The Coronavirus: Why the U.S. Economy Will Never be the Same by Kevin Bahr, Chief Analyst, Center for Business and Economic Insight. Please continue to follow Kevin’s blog page at http://bit.ly/uwspcbeiblog where he will post updates on the coronavirus as well as articles on other important business and economic topics.
CENTER FOR BUSINESS
AND ECONOMIC INSIGHT
THE CORONAVIRUS Why the
U.S. Economy Will Never be the Same by Kevin Bahr, Chief Analyst, CBEI
UWSP
CBEI Extra! The Coronavirus: Why the U.S. Economy Will Never be the Same The coronavirus has caused untold harm to the U.S. and world economies. In this special issue, our chief analyst Kevin Bahr describes the impact of the virus on the stock market, supply chains, the health care industry, and corporate debt levels. He also includes a detailed breakdown of the stimulus package and the likely implications of the virus for the federal deficit and national debt. His report calls for reforms of securities regulation of Congress. Kevin also gives tribute to the low wage employees of the service sector who continue to do so much for us in return for so little.
Please continue to follow Kevin’s blog page at http://bit.ly/uwspcbeiblog where he will post updates on the coronavirus as well as articles on other important business and economic topics. The health impacts of the coronavirus and the social distance responses to it have dramatically disrupted the ebb and flow of all our lives. The Center for Business and Economic Insight is no exception. The coronavirus forced us to cancel our May breakfast, for example. God willing, we will return in full force in the fall with our breakfast presentation and publication. In addition, we are looking to add a luncheon to the mix. It is too premature to announce specific times and locations. Please stay tuned!
Thank you for your support of the Center for Business and Economic Insight. Stay safe and healthy, friends!
Scott Wallace Director and Editor, CBEI
CBEI Mission
CBEI Staff
The UW-Stevens Point Center for Business and Economic Insight (CBEI) promotes regional economic and community development through the provision of business and economic knowledge to local business, governmental, and community leaders. The primary areas of focus are Portage, Marathon and Wood counties.
Scott Wallace.................................... Director and Editor, CBEI Kevin Bahr................................................... Chief Analyst, CBEI Landis Holdorf. .....................Senior Research Assistant, CBEI Emma Fisher.....................................Research Assistant, CBEI Eva Donohoo................................... Publication Designer, CPS
The Central for Business and Economic Insight is made possible thanks to support from the UW-Stevens Point School of Buinsess and Economics.
The UW-Stevens Point School of Business and Economics creates career-ready graduates and leaders through applied learning. We serve the businesses, economy and people of the greater Central Wisconsin region. We specialize in preparing students for success by providing professional development experiences, access to employers, and in-demand skills.
The Coronavirus – Why the U.S. Economy Will Never be the Same
Kevin M. Bahr Chief Analyst, Center for Business and Economic Insight Professor of Business, School of Business and Economics
Hopefully the coronavirus subsides quickly and never returns. However, the impacts of the virus on the economy will remain long after the virus subsides. This article will discuss some of those impacts, after initially reviewing the economic and financial market effects of the virus. What Happened: A Review of the Economic Impacts If there was any doubt about the severity of the Coronavirus impact on the U.S. economy, those doubts came to an abrupt halt in March. The Department of Labor announced initial jobless claims soared to a seasonally adjusted 3.28 million in the week ended March 21, up from the prior week claims of only 282,000. An incredible, record one-week jump. Speaking of records, the nearly 3.3 million of initial jobless claims smashed the old record – by far. The previous high was 695,000 claims filed in the week ended October 2, 1982. Although 3.3 million was a new record, unemployment claims doubled the following week to 6.65 million. Wisconsin wasn’t immune, with initial unemployment claims skyrocketing to over 51,000 for the week ended March 21 up from only 5,200 the prior week. The following week (March 28), there were over 115,000 claims according to the Wisconsin Department of Workforce Development. 1
With rare bipartisan support, most members of Congress realized that something had to be done – and quickly.
