Economist: COVID economic relief package should be a ‘walker’ not a ‘crutch’

Top Capitol Hill negotiators sealed a deal on a $900 billion COVID-19 economic relief package, finally delivering long-overdue help to businesses and individuals and providing money to deliver vaccines to a nation eager for them.

The package, expected to draw votes in Congress on Monday, would establish a temporary $300 per week supplemental jobless benefit and a $600 direct stimulus payment to most Americans, along with a new round of subsidies for hard-hit businesses and money for schools, health care providers and renters facing eviction.

It came together Sunday after months of battling and posturing, but the negotiating dynamic changed in Republicans’ favor after the election and as the end of the congressional session neared. President-elect Joe Biden was eager for a deal to deliver long-awaited help to suffering people and a boost to the economy, even though it was less than half the size that Democrats wanted this fall.

Robert Francis, editor of the Fort Worth Business Press, spoke with KC Mathews, Chief Investment Officer at UMB Bank, prior to the vote. Here are some lightly-edited comments from the discussion.

Mathews: Some of the research that we’re looking at is, when you look at the CARES Act (the first COVID-19 relief bill), and we have a good idea where the money went, a lot of it went to the states and local governments and now that’s not in the conversation. What’s interesting is, we just got new data from the Congressional Budget Office that went back and said, “Let’s look at the fiscal multiplier.” … A fiscal multiplier is when the government spends a dollar on stimulus, what type of economic impact does it have? Does it have a dollar-50 or does it have 50 cents? Well, 50 cents would be bad; $1.50 would be good.

So the Congressional Budget Office just came out and said, when you look at the fiscal multiplier of the CARES Act, the state and local government assistance was 0.88. Now still kind of negative, meaning they spent a dollar. We only got 88 cents of economic activity like the direct payments, 0.6, PPP loans, 0.36.

So isn’t it interesting that as an economist, you would say, “Hey, politicians, look at the fiscal multiplier. You can do a lot of that.” And they’re doing the opposite. Maybe we shouldn’t be surprised.

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FWBP: Since we’re talking about stimulus, let’s talk about the need for it. How would it impact the economy and what did you see from the last stimulus package?

Mathews: Well, my conclusion is we definitely need it, and here would be the reasons why, because let’s start with just the labor market. On the surface, you see the healing of the labor market, right? We’ve got unemployment coming down to 6.7% after the close to 15% in April. You got initial unemployment claims coming down from a high of whatever. It was six and a half million back in April and May. You kind of think, “oh, this all looks good, things are healing,” but I think there’s some pain underneath all the data, because just recently, now we’ve seen these spikes and COVID cases again, and hospital capacity on the brink. That might shake consumer confidence. It might shake retail spending, and all of a sudden you get another low in the economy. I think most people are thinking since we have a vaccine, that would be short-lived.

KC Mathews

But if we look at the data, initial unemployment claims are heading the wrong direction because we just got that [Dec. 17]. We saw it increased to 885,000. What I like to do is put everything in perspective. 885,000 filed – this was the week of December 12th – filed for initial unemployment benefits. In the Great Recession, a period that was so damaging, so painful, it was labeled the Great Recession. The peak in ’08 was 665,000 of initial unemployment claims. You can see there’s some light at the end of the tunnel, but we’re not out of the tunnel.

The other thing that’s confusing, and it’s interesting because not many people talk about it, is people might look at the standard continuing claims number. Well, that’s the state programs and that’s come down, right? We’re at 5 million, 766 odd thousand. You could say, “Look, isn’t it improving?” Okay. Okay. But the CARES Act put all these other programs in place. They put the Pandemic Unemployment Assistance program in place for the gig economy. That’s 9.3 million people still receiving benefits on that program. Then there’s the Pandemic Emergency Unemployment Compensation benefit. That’s another 4.8 million people receiving benefits on that program. There’s extended benefits and there’s all these different programs. So if you add them all up, it’s not 5.7 or 8 million people on continuing claims. There’s 20.7 million people, the week ending November 28th, receiving some type of assistance.

It’s kind of like, “Hey, good news, continuing claims is going down.” Oh my God, peel back the onion. You can see the pain in the labor market. What’s interesting about this, Robert, and you might know this, many of these programs, like the moratorium on student loans was extended until the end of January, but there are some programs like that. But most of the programs expire the week ending December 26th.

FWBP: Yeah. Merry Christmas.

Mathews: What’s interesting is, it’s a cliff. It’s not, “Hey, I got laid off 26 weeks ago.” That’s the standard state unemployment. But all of a sudden with the CARES Act, it goes 39 weeks. I got more. I got 13 more weeks coming. Nope, nope. On December 26, you’re done. Well, I didn’t get my full benefit. Too bad. It’s a cliff. That’s the title of that article. That’s the potential household fiscal cliff.

So you can see that. I just don’t think… What’s a little bit maybe frustrating for all of us is you have bipartisan support. Everyone says, “Hey, we need to do this.” And it’s all arguing. The brinkmanship is all around the magnitude. Is it a half trillion dollars? Is it a trillion dollars? Just do something.

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FWBP: I’m sure you’ve probably seen it where you are, but here, one of the things that tipped me off that things were still in some dire straits for a lot of people has been the food bank giveaways, and people are waiting for hours and hours in line to get food. So that tells you that there are other issues aside from food. What else? There’s rent, there’s mortgage payments, and that sort of thing. People are pretty desperate for that kind of stuff.

