Eviction Moratorium

Many people who lost their jobs because of Covid are not able to pay their rent until they return to work. What should we do about it?  Most landlords will work out an arrangement for deferred rent with tenants that are otherwise trustworthy. Most overdue debts are handled this way. But a case can be made, and has been made, for temporary government assist. Where you think the money should come from to bridge the income gap tells a lot about your general attitudes toward our market economy. When renters lose their incomes and stop paying their rent, they are passing on part of that loss to their landlords.  

But landlords are people with financial needs as well.  As noted by George Will: “As of June, landlords were owed $27.5 billion in unpaid rents. Almost half of landlords, who include many minorities, own only one or two rental units. They continue paying mortgages, property taxes, insurance and utilities while the CDC requires them to house nonpaying people or risk jail. Landlords can plausibly argue that the moratorium is a “taking.”  https://www.washingtonpost.com/opinions/2021/08/04/eviction-moratorium-exacerbated-americas-institutional-disarray/

The income supplement to out of work renters can come from the general taxpayers (us) or from landlords.  Investing in real estate is one of the primary ways in which lower middle-income families build wealth and move up the ladder. They should not be the ones to bear the cost of this assistance.  The CARES Act and subsequent programs was meant to share this burden more fairly, but its disbursements seem to have been slow.  The eviction moratorium, in addition to being illegal, is immoral.

The New Covid-19 Support Bill

The New Covid-19 assistance bill could add an additional 1.9 trillion dollars to support the fight against Covid-19.  In discussing the 2 trillion dollar CARES Act last April I wrote that: “The idea is that as the government has requested/mandated non-essential workers to stay home, and non-essential companies (restaurants, theaters, bars, hotels, etc.) have chosen to close temporarily or have been forced to by risk averse customers or government mandates, the government has an obligation to compensate them for their lost income. Above and beyond the requirements of fairness, such financial assistance should help prevent permanent damage to the economy from something that is meant to be a temporary interruption in its operation.”  “Econ 202-CARES Act-who pays for it?”  While I referred to the shutdowns as the result of “risk averse customers or government mandates”, it seems that the “blame” lies with sensibly risk-averse customers who stayed home and/or out of public gathering places by their own choice before the government required it. “Lockdowns-job losses”  A key point was that this was not a stimulus bill as output/income fell because its supply fell, not for lack of demand to buy it by consumers.

As total and partial shutdowns will continue for a few more months (or permanently for some unlucky firms) such support (properly targeted) should be continued for a while longer. But at what level and for how long? As I stressed in my April blog, the CARES Act payments to unemployed workers did not create income but rather transferred it out of a diminished pie from those who still had incomes (and could buy the government bonds that raised the money being transferred).  As I noted then and as is increasingly important now, the increased fiscal and monetary support that accompanied these government expenditures will need to be unwound carefully as the economy recovers. Equally important, the further increases in debt and money created by the currently proposed support should not exceed what is “truly” needed. U.S. national debt is already almost 28 trillion dollars, over 130% of GDP.

While CARES Act type support was needed and helpful, it was not always appropriately targeted. It is not the kind of emergency spending that is easy to get fully right.  As time goes on more and more evidence will be collected of abusive uses of these funds. Rather than choosing specific firms and classes of individuals to receive support, implementation of a Guaranteed Basic Income for everyone irrespective of income and situation would provide a better safety net for all situations. “Our social safety net”

In December President Trump signed a $900 billion Covid relief bill providing “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, restaurants and theaters and money for schools, health care providers and renters facing eviction.”

President Biden has proposed a new additional $1.9 trillion dollar package. Added to the $900 billion approved in December, this would be 13% of GDP, a VERY large amount.  Ten Republicans have proposed a narrower package of $618 trillion. They would exclude measure not directly relevant to the impact of the pandemic such as raising the minimum wage to $15 per hour (a measure that would be damaging to inexperienced, new job entrance). The Congressional Budget Office has just “estimated that raising the minimum wage to $15 an hour would cost 1.4 million jobs by 2025 and increase the deficit by $54 billion over ten years.” “Minimum wage hike to $15 an hour by 2025 would result 14 million unemployed”

The Democrats’ package would provide $1,400 per person direct cash payments across the board in addition to the $600 provided by the December bill. The Republican proposal would lower the thresholds for receiving assistance to individuals making $50,000 or $100,000 for couples and would provide checks of $1,000 per person.  They were expecting to negotiate a compromise package, which now, unfortunately, seems unlikely, though as this is written discussions continue. There are many individual provisions in the proposed bill. I have not reviewed them. My focus here is on the overall financial size of the proposal.

In an interesting oped in the Washington Post, Larry Summers, former Secretary of the Treasury during the Clinton administration, gently warned that the democrats’ package was excessive and risked rekindling inflation.  He wrote that:

“A comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.

“In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.