By the end of March, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. CARES was the largest fiscal stimulus in the history of the United States – a $2 trillion stimulus package that more than doubled the $800 billion stimulus package that was implemented in 2009 to overcome the financial crisis. Certainly, the bill was not perfect, but it created a vast array of programs with bipartisan support that would provide economic support to individuals and businesses. The funding would cover five general categories: 1) Small Business, 2) Distressed Companies, 3) Individuals, 4) Local governments, and 5) a Safety net for selected social programs. In a nutshell, the distribution of the funding:
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More detail regarding the funding provisions:
$377 billion loan program for small businesses The bulk of the program was $350 billion to provide eight weeks of cash-flow assistance to small businesses through 100 percent federally guaranteed loans to employers who maintain their payroll during the emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers to remain employed and aid in the recovery of small businesses and the economy after the crisis. $10 billion will be for the Small Business Administration (SBA) emergency grants of up to $10,000 to provide immediate relief for small business operating costs; $17 billion will be for SBA to cover 6 months of payments for small businesses with existing SBA loans. $500 billion lending fund for distressed businesses The provision increases the U.S. Treasury Department’s Exchange Stabilization Fund with $500 billion to aid large distressed firms, which the Federal Reserve can then leverage to inject approximately $4 trillion back into the marketplace in secured loans. An independent Inspector General and Congressional Oversight Panel will be established to oversee Treasury loans and investments – the loans must eventually be paid back following the coronavirus pandemic. Individuals (approx. $560 billion) Each qualifying adult will receive up to $1,200 in the form of a one-time rebate check. The full amount is available for individuals with incomes up to $75,000 per year ($150,000 for married couples) before phasing out and ending altogether for those earning more than $99,000 ($198,000 for joint filers with no children). Families will receive an additional $500 per child. Included in the $560 billion is $260 billion for expanded unemployment insurance. An additional $600 per week payment to each recipient of unemployment insurance for up to four months. Funding will be provided to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits. Finally, the expansion of unemployment insurance will provide an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Public Health $153.5 billion – provisions include: • Hospitals: $100 billion for hospitals responding to the coronavirus. • Community health centers: $1.32 billion in funding for community centers that provide health care services • Drug access: $11 billion for diagnostics, treatments and vaccines. • Centers for Disease Control and Prevention: $4.3 billion for CDC programs and response efforts • Veterans’ health care: $20 billion • Medicine and supplies: $16 billion for the Strategic National Stockpile to increase availability of equipment, including ventilators and masks. State and Local Governments $339.8 billion Included is $274 billion to help states fight COVID-19, with $150 billion in direct aid for those state and local governments that are running out of cash. Also included is $5 billion for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education and $5.3 billion for programs for children and families, including immediate assistance to child-care centers. Safety net $26 billion This includes $8.8 billion school meals, $450 million for food banks, and $15.5 billion for the Supplemental Food Nutrition Program (SNAP), in other words, food stamps. Student Loans • The Department of Education will automatically suspend payments on Direct student loans without penalty through Sep. 30, 2020. • Employers can provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income.
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The CARES Act was Phase III of a fiscal response to the coronavirus. In dollar amount, Phase III dwarfed the previous measures. Previous Phase I legislation included $8.3 billion in aid to help contain and treat the virus, including diagnostic testing and human vaccine clinical trials. Phase II (the Families First Coronavirus Response Act) legislation guaranteed free coronavirus testing, provided paid emergency leave, enhanced unemployment insurance, strengthened food security initiatives, and increased Federal Medicaid funding to states. The bill required governments and private businesses with fewer than 500 employees to provide up to two weeks of paid sick leave for those who miss work due to the coronavirus or for those who have to take care of family members affected by the pandemic. If needed, workers could take another 10 weeks off at two-thirds of their pay. A refundable tax credit is available to businesses and self-employed workers to cover the expense. The U.S. Labor Department could exempt companies with fewer than 50 workers if they risk going out of business. The fiscal policy stimulus reflects the challenges of a service sector economy when