook this:

Senator Pat Toomey’s success in ensuring the Fed’s emergency-lending programs remain limited to emergencies may be the most consequential provision of the bill: A permanently politicized central bank would threaten economic stability well beyond the pandemic.


Toomey spokesman Steve Kelly told Reuters the senator’s agreement with Democrats “rescinds more than $429 billion in unused CARES Act funds; definitively ends the CARES Act lending facilities by December 31, 2020; stops these facilities from being restarted; and forbids them from being duplicated without congressional approval.”

Note those magic words “without congressional approval.”

Decisions of this magnitude should be taken at the political level and not by a central bank that is — shall we say — not immune to mission creep. Take a look, for example, at the Fed’s decision to get more deeply embroiled in steps to combat climate change, steps that will have little, if any, impact on the climate, and which cannot, whatever the Fed may claim, be justified as an exercise of its obligation to reduce financial risk in the system. (I wrote about this here.)

Back to CNBC:

On CNBC, Toomey said: “My concern was there would be tremendous political pressure to misuse these, to morph these liquidity facilities that had successfully restored market liquidity and turn them into an instrument of fiscal policy, which is a terrible idea.”

Treasury Secretary Steven Mnuchin told CNBC he believes Democrats and Republicans struck “a very good compromise” around the Fed’s emergency lending powers. “This is no different than after the financial crisis in Dodd-Frank,” he said Monday on “Squawk on the Street,” referring to the 2010 law that regulated financial institutions. “The Fed used to be able to lend directly to any one company and Congress said, ‘No. We want you to come back if you need that in the future.’”

Toomey, who serves on the Senate’s Finance, Budget and Banking committees and has indicated he will not run for reelection in 2022, said he would be willing to allow the Fed to reestablish wide-ranging lending programs should economic conditions deteriorate.

“If we get back to a terrible circumstance next year or 10 years from now and the Fed and the Treasury come together and say, ‘Hey, this is the kind of facility we need,’ I would support that under the right circumstances,” Toomey said. “But it shouldn’t be a sort of permanent vehicle that’s there for some politicians to decide, ‘Let’s take this over and start doing subsidized loans.’”


Toomey also supported the decision not to include additional (direct) aid to state and local governments in this package.

I think that decision can be defended, not least for the reasons given in NR’s editorial, and it is also worth looking at this article on state finances by the Reason Foundation’s Marc Joffe (who also has a fine piece on what looks like another mess up by the ratings agencies up on the site today):

The Census Bureau just reported that state and local governments collected $1.12 trillion in tax revenue during the first nine months of the 2020 calendar year, which is just $8 billion less than they collected during the same period in 2019. It’s clear that the worst-case forecasts estimating how badly the coronavirus pandemic would hit state coffers have thankfully not come to pass.

Much of Joffe’s focus is on California:

Census data are provided on a lagged basis, so it will be a few months until we know how state and local revenues held up during the fourth quarter of 2020. But some entities, including the state of California, publish monthly updates. In the 2020 calendar-year-to-date, California’s general fund revenues are running $2.1 billion (1.6 percent) above the 2019 levels. . . .

The full calendar year totals include the economically strong pre-COVID-19 pandemic months of January and February. If we just look at the March through November period, revenues were down $2.2 billion (2.1 percent).

While this is admittedly a significant revenue hit, state revenue declines of this magnitude have not historically elicited state bailouts or federal stimulus packages.

For the fiscal year to date, California’s revenue collections are running $12.4 billion above the state’s dismal projection issued back in May, when state officials feared the coronavirus pandemic and economic shutdowns would crush its economy. California’s revenue has exceeded its forecasts for each of the five months of the fiscal year 2020-2021, which started on July 1, 2020.

Joffe notes, of course, that things could take a turn for the worse, and also that the pain in California has been unevenly distributed:

While the state of California and many other government entities are seeing 2020 revenues running close to or prior calendar year levels, a few governments including those heavily dependent on travel and tourism are suffering steep revenue declines.

For example, Anaheim, California, has suffered an 89 percent reduction in its transient occupancy tax revenue compared to the same period last year due to the pandemic and state government-mandated closure of Disneyland. . . .

My not very inspired guess is that this uneven pattern will be repeated across the nation (I am writing this staring bleakly out of a window in Manhattan) and, as Joffe observes in a Californian context, mass-transit systems can present a separate problem, for reasons that can both reflect a distinct legal setup and the catastrophic falloff in ridership.

It is hard not to think that a very nasty crunch, which may well include wide-ranging layoffs (avoiding those layoffs would, in my view, be the best reason to advance some money to the states now), will be coming in some states (I would also be writing this if I were staring bleakly out of a window in Chicago or, say, if the anti-frackers get their way, in Santa Fe). These are crunches that will be made worse by the determination of certain legislatures to dig a deeper hole (take a look, for instance, at some of the tax proposals floating around New York).