“In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large….  [Given] the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.” “Larry Summers-Biden-covid stimulus”

The U.S. national debt was $22.7 trillion at the end of 2019 and skyrocketed to $26.9 trillion at the end of 2020. On February 7 it stood at $27.88 trillion or $84,198 per person and $222,191 per taxpayer. This is 130.8% of GDP. This is a very big number. Much of this debt has been purchased by the Federal Reserve resulting in an explosion of its balance sheet and the public’s holdings of money. At the end of 2019 the Federal Reserve assets (the counterpart of which is largely base money–currency held by the public and bank deposits with the Federal Reserve) $4.17 trillion and grew to $7.36 trillion by the end of 2020. In other words, the Federal Reserve bought $3.19 trillion of the $4.2 trillion increase in the national debt. This is a bit of an overstatement because the Fed also bought a modest amount of other debt.  Much of the rest was purchased by foreigners as “the U.S. trade deficit rose 17.7% to $678.7 billion and hit the highest level since 2008.” “The US trade deficit rose in 2020 to a 12 year high”

Because the Federal Reserve now pays banks interest to keep large amounts of their deposits with the Fed in excess of required amounts (excess reserves), the money supply measured as currency in circulation and demand deposits with banks (M1) grew somewhat less than the Fed’s purchases of US debt. In 2020 M1 grew $2.5 trillion, a year in which GDP ended a bit lower than it started.` In part, the public is not spending this money at the rates they normally would because the theaters and restaurants, etc. are closed. A seriously inflated stock market and cryptocurrency values seem to be temporary beneficiaries.

According to Wells Fargo: “We estimate consumers are sitting on $1.5 trillion in excess savings compared to the saving rate’s pre-COVID trend….  After a year of limiting trips, eating at home and putting off doctor appointments, we expect consumers will be eager to engage in many of the in-person services forgone during the pandemic, and spend on gas to get there and clothes to look good doing it. The ample means and eagerness to spend could potentially set off a bout of demand-driven inflation that has not been experienced in decades.”  “Wells Fargo–Poking the Inflation Bear”

As I noted last April, unwinding these monetary and fiscal injections, as is necessary to avoid a significant increase in inflation, will be challenging. And now we are even deeper into debt. As inflation increases nominal interest rates will increase as well and the cost of our huge debt financing with it. While managing the short run impact of the pandemic, the government’s eyes should be on the longer run picture as well.

Econ 201: CARES Act–Who pays for it?

April 11, 2010

Congress has authorized over 2 trillion dollars (so far) to help those harmed by the partial shutdown of the economy undertaken to slow the spread of the SARS-CoV-2 virus, and to facilitate its rapid recovery when it is safe for people to return to work. The idea is that as the government has requested/mandated non-essential workers to stay home, and non-essential companies (restaurants, theaters, bars, hotels, etc.) have chosen to close temporarily or have been forced to by risk averse customers or government mandates, the government has an obligation to compensate them for their lost income. Above and beyond the requirements of fairness, such financial assistance should help prevent permanent damage to the economy from something that is meant to be a temporary interruption in its operation. No good economic purpose would be served, for example, by lenders foreclosing on mortgage and other loans to workers sheltered in place at home with no income with which to service them. Some of the increased spending quite rightly will go to improve our ability to deal with covid-19 directly (expanded hospital capacity, virus testing capacity, vaccine research and development, etc.)

Obviously, it will be impossible to prevent some amount of waste and corruption from such a huge increase in expenditures. Every rent seeker on the planet has been lobbying Congress to get a piece of the action. In the design of these support programs every effort should be made to carefully target them on the people and activities appropriate to the “above objectives, to remove them and their associated distortions of economic resource allocation when the crisis has passed (i.e., keep them temporary), and to provide watchdog oversight of their implementation. Unfortunately, President Trump is already undermining such oversight. “How-trump-is-sabotaging-the-coronavirus-rescue-plan”  Nonetheless, the objective of minimizing the economic damage of a temporary forced shutdown of a significant part of the economy is appropriate.

The question explored here is who will pay for it and how.  The entertainment output of the economy (restaurants, movie theaters, hotels, vacation travel) is to a large extent non-essential, at least for a few months. If those are shuttered, about 20 percent (my guess for purposes of this analysis) of our economic output and the incomes of those producing them will be lost for the duration of the shutdown. A central goal of the “Coronavirus Aid, Relief, and. Economic Security Act” (CARES Act) is to prevent this necessary shutdown from killing that part of the economy and from spilling over into others. The goal is to enable it to restart as quickly and easily as health conditions permit. Thus, idled workers who would not be able to pay their rent/mortgage, or electric bill, or buy food without help should not be evicted for temporary nonpayment etc. The government might pay them for their lost income directly (unemployment insurance) or it might pay their employer to continue paying their wages for non-work under one program or another, thus continuing their health insurance and other benefits. These details are important but not the subject of this note.  The simplest assumption is that they all receive cash payments sufficient to see them through the shutdown (universal basic income, guaranteed minimum income or whatever you want to call it).

The starting fact/assumption is that the economy’s output and thus income is 20 percent or so lower for the next few months than it was a few months ago. Everyone on average has 20 percent less income, but that average consists of those who continue working as before and those sitting at home earning nothing.  If those unemployed are to receive income support (UBI), those still working and those clipping investment coupons must pay for it.  Paying an income subsidy to the unemployed does not create income, it redistributes it.