consumer spending is declining. According to the U.S. Bureau of Labor Statistics, nonfarm payrolls in the private sector consisted of 128 million jobs as of February 2020. Out of those jobs, approximately 107.2 million (about 83 percent) were in the service sector, approximately 20.8 million (about 17 percent) were in the goods-producing sector. Many service sector jobs are in transportation, retail trade, restaurants, real estate, movie theaters – industries that depend on personal visits and service. Many of those jobs are within small businesses. The Phase III fiscal policy also comes on the heels of the use of monetary policy by the Federal Reserve to bolster the sinking economy. Programs of the Federal Reserve included: • Purchase at least $500 billion of Treasury securities • Purchase at least $200 billion of mortgage-backed securities (including commercial) • Creation of two credit facilities that support large employers through making loans and bond financing more accessible • Additional credit facilities were created to help facilitate the flow of credit to consumers, small business, and municipalities In April, the Federal Reserve announced additional actions to provide up to $2.3 trillion in loans to support the economy. The $2.3 trillion loan program would supply increased liquidity to financial institutions and access to credit for individuals, businesses, and local governments. Working with financial institutions and the U.S. Treasury, the Federal Reserve established specific loan programs targeted at households, employers of all sizes, and state and local governments to help weather the economic storm caused by the coronavirus. Collectively, the programs of the Federal Reserve were meant to increase access to credit and borrowing by consumers, business, and municipalities. The programs were in tandem with the Federal Reserve cutting the fed funds rate to 0.00 – 0.25% in early March. Unfortunately, the fiscal and monetary policy actions were reactionary. Would they be enough to bail-out the economy? Probably not, but no one really knew. The ultimate impact of the coronavirus on the economy and financial markets would be a function of how much it would spread, and how long it would last. With mounting unemployment, it quickly became clear in April that the Phase 3 stimulus was not enough. In late April, another $484 billion (also known as the Phase 3.5 stimulus) was passed by Congress and primarily aimed at small businesses. The legislation includes another $320 billion to help small businesses keep workers on the payroll. The initial program established by the CARES Act, referred to as the Paycheck Protection Program (PPP), ran out of money due to heavy demand. The program provides forgivable loans to small businesses that keep employees on the payroll. The initial program also ran into difficulties because funding was often difficult to obtain by small businesses that did not have established banking relationships. Approximately $60 billion of this additional PPP funding is aimed at businesses that do not have established banking relationships, including rural and minority- owned businesses. An additional $75 billion in funding is provided for hospitals and $25 billion for corid-19 testing. The Small Business Administration’s disaster relief fund is also increased by $60 billion.
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A future phase 4 package may also materialize. Many states face financial struggles and huge deficits resulting from the economic slowdown. Whether phase 4 includes any funding for states remains to be seen. Senator Mitch McConnell suggested that states file for bankruptcy rather that having the federal government provide any funding. That would have significant, detrimental impacts to states and the municipal bond market. It could cut funding for first responders, health care, education, and other essential state programs. In addition, it also creates questions as to why large corporations should be bailed out with states left on their own. Any state or local government defaulting on bond obligations would also have a major detrimental impact on the municipal bond market, with investors losing money. According to a report by the Rockefeller Institute of Government, forty-two states had a positive balance of payments with the federal government for 2018, meaning those states received more money from the federal government that what they remitted in federal taxes and other federal revenues. McConnell’s Kentucky enjoyed being number three – Kentucky provided only $32 billion in federal tax revenue yet received $77 billion in federal expenditures. New York, the hardest hit by the coronavirus, subsidizes Kentucky. New York ranked 50th, meaning the federal taxes paid by New Yorkers exceeded federal expenditures by a greater amount than any other state. New York provided $247 billion in federal tax revenue yet received only $225 in federal expenditures. Wisconsin ranked 29th, generating $53 billion in federal revenues and receiving $57 billion in federal expenditures.
For further information on the CARES Act: 1. From the Tax Foundation: Tax Foundation - CARES Act 2. From NPR: NPR - CARES Act 3. Federal Reserve actions:
Federal Reserve March Federal Reserve April 4. Federal Receipts and Disbursements by State: Rockefeller Institute - State Balance of payments with Federal Gov.