Some muni nerds will be beginning to look at what happened in Arkansas in 1933. When it comes to the states, something somewhere is going to have to give, and I have a strong feeling that it’s going to give next year.

Around the Web

On lockdowns.


A generally held principle in politics is that of evidence-based policymaking, which states that policies should only be introduced if there is clear evidence, based on rigorous analysis, that they work. Many popular Covid-19 policies have already failed that test by the urge of political leaders to simply “do something,” regardless of what. For instance, EU agencies have concluded that quarantines after flying are pointless – yet they continue to exist. Germany’s Robert Koch Institut explained that only 0.5% of total infections arise in restaurants – yet the country’s restaurants were first in line for closure. The virus spreads the same regardless of which hour of the day – yet still we see night-time curfews.

More concerning still is how little many political leaders seem to care about the enormous intrusions on our hard-fought liberties entailed by these measures. It has become axiomatic that whenever infection numbers rise, restrictions must as well, with little regard to the economic costs or the misery that creates. Whether there is actual evidence that this works is not relevant. We simply have to do something – or anything.

Shop, restaurant, and hotel owners standing in front their closed businesses and financial ruin, cancer patients not being treated as fast as they otherwise would, those wanting to travel or move to another country, the 135 million people who are close to dying from hunger, and those sitting along by their Christmas tree will all think differently. They will wonder if it’s all worth it. And there will be no answer other than a threatening “if you don’t follow the rules, it’ll be Bergamo all over again”.

Bubble watch.

The Wall Street Journal:

SoftBank and the special-purpose acquisition company make a great couple.

The Japanese technology conglomerate filed Monday to raise up to $604 million for a SPAC. Sometimes called blank-check companies, these publicly traded cash shells are formed with the sole purpose of taking over a yet-to-be-named operating company.

The only surprise is that SoftBank didn’t move earlier. SPACs have been one of the hottest asset classes of 2020, with 234 U.S. initial public offerings raising $81 billion this year, according to Dealogic. There were 59 last year. In a market obsessed with new technology, investors have flocked to the vehicles as a way to access businesses with disruptive potential. . . .

The SPAC craze seems likely to cool at some point. SoftBank is wise to strike while it’s still hot.

Cheddar on chicken:

In the summer of 2019, Popeyes threw the fast-food industry for a loop. The Southern-inspired chain released a new crispy fried chicken sandwich topped with pickles on a brioche bun that quickly became the success story of the decade. Record sales, memes, and Twitter feuds with rival brands soon followed, but the real impact on the fast-food biz was just getting started.

In the year-plus since, even amid a global pandemic, the fried chicken sandwich has continued to transform the fast-food landscape, bringing new competition to the dominant chains and forcing some to come up with a crispier, more authentic chicken offering of their own.

“This has been really one of the standout product stories in the restaurant space in the last several decades,” said R.J. Hottovy, director of financial analytics at Aaron Allen & Associates, a restaurant consultancy firm. . . .

The only comparable single-product phenomenon in recent memory, he added, was Starbucks’ pumpkin spice latte, which quickly inspired imitators across the coffee shop industry. Now that same process is unfolding among fast-food brands eager to take advantage of what’s looking less and less like a fad and more like a sea-change in what customers want.

One key difference between the Popeyes fried-chicken sandwich and pumpkin-spice latte (other than the whole drink vs. food, coffee vs. chicken thing) is that the sandwich tastes good. The pumpkin-spice latte not so much.

A Capital Matters Webinar: Will Personnel be Policy?

Watch Jason Wise, Kevin Hassett, and Casey Mulligan discuss President-elect Biden’s economic advisers and their significance.

Random Walk

If state finances are going to be a major topic in 2021, so is antitrust, where a coalition of left, right and, just to make things worse still, the protectionists of Brussels, seems to be set on taking a run at American Big Tech.

Writing for The Dispatch, Tim Sandefur pushes back with a useful summary of the existing law in this area:

Seventy-five years ago, a federal court in New York issued one of the most destructive decisions in the history of American law. Bizarre as it sounds, that ruling, called United States v. Alcoa, essentially made it illegal for businesses to succeed through hard work, and established a precedent that threatened the competition and efficiency upon which economic growth depends. It took decades for legal scholars to persuade judges to abandon that foolhardy rule, and adopt a more pro-competitive principle called the “consumer welfare standard” instead. Their success led to an explosion of innovation and vast improvements in the standard of living. But today, in supporting antitrust actions against Google and Facebook, intellectuals on both the left and right are trying to eliminate that rule and move backwards to a day when antitrust laws served to punish economic success. . . .

Read the whole thing. This is going to matter.

— A.S.

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