The Coronavirus Depression Requires A New Approach to Budgeting

Yves here. Nathan Tankus wrote for NC upon occasion before getting a following on Twitter and now on his site, Notes on a Crisis, where one of his ongoing projects is keeping up with the onslaught of Fed interventions. We are grateful for being able to feature his latest work, on how coronavirus is (or ought to be) shaking up economics and political economy.

By Nathan Tankus. Originally published at Notes on a Crisis

Congress recently passed a 1.5-1.7 Trillion dollar stimulus bill (as I wrote about last week, the reported headline number is including a useless accounting gimmick which provides no additional support to the U.S. economy). Part of the reason we can report such an exact number is congress budgets in exacts.Take a look at these two sections of the CARES Act, picked at random.


Where did these numbers (especially the Small Business Association loans number) come from? It’s hard to know for sure, but what we do know is this number wasn’t picked for any particular macroeconomic reason. The size of the forgivable loans in the Small Business Association program certainly wasn’t picked based on the enormous need small businesses have to make payroll and rent. What exactly is the purpose of capping the program at a specific dollar amount? When they run out of funds, is the need for small businesses to make payroll any less? Are those who get in their applications after the funds appropriated run out any less deserving of the funding to make payroll payments than the small businesses who got funds?

The reality, of course, is this program is likely to be extended. But when? And by how much money? Will the small businesses who need it now be able to wait for the extended negotiations over extending it?

In the best of times the federal government budgeting in specific dollar amounts was silly. Congress is attracted to this kind of budgeting because it suggests their capacity to exactly control how much the federal government is spending and thus (in theory) the deficit. As James Galbraith says, “The entire foundation of the budget process is built on an illusion of control”. You can’t actually control how much the federal government spends during the budgetary process because the budget has a large component of programs which rise or fall with incomes, poverty and unemployment. In crises, this obsession is actively dangerous because it is at this time that we need absolute security the most. In an environment of very heightened uncertainty, people need the utter certainty of uncapped programs with clear qualifying events. The economy will function better with these kinds of programs.

If we think that payroll protection (along with making rent and paying utilities) for small businesses is a worthwhile program then the federal government should create uncapped, mandatorily funded programs which establish an absolute legal right to access the program as long as the small or medium sized business qualifies. This is easier to communicate to the public, easier to solicit participation for and easier to prevent businesses from falling through the gaping holes. It also doesn’t create recurrent showdowns over extending funding that are pointless and stress the system more.

Of course, the other obvious uncapped program with mandatory funding that would see far larger take-up during this crisis is the Job Guarantee i.e. a legally enforceable, uncapped, right to a job. Now you may have all sorts of objections to such a program but it is important to recognize that it provides an administratively simpler and direct way to ensure low unemployment than a patchwork of programs which undergo annual appropriations from congress, get finite budgets and limited mandate (or capacity) to make systematic decisions. Crises like these reveal why advocates are so committed to a Job Guarantee. Congress inadequately funds reducing unemployment in the best of times. However, in the worst of times it does even worse as its programs are always far smaller than the need because they can’t bring themselves to authorize programs with such large price tags associated with them.

Congress is clearly proud it managed to spend a “2 trillion” dollar “stimulus” package in such a short amount of time. Yet this amount is clearly inadequate for the scale of the problem (with 4.5 to 5.5 million plus more weekly unemployment claims expected to be reported tomorrow), even if it weren’t inflated by the gimmick I discussed last week. Since the vast majority of the support to households is coming through unemployment insurance, we’re likely going to see unemployment rates of 25% or more for a very extended period of time unless congress finally responds very aggressively. We’re far shorter from the amounts of money I thought were necessary 2 weeks ago, but the reality is no one knows how much would need to be spent to keep people economically secure and keep unemployment down (even as people can’t leave their houses). The only way to get congress to spend adequately is demand programs without simple, single dollar amounts and shift congress away from obsessing about specific dollar amounts all together. Appropriations for specific budgets is so twentieth century. But if we’re going to cause this political sea change, we need to create it quick.

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  1. GramSci

    Because gold! It’s what the banks have and what Uncle Sam needs to borrow! /s (In specific, contractual amounts.)

  2. Hoppy

    People are still under the illusion that you can just shut down the economy for an unspecified period of time and then spin it up again.

    1. Susan the other

      There are a lot of informed people in Congress – Stephanie Kelton has been telling them for almost 10 years that if you want to get money, taxes, prosperity out of the economy, first you must put money into it. So if we have an extended depression congress will have no one to blame but themselves. They aren’t as stupid as they used to be. But I bet it’s embarrassing for them to switch horses like this after they’ve spent their lives pontificating about the budget. Funny.

  3. K teh

    Monkeys throwing darts.

    The only greater fools than experts are their followers.

    Digital money is a control system in which debt-driven technology replaces labor. There is nothing backing it up. Physical cash in general circulation is an information system, balancing local supply and demand. Look at the graph of money supply.

    Electronic money exists to the end of economic warfare.

    USTs are neither risk free, nor equivalent to cash. That’s the black hole the Fed is fighting, of its own creation. Congress abdicated responsibility, to the experts, long ago.

    When demographics were accelerating, USTs created a wealth effect in the form of real estate inflation, encouraging people to buy the same house many times. Now that demographics are decelerating, people are waking up in a depreciating asset.

    As the world sells USTs in a USD margin call, cities, states and pension funds are left holding the bag.

    Poof goes the wealth effect psychology.

    Models have to be built from the bottom up, and execute from the top down.

    It’s been decades since computer science programs taught computer science. It was always a labor replacement scheme, by finance, which simply defines labor to suit itself.

    Look around before blaming institutions. Look at how people treat the labor they depend upon to keep their world turning. Dropping kids off for training by the government, built to transfer wealth from people who work to people who don’t, doesn’t end well.