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What Happened: A Review of the Stock Market The stock market is not the economy. However, the stock market reflects what is expected to happen to the economy. Although some political leaders doubted the impact of the coronavirus on the United States, a growing uncertainty was becoming evident in U.S. financial markets. As the coronavirus worked its way through China, South Korea, and Italy, U.S. stocks became increasingly volatile and returns became negative. According to Morningstar, the return of the S&P 500 was -0.16% in January and -8.24% in February. Clearly, the markets were reflecting the increasing concern of the economic impact of the virus on the world and the United States. The coronavirus created great uncertainty – in terms of both healthcare and the economy. And it wasn’t just the United States, it was global. The year-to-date returns through February were down significantly for most stock markets around the world. Stock market declines in the first two months of 2020 included: Canada -5%, Mexico -7%, Germany -11%, France -12%, Japan -9%, and China -7%. The global economic and healthcare crisis was clearly reflected in financial markets around the world. March began with another week of stock market turmoil. 7%, 13%, and 20% - those are the magic drops in the S&P 500 that trigger “circuit breakers” for the New York Stock Exchange (NYSE). Circuit breakers are when stock market trading is halted to give investors and traders a breather to assess what is going on and avoid panic selling. A decline of 7% triggers a 15-minute halt in stock trading; a 13% decline triggers another 15-minute halt. If the S&P 500 declines by 20% on a given day stock trading is stopped for the day. On Monday morning March 9, the S&P 500
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declined by over 7% and trading on the NYSE was temporarily halted. The growing uncertainty and impact of the coronavirus on global economies was evident once again. The S&P 500 finished the month with a -12.51% return. Consumer spending accounts for approximately two-thirds of U.S. GDP growth and growth in consumer spending fueled the recent economic expansion. Any event that reduced that spending would derail the economic growth. The coronavirus would change consumer spending quickly and significantly. As the virus spread in March and stay- at-home orders became all too familiar, a service-sector economy would be significantly impacted and quickly. That’s pretty much what the financial markets were forecasting; and that is exactly what happened when the U.S. Department of Labor announced that initial jobless claims exploded to a seasonally adjusted 3.28 million in the week ended March 21 up from the prior week claims of only 282,000. Unemployment claims doubled the following week to 6.65 million. While some leaders may have doubted the economic and healthcare impact of the coronavirus, the financial markets said otherwise. The stock markets reflected the growing concern and expected economic impact on corporate profits around the world. The U.S. stock market was a precursor to what would happen in the U.S. labor market.
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What Will Change: Supply Chains
The U.S.-China Economic and Security Review Commission was created by the United States Congress in October 2000 with the legislative mandate to monitor and report to Congress on the national security implications of the bilateral trade and economic relationship between the United States and China. In 2019 the U.S.-China Economic and Security Review Commission held a hearing on the growing reliance of the United States on China’s pharmaceutical products. Important points from that hearing were summarized by the Council on Foreign Relations, an independent nonpartisan think tank that analyzes foreign policy issues. Key points included: • Chinese pharmaceutical firms have captured 97 percent of the U.S. market for antibiotics. • More than 90 percent of the market for vitamin C is imported from China. • In 2018, 95 percent of ibuprofen, 91 percent of hydrocortisone, 70 percent of acetaminophen, and 40–45 percent of heparin used in the U.S. came from China, according to the U.S. Commerce Department. • In addition, many over the counter and other generic drugs sold in the U.S. are sourced from China, including antidepressants, HIV/AIDS medications, birth control pills, chemotherapy treatments, and medicines for Alzheimer’s disease, diabetes, epilepsy, and Parkinson’s disease. • Key drug imports from India include antibiotics, painkillers, hormones, antiviral drugs, and vitamins B1, B6 and B12. Speaking of sourcing from China, ventilators were needed and in short supply as the coronavirus took hold in the United States. China became increasingly important as a supply source for ventilators. China is also the world’s largest producer of medical face masks. According to the BBC, normally China produces around twenty million masks each day, which is estimated to be around half of all masks made globally. Going forward, the supply chain of medical products and pharmaceuticals will likely (and should) change as a result of the coronavirus. The extreme dependence on China for antibiotics, select drugs, and medical products can be problematic on multiple fronts. First, heavy reliance on sourcing from a single country, no matter which country, is problematic if that supply chain is broken due to a pandemic or natural disaster. Second, heavy reliance on sourcing from a country which has been the focus of a trade war with the United States can create problems, particularly when products sourced are needed medicines and medical supplies. That being said, there are reasons why the supply chains were established the way they were. Usually cost plays a big factor. Changing the supply chains to include more U.S. and near-shore sourcing could impact costs – and consequently prices. Nonetheless, sourcing needs to and likely will change. Multiple options for product sourcing and multiple country options for sourcing can lessen the probability that disruptions to supply chains will occur, no matter where the next pandemic or natural disaster originates. It would also provide a quicker response to any national
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emergency where additional medical supplies were needed.
For further information: 1. From the U.S.-China Economic and Security Review Commission Exploring the Growing U.S. Reliance on China’s Biotech and Pharmaceutical Products 2. From the Council on Foreign Relations Council on Foreign Relations - Coronavirus Could Disrupt U.S. Drug Supply
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Yes, the economy and stock market have been strong; but significant challenges remain.