Mathews: You got it. Again, the data is being clouded by the stimulus. So, if you look at mortgage delinquencies, okay? That’s a big one, right? So a year ago, and this is a little off, the numbers are a little squishy. I’m just doing this off the top of my head. I don’t have the numbers right in front of me, but it’s directionally correct. So a year ago, there was 1.5% of mortgages that were 60 days delinquent. A year ago. Okay? Today, it’s right around 1%. How did it go down during the global pandemic? It went down because all the mortgage lenders in the bank said, “Hey, you know what? You don’t worry about paying me back just yet. I’m just going to put it on the back end of your loan. I’m going to modify it. I’m going to delay it.”

So the question is, what is the real delinquency rate? We don’t know when the bank said, “Nope, don’t worry about paying me back just yet.” And that’s the cliff. That’s all part of the cliff. What happens when the mortgage bankers at the bank say, “Hey, you got to start paying me?” Okay?

A lot of these are publicly traded companies. Sooner or later this year, all of these go, “Hey, you got to be making money. You got to pay me my dividend.” Right? It’s this vicious circle. Right? That’s where I think the good news is the economy is healing. We are putting people back to work. It’s just like in my article, I tried to make maybe a funny analogy where it’s the CARES… No one knew back in March, how long this whole crisis would last, so we got a crutch. The crutch helped. There’s no doubt about it. But now we know as this thing continues and we get this second wave, we needed a walker. We needed more support.

FWBP: That’s a very good analogy.

Mathews: That’s where we need another program. I think we’re going to get it, and then it’ll be modified once President-elect Biden gets in there, I think. And then hopefully it just takes some time for the economy to continue to heal, the global economy to heal, to get rid of this nasty virus, and then we’ll be back to what I call… We’ll be back to the great plateau, meaning GDP is back to that, two to two and a half percent going forward.

FWBP: What do you see is the impact of having the vaccine and how quickly will we feel that impact economically?

Mathews: It’ll take some time because you probably have seen these surveys, and we do surveys with our clients. It’s no longer a question of when will we have a vaccine? We clearly have a vaccine, and the efficacy from many providers is extremely high, and that’s good news. Now it’s a question of distribution. How fast can we get the vaccines out to everyone? And then the next question will be, when will people take it? And you’re starting to see stories, and you know I’m not a scientist, epidemiologist, but you’re starting to see stories that some people have some big negative reactions to these vaccines. People are worried that it went through warp speed, but is it safe? People are worried, will I get sick? People are worried after the first vaccine, if they have a side effect, I’m not going back for the second one.

There are still some risks out there. But my speculation is you call it mid-summer, late summer, early fall, there’ll be a lot of people that have been vaccinated. And all of a sudden the bars and restaurants, everywhere where we’re close to people really getting back to a sense of normalcy. The cruise ships are sailing and things like that. So I would say at the latest, in the fall, we’ve got a lot of people that either had the virus, went through it, or are vaccinated and you start to reduce the risk dramatically.

FWBP: Have you looked at any industries that you think will lag significantly or do well? As a side note, I’d say one of the things we’re seeing here is that home sales and such have actually outpaced last year in the Dallas-Fort Worth area. People are still moving here. We’re still creating some jobs, even in the midst of all this. So it kind of hides what’s going on, I think in the overall economy.

Mathews: You got it. You hit the nail on the head. Your housing will help. Housing isn’t that big of a contributor to GDP, but it will be positive as people seek. The things that will change is maybe we don’t need to go to the office every day. So I need a conducive spot for a home office. Maybe if I have a small house or an apartment, I don’t have that conducive environment. So there’s this exodus out of the cities and apartments to bigger houses … With some of these viruses that we know can really hinder our lives, we want to be spread out more. Maybe we want yards, so our kids can go to the swing set instead of going to Central Park in New York. I think that housing demand will continue, and that will help the economy.

Areas that I think will be permanently hindered… I don’t want to say damaged. I call it hindered. It could be hospitality and leisure. Once we get the green light that we’ve squashed this virus, I think you’ll see a spike at some of this because we all delayed our vacations. We postponed our spring breaks. We didn’t go see our family during the summertime and things like that. My family is the exact same way. But pre-crisis, I traveled almost every week, buying airplane tickets, spending money in hotels and restaurants. I don’t think I’m going to travel as much. I don’t think a lot of people are going to travel as much because I could effectively have a conversation with you, Robert. We can do a WebEx or I can do a video call with you and I could see you. Maybe if you’re my client and I would come see you in Texas four times a year, maybe it’s… How about two times a year that we break bread together? But two times we’ll do a video call.

Certain industries, hospitality, leisure airlines, I think their business, you might see a spike as we can’t wait to get out of our houses. After that, I think it might not return to the old days of glory. Others, I think will do well. You know, banks got beat up. I’ll just call it the finance sector. They got beat up. There’s this uncertainty thinking about defaults. I think due to stimulus, due to the adaptation, I mentioned, we adapted. We figured out restaurants can open up with carry out rather than outdoor dining, et cetera, et cetera. They can pay their bills, pay their rent, pay their mortgage, et cetera, et cetera. I think the banks have been beat up because of that. I think that might be an opportunity going forward. So that’s just a couple of ideas that I think some that might be hindered and some, I think, will return to the old days of glory.