    Funny, how History, written in some biased narrative, suddenly becomes alive when the rubber hits the road. FinTech would be amusing if it weren’t so destructive.

    1s and 0s are not going to solve the problem of FinTech being paid to buy its own stock, to replace people in the economy and charge them 25% interest on loans to buy their daily bread.

  4. NoBrick

    As James Galbraith says, “The entire foundation of the budget process is built on an illusion of control”. BINGO!

    I fail to see how the “illusion of control” is neutralized with another “illusion of control”.

    “The only way to get congress to spend adequately is demand…”

  5. The Rev Kev

    Instead of actually listing amounts of money in the legislation, they could use the phrase “one dollar and due consideration” instead. It could mean whatever you wanted it to mean at whatever time necessary. That should do it.

  6. Susan the other

    This was a great post. Thanks Yves and Nathan. “Appropriations for specific budgets is so 20th Century.” Specific dollar amounts are absurd! And depressing. So, if we are all depressed does that qualify as a “depression?” It’s looking more like the Great Bereavement. I’m now sublimating by watching old reruns of Law and Order – I forgot how appealing Lenny’s character was – but Law and Order is almost as quaint as Dragnet compared to the realities we are facing. As long as a SB “qualifies,” the program should be uncapped. And the most important qualification is employees – as long as a SB is paying out the forgivable loans to its employees, it qualifies. I’m thinking this qualification is more interesting than it sounds because if the SB can’t make any headway in this devastated market they might not be able to write off their operating costs – if they are too high. A thinning out of businesses that are not viable? Let’s let the market do it, Mitch. I’m also thinking this plan would guarantee the lowest prices possible for energy – usually natural gas or maybe diesel. And I’m also thinking we are never going back to the way it was. So that’s the good news, imo. Just this morning on NPR/BBC there was a report on how airlines are cutting way back – some of them from 30 flights a day down to just one.

    1. Ian Ollmann

      You know, I really don’t miss the Cold War, leaded gasoline and massive crime. Compared to that modern day life is pretty good. The epidemic will pass. Maybe, just maybe we will decide not to kick the unemployed for being unemployed, because it is our fault, not theirs, but old habits die hard. We still won’t be doing enough about global warming, but otherwise life seems to me to be pretty good.

  7. Michael K

    I’ve been working on getting my company SBA assistance before the cap is reached. I have no idea where we’ll be in the queue, but it’s absurd that some companies will be doomed to failure simply because Congress put a cap on the programs.

    There are actually some good innovative programs in the CARES act (in addition to the awful Mnuchin slush fund), such as the PPP and EIDL, but they need to have the caps lifted to avoid a bloodbath that will be an order of magnitude worse than the ultimate cost of those programs.

    There will be economic damage no matter what, but I think the citizenry is waking up to the fact that our government has enormous power to prevent the worst from happening. I hope they demand a permanent change in thinking.

      1. Rory

        PPP is the “Paycheck Protection Program” that is part of the recent bailout legislation and supposedly will, through the SBA, provide loans to small businesses injured by CV19 to let them continue to operate. The loans, tied in amount the business’ payroll, are forgivable in part or in total if the business does not cut its payroll after receiving the loan.

        EIDL is another SBA loan program — something like “Economic Injury Disaster Loan.” I don’t know whether loans under that program can be forgiven.

  8. Marie Parham

    Thank you Yves for nurturing such a brilliant young mind over the years. He seems to be making a contribution and you should be proud.

  9. Anthony K Wikrent

    The next round of bailout is coming. We need to make the next round of bailouts large enough (hundreds of billions) and directed ONLY to state, county, and municipal governments. Businesses are licensed at the state, county and city levels. Counties and cities have the records of what businesses are legitimately operating, and what their revenues are. Local officials are therefore better and faster at assessing the conditions and needs of the businesses in their jurisdictions.

    Medical testing and treatment also occurs at the local level, and health care and health insurance are regulated at the state level. To stop the epidemic, there must be widespread testing to locate and isolate the infection. Then people can return to work. But people without health insurance must have their COVID19 tests and medical care completely covered — and ten million people have just lost their jobs in the past 2 weeks, and will soon lose health insurance as a result. It is too late to set up a national program. However, almost every single county and city has a public health program and agency that can (hopefully) be ramped up to provide free testing and treatment PROVIDED there is federal funding to do so.

    In Orange County NC (home of Univ of North Carolina Chapel Hill) our county commissioners have already created an Emergency Small Business funding program for Orange County small businesses (see I think if this can be enlarged and adapted to handle billions in funds from the federal government, it can be a model to the nation. It will effectively, I hope, bypass the stanglehold special interests and the finance sector have on Congress, and get money to the local level.
    I think even Republican local officials — except the most ideologically libertarian — would badger their Congressmen and Senators for such a program.

    There should also be legislation to authorize and direct the Federal Reserve banks to lend directly to state, county, and municipal governments. Lowest possible interest rates should be specified. If I understand Tankus’ other posts on his website correctly, the Fed at this point can only lend to mutual funds or other entities that buy debt of state, county, and municipal governments.

    1. Oregoncharles

      I’ve been making the same point. This is a situation MMT warns about, where the resources (labor, capital, natural resources) limit production; in this case, primarily people who can’t come to work. Not everything can be done “from home.” For that reason, it actually makes sense to emphasize unemployment “insurance;” you’re just making sure people can pay their bills in the meantime. The inability to do that runs riot through the economy – not all landlords are big companies. But a flood of money into people’s hands, when there isn’t much to buy, is likely to cause inflation – thus achieving what the Fed failed at. Or it will be a test case for the theory.

      IMO, a bout of inflation would be a small price to pay for keeping the economy in functional condition.

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