What Will Change: Healthcare
Never again. Shortages of PPE (personal protective equipment), medical testing, and medical supplies such as ventilators occurred across the country. While the U.S. spends more on healthcare than any other nation, inappropriate (or lack of) planning and vulnerable global supply chains left the U.S. without the equipment necessary to protect healthcare workers, first-responders, and its citizens from the coronavirus. Pick a state – it is not too hard to find a governor, local government official, healthcare worker, or news story describing a shortage of masks, gowns, testing, ventilators, and/or medications. By late March, governors reported states “bidding against each other” to get ventilators because of a lack of coordinated federal response. Congress reacted to the coronavirus economic impacts with needed fiscal response measures in March. Those measures were reactionary to the coronavirus economic impacts; unfortunately, the federal government failed in planning for the healthcare impacts of the coronavirus. Before the arrival of COVID-19 in the United States, the potential impact of the virus on healthcare systems and economies had already played out in China, South Korea, and Italy. As previously indicated, the U.S. stock market in January already began to show the potential impact of the virus on the U.S. economy. Despite being in the midst of the longest economic expansion on record, the S&P 500 declined -0.16% in January. The market was in full reverse mode in February with a drop of -8.24%. The eventual arrival and impacts of the virus on the United States should not have been a surprise. It was becoming clear in January that the United States would not be immune to the impact of the virus. In 2015, Bill Gates had already spoke of the United States being inadequately prepared to handle a pandemic. According to the Centers for Disease Control, there was 1 COVID-19 case in the United States in January. COVID-19 had arrived. By the end of March, over 186,000 cases. It should also be pointed out that due to the lack of available COVID-19 testing, the numbers likely understate the actual amount of COVID-19 cases in the United States. The healthcare system and its workers faced challenges that they should have never faced. No healthcare worker, including doctors, nurses, social workers, materials attendants or any other worker in a healthcare facility should ever be without PPE. Not only do they need it but having healthcare workers without appropriate PPE isn’t the greatest thing for patients either. At the very least , the federal government should have started planning in January for the shortfall in PPE and other medical equipment that would occur due to the virus. The impact of the virus was already playing out in other parts of the world, and even the U.S. financial markets were beginning to show the signs of the economic impact of the pandemic. Unfortunately, there was a lack of federal government planning for a coordinated nationwide response to the coming pandemic. In addition, the July 2019 hearing of the U.S.-China Economic and Security Review Commission clearly revealed the heavy U.S. dependence on China for key PPE, medical supplies, and pharmaceuticals. That certainly indicated the U.S. supply chain was vulnerable, especially since China was at the center of the pandemic by late 2019. A focus on shifting that reliance and ramping up U.S. production of key supplies could have occurred by late 2019. Invoking the Defense Production Act could have required U.S. companies to produce those needed supplies.
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Insufficient PPE and medical equipment to deal with any pandemic, a vulnerable supply chain, and a lack of appropriate federal government planning. That combination resulted in healthcare workers and first-responders dealing with unthinkable circumstances in the country that spends more on healthcare than any other country in the world. Going forward – never again. Healthcare workers and first-responders should never be put in this position again. Another issue that arose in the pandemic – access to healthcare, That issue will likely stay a focus even after the pandemic winds down in the U.S. Access to testing, access to needed medical services, the ability to pay unexpected healthcare bills – particularly if being furloughed or becoming unemployed, the ability to get health insurance, the potential of needing (and paying for) health insurance with a preexisting condition, all these issues will likely be topics of discussion as the country moves forward after the pandemic. Planning for the next pandemic should begin now. For further information: 1. Health care spending by country from the Organisation for Economic Co-operation and Development (OECD) https://data.oecd.org/healthres/health-spending.htm
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What Will Change: Deficits and Government Spending