The $2 trillion plus authorized by Congress for these purposes will be debt financed, i.e. the government will borrow the money (adding to its deficit of $1 trillion for 2020 already budgeted).  So, to examine who pays for this program we must start by asking who will buy this additional debt?  In the past the Chinese and Germans funded an important part of our debts (via their trade surpluses with the US.  “Who-pays-uncle-sam’s-deficits”  China’s current account surplus with the U.S. is now negligible and it and most every other country in the world will have the financing of their own covid-19 expenditures to worry about. Those purchasing the additional Treasury bonds will thus be largely Americans who must shift their spending from other things (other investments or consumption) to the bonds and thus to the incomes of the unemployed these programs are supposed to be helping.  To the extent that new bond buyers are diverting their spending on other financial instruments interest rates on such instruments will tend to rise.

At this point very little money has been disbursed under CARES and no new government bonds to finance it have been issued. As individuals and firms miss rent and debt service payments, their lenders are being squeezed for the funds with which they must service those financing them (this is why we call banks financial intermediaries). Utility companies faced with nonpayments by their customers must borrow to continue paying their own employees, etc.  Scrambling for such funds would drive up interest rates in funding markets where it not for the Federal Reserve’s willingness to provide the needed liquidity. Similarly, with regard to the supply of funds to financial markets (the other side of bank’s balance sheets), normal investors are interrupting or even withdrawing funding in order to cover their own income shortfalls. This again squeezes financial sector liquidity and the flow of funds from lenders to borrowers needed to finance the remaining economic activity.

Enter the Federal Reserve.  In order to supply the missing funds–the missing rent and debt service payments–needed to keep the financial system flowing and in balance–the Fed has supplied almost $2 trillion to banks over the last 6 weeks, largely by outright purchases of treasury securities, though it has also opened a number of lending facilities. Bank reserve deposits at the Fed increased about $1 trillion over this period and M2 grew by about the same amount. On April 9, the Fed announced that it was opening or expanding facilities to support CARES Act objectives with up to another $2.3 trillion (leveraged by Treasury financial support to cover losses on any Fed loans provided in support of the CARES Act).  Federal Reserve Press Releases  This includes support for lending by the Small Business Administration (refinancing of SBA loans), the Main Street Lending Program administered by banks, Primary and Secondary Market Corporate Credit Facilities, and the Municipal Liquidity Facility. These are dramatic expansions of Fed credit operations and the details of eligibility of borrowers and of the facilities’ administration are critically important. Ensuring that this massive government intervention in the economy creates the right incentives for a quick rebound in the economy when it can reopen and that these interventions are indeed temporary will be difficult and is very important. But the question I want to address here is whether this monetary financing on such a huge scale will be inflationary.

Simplifying and reviewing, if economic output/income falls by, say 20 percent, and the loss is shared by those working with those temporarily laid off (or idle) by workers lending money to those idled, the Fed need not be involved. However, as is often the case with fiscal policy, it is simply beyond the administrative capacity of the government to launch and coordinate such a redistribution of income quickly and smoothly enough to avoid the disruptions of credit flows described above. Instead, the Fed has printed the money paid to those idled by shuttering 20 percent of the economy. As a result, the idled workers have their regular income (more or less) from newly printed money, and the rest have their regular incomes, but the economy is producing 80 less for them to buy. The “excess” income constitutes the inflationary potential. If this income is voluntarily saved (i.e. a temporary increase in the demand for money), the increased saving would be indirectly financing the spending of the unemployed. It is not unreasonable to expect this to reflect actual behavior for a shutdown of a month or two. But should it drag on for many months the extra saving held in anticipation of a reopening of restaurants and theaters, etc. will seek other consumption outlets and prices will begin to rise.

With luck, the economy will begin to return to “normal” after a few months and the Fed will begin to withdraw its monetary injection as loans and payment delinquencies are paid off from increased output/income. The artificially preserved incomes will increasingly be spent on restored output without significant inflationary consequences.

But the CARES Act provides for the forgiveness of loans by firms that kept or that rehire their workers promptly. As the Fed sells its treasuries back to the public (or allows them to mature without replacing them), the Treasury will be issuing the additional debt needed to fund the $2 trillion plus of CARES Act expenditures, including the forgiveness of debt described above. In short, to avoid the inflationary consequences that would normally flow from the Fed’s massive increase in the money supply, the monetary financing must be replaced with fiscal debt financing.  It is hard to see where the money will come from to buy such a large increase debt (some, but not much, will probably come from the foreign financing implicit in an increase in our balance of payments deficits, but the rest of the world is now being saturated with its own debt) without an increase in market interest rates, potentially a significant increase in such interest rates. To the extent that financing remains monetary and pushes up prices, the rising inflation rate will be added to nominal market interest rates compounding the pressure of expanding real debt.  The long looming US fiscal debt problem may be near.