It’s like nothing that you’ve seen - the pending federal deficit. During the financial crisis, the budget deficit hit approximately $1.4 trillion - a record at the time. According to the Congressional Budget Office (CBO) the budget deficit for fiscal year 2020 (which ends in September) was expected to top $1 trillion before the coronavirus. The tax cuts of 2018 set the stage for record deficits if anything went significantly wrong with the economy. It did. Given the $2 trillion phase III fiscal stimulus and the possibility of another fiscal stimulus, the budget deficit will explode. Unfortunately, the coronavirus will have a double whammy on the economy. Not only will the fiscal stimulus increase government expenditures by almost 50%, tax revenues will contract significantly as corporate and individual incomes decline. In the current economic scenario, an appropriate and large enough fiscal stimulus had to take priority over any deficit concerns. The impact of the coronavirus on the U.S. economy was too detrimental. Without appropriate fiscal stimulus, a recession could turn to depression. However, the likely record-setting deficit will have significant consequences moving forward, and decisions will have to made regarding government spending and tax policy. Generally, an expanding economy leads to a decrease in the U.S. federal government budget deficit as tax revenues increase. However, the 2018 tax cuts changed that – they were different. The economy had over eight years of economic growth; the unemployment rate had declined gradually from approximately 10% in 2009 to nearly 4% at the end of 2017. Contrary to tax cuts in 2003 and 2011-2012, the 2018 tax cuts were implemented when the economy was expanding and the unemployment rate was relatively low. The largest cuts were to corporate taxes. The corporate tax rate was lowered significantly from 35% to 21%. In addition, taxable income could be lowered through capital expenditures (spending on property, plant, and equipment) which could be expensed (a tax deduction in the year of the expense) rather than depreciated (allocating the cost and spreading the deduction over the life of the property). Owners of small businesses also benefitted. Many small businesses are organized as “pass-through” businesses, where the business does not pay tax, but the owners do. Sole proprietorships, partnerships, LLCs, LLPs, and S corps are pass-through businesses. The new tax law allowed pass-through owners to deduct up to 20% of their net business income from their income taxes. Finally, individual tax rates were cut approximately 2-3% in each income bracket, although deductions were limited. According to the Office of Management and Budget, corporate taxes as a percent of GDP fell from 1.5% in fiscal year 2017 to only 1.0% in 2018. Individual income taxes as a percent of GDP actually increased from 8.2% in fiscal year 2017 to 8.3% in 2018. Another effect of the 2018 tax bill was how the resulting split between individual
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and corporate taxes comprised total federal tax revenues. In fiscal year 2018, corporate income taxes comprised 6.1% of federal tax revenue compared to 9.0% in 2017. The 6.1% rate was the lowest rate ever based on Office of Management and Budget data available since 1934. Conversely in fiscal year 2018, the contribution of individual income taxes to total federal tax revenue increased. Federal income tax revenue from individual income taxes comprised 50.6% of federal tax revenue in fiscal year 2018 compared to 47.9% in 2017. The 50.6% rate for individual income taxes was not the highest rate ever based on Office of Management and Budget data available since 1934. The 2018 tax cuts contributed to growing federal deficits. The graph below shows the U.S. federal budget surplus or deficit since 1980. The shaded areas of the graph indicate an economic recession. Note the economic expansion in the 1990s led to budget surpluses. Following the recession of the early 2000s and the financial and economic crisis of the late 2000s, the deficit once again was reduced as tax cuts helped spur economic growth. The tax cuts in 2018 were different. The tax cuts were not made to help the economy recover from a recession; there was no recession. Taxes were cut, the rate of economic growth temporarily increased, but the deficit increased . Since 2016 the budget deficit has increased; and increasing deficits during an economic expansion were problematic. Federal Budget Surplus or Deficit
Annual amount of Federal Budget Surplus or Deficit in Millions of Dollars (1/1/80-9/30/19) Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget
Federal debt as a percentage of GDP provides a relative measure as to how the federal debt financially burdens the country. That number is at record levels and will likely continue to go up. Total federal debt increases can be mitigated by Federal Reserve policy which includes the purchase of Treasury securities, but that ability is limited. The graph below provides a long-term perspective on the amount of federal debt outstanding relative to the amount of income (GDP) generated in the U.S. Relatively speaking, federal deficits and increasing federal debt were not much of an issue until the 1980s. Federal debt to GDP rose to over 50% by the end of the decade. In the 1990s, following a decade early recession, federal debt to GDP topped 65%; federal budget surpluses helped reduce the level to approximately 55% by the end of the decade. The return of budget deficits after the turn of the century increased federal debt to GDP to nearly 65% prior to the financial and economic crisis of 2007-2009. Federal debt to GDP now stands at over 100%.
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Federal Debt as a Percentage of U.S. GDP 1966 - 2019 Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget
Going forward, the deficits will have to be dealt with. The pending deficit should provide a needed short-term boost to the economy. However, long-term changes in tax policy and/or government spending, will have to be made. That could create some interesting political battles, because the deficits will likely be significant and be a long- term detriment to economic growth. (The Trump Administration had already proposed reductions to Social Security programs in its fiscal 2020 budget prior to the coronavirus). Although the fiscal stimulus spending will subside, tax revenues may take some time to recover. The coronavirus may also change the preferences of the public as to how the government spends its money. Healthcare and social programs became prominent topics of discussion once again with the impact of the coronavirus. And regarding those “social programs”, over the past decade there has been government spending on numerous individual and corporate social programs, including Social Security, the Financial Crisis bailouts (a $700 billion Toxic Asset Relief Program to purchase bad loans and investments from financial institutions; $80 billion to GM and Chrysler to remain solvent), and the Phase III coronavirus stimulus ($500 billion to distressed corporations and $377 to small businesses in addition to direct payments to individuals and expanded unemployment insurance). The bottom line – government spending has included both individual and corporate social programs. On the revenue side, changes in tax policy have lowered corporate tax revenues relative to individual tax revenues. Going forward, changes will likely be made to government spending and/or tax revenues. Exactly what those changes are will likely be the subject of much political debate. One final point. The deficit problem will impact both states and the federal government. Tax revenues will shrink in combination with increased costs related to the pandemic – for both.
For further information: 1. From the St. Louis Federal Reserve database: U.S. Federal Debt as a Percentage of GDP U.S. Budget Surplus or Deficit 2. From the congressional Budget Office, budget projections: https://www.cbo.gov/topics/budget 3. From the Office of Management and Budget, tax revenue by source: https://www.whitehouse.gov/omb/historical-tables
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What Will Change: Corporate Debt Levels
The level of corporate debt likely won’t be going down any time soon given the economic impact of the coronavirus. Despite the economic good times of the 1990s and last decade, corporate debt has been increasing – to record levels. Particularly since the financial crisis, despite a record period of economic growth and the tax cuts that occurred in 2018, corporate debt has been increasing. The level of corporate debt fell during the financial crisis as the economy contracted and the availability of loans declined as many financial institutions were facing difficulties. However, that was different. In the current economic scenario, new loan programs sponsored by the Federal Reserve, fiscal stimulus programs, and the decline of the economy will likely increase corporate debt. Since the financial crisis, it has pretty much been up, up, and away for corporate debt – despite economic growth for over a decade and tax cuts. The graph below shows the amount of nonfinancial corporate debt for large (public) corporations, including debt securities and loans, since 1990. U.S. nonfinancial corporate debt of large companies exceeded $10.1 trillion dollars in 2019, up over 50% from the $6.5 trillion in 2008 during the financial crisis. Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level 1990 - 2019 Source: Graph from Federal Reserve Economic Database (FRED)
As a percent of GDP, U.S. nonfinancial corporate debt of large companies now stands at about 48%, up from the 44% of 2008 GDP. Also on the rise, leveraged loans to corporations. Leveraged loans can be viewed as relatively risky loans made by lenders to corporations, where the company receiving the loan already has a significant amount of debt outstanding and/or a low credit rating. According S&P Global Market Intelligence, leveraged loans increased by approximately 20% in 2018, from approximately $950 billion at year-end 2017 to $1.15 trillion at year-end 2018. No matter how you slice it, generally corporate debt has been increasing and getting riskier, no matter what size the company. The greater the amount of debt, the greater the chance that companies will not be able to withstand financial distress in an economic downturn. The greater the amount of debt, the greater the chances that corporate bailouts will be required by the federal government for corporate sustainability. Despite a record long economic expansion and tax cuts, financial vulnerabilities to an economic downturn increased for many companies.
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What Should Change An Appreciation for Service Sector Workers
Ever wonder what it would be like to not be able to go to your favorite restaurant, or not be able to take a trip to your favorite location? Ever think about how dependent the U.S. economy is on delivery drivers, grocery store workers, and food distribution/warehouse workers? Maybe not, but perhaps the coronavirus changed that. It put a spotlight on the importance and contributions of many service sector workers and occupations. And of course, the contribution of healthcare workers. Doctors, nurses, social workers, supply workers, administrative support personnel, and all those responsible for keeping hospitals and medical clinics clean and full of supplies. Obviously, workers in many different positions made important contributions to the U.S. dealing with the pandemic. There are many service sector workers that play key roles in the U.S. economy – those key roles make ordinary living better, safer, and healthier. The coronavirus highlighted some of those roles and gave much deserved recognition to select service sector workers. Listed below is information from the U.S. Bureau of Labor Statistics (BLS) as of May 2018 that shows employment and wage information for select service sector workers. Unfortunately, workers are not always paid based on their contributions to society. As the data indicates, the workers are many, but the pay is not always high. Greater detail for each category of workers is available through the BLS links provided below. At the very least, perhaps the pandemic leads to a greater appreciation for all those workers in the service sector that make life better, safer, and healthier.
Food Preparation and Serving Related Occupations
National Employment 13,374,620
National Mean Hourly Wage
National Mean Annual Wage
Wisconsin Employment
Wisconsin Mean Annual Wage
$12.30
$25,580
245,820
$23,270
National Wage Distribution for Food Prep and Serving
50% (Median) $11.09 $23,070
Percentile
10%
25%
75%
90%
Hourly Wage Annual Wage
$8.49
$9.33
$13.59 $28,270
$17.96
$17,660
$19,410
$37,360
Healthcare Support Occupations
National Employment 4,117,450
National Mean Hourly Wage
National Mean Annual Wage
Wisconsin Employment
Wisconsin Mean Annual Wage
$15.57
$32,380
71,290
$32,760
National Wage Distribution for Healthcare Support Occupations
50% (Median) $14.30 $29,740
Percentile
10%
25%
75%
90%
Hourly Wage Annual Wage
$10.21 $21,240
$11.77 $24,470
$18.04 $37,520
$23.05 $47,950
For further information: 1. Greater detail from the U.S. Bureau of Labor Statistics on National and Wisconsin:
BLS - National Occupational and Wage Data BLS - Wisconsin Occupational and Wage Data
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What Should Change: Securities Regulation of Congress According to the Securities and Exchange Commission (SEC):
“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.” Unlawful insider trading can be prosecuted in civil proceedings by the Securities and Exchange Commission or in criminal actions by the Justice Department. The primary issue surrounding insider trading is trading on material, nonpublic information that provides the opportunity for profit that is not available to the public. There were multiple instances of Senators on the Senate Intelligence Committee selling stock during the coronavirus pandemic. Senators on the Senate Intelligence Committee also had access to material, nonpublic information and briefings on the coronavirus and how it would impact the U.S. economy. Whether the securities transactions of the Senate Intelligence Committee members were illegal is debatable, as well as the ethicalness of such transactions. What is not debatable are the millions of dollars in profits that the transactions provided; profits not afforded to the American public when information was made public. The point of insider trading is that you should not be able to be “first-in-line” to conduct a securities transaction using insider information and profit before the public knows the information. Congress passed the Stock Act in 2012 which states that all senators and representatives owe a duty of trust and confidence to the nation with respect to material, nonpublic information they obtain in the course of their official duties. Ethics rules already prohibited members of Congress to use information they gain as part of their official duties in order to make a private profit. However, although the Stock Act provides for fines, there are no criminal penalties. Although theoretically it is illegal for members of Congress to trade based on non-public information gathered during their official duties, neither the SEC nor the Justice Department has ever prosecuted a lawmaker for trading on government information. A new federal law prohibiting lawmakers from owning stocks in individual companies would stop trading in any company in which the lawmaker had insider information. A more expansive law could prohibit any stock trading (public or private company, stock or fund), in an account owned by the member of Congress, their families, or any trust in which they have an interest, while that person is serving in Congress. This would prevent members of Congress (regardless of political party) from trading on material, nonpublic information that the public does not have. It would also avoid any sense of impropriety and any conflict of interest. After all, Congress should be acting in the best interests of the American public – not their own. Exactly what constitutes insider trading can be murky, and proving insider trading can be an expensive, time consuming endeavor that essentially would be paid for by taxpayers. The Stock Act of 2012 was a good first step, but clearly it did not go far enough to end questionable stock trading by Congressional members. Both the Senate and House have rules on financial disclosure for members. Unfortunately, financial disclosure does not prevent dubious securities transactions. Congressional members having inside information on companies or likely economic events can conduct profitable stock transactions that are at the very least a potential conflict of interest. Of course, the challenge to new regulation on stock transactions for Congress to prevent conflicts of interest and any wrongdoing - Congress would have to pass the legislation and lose the opportunity to profit from such transactions.
For further information: 1. Definition on insider trading from the SEC: SEC - Insider Trading 2. Ethics and Financial disclosure rules for the House and Senate: House Ethics Committee Rules on Financial Disclosure Senate Rules on Financial Disclosure
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