Covid relief bill could be very bad for economy (2021)

Right now the Democrats and President Biden want to pass a massive relief bill.
But that could be very bad for the economy.
Right now the stock market is overheated. Stimulating the economy more could make things overheated, and lead to a big crash.

You don't want to encourage people to spend more money and speculative investment prices to go up even more when those prices are already too high.
There is a high chance the US stock market is in a bubble, and if/when that pops, that could have big reverberations on the rest of the economy.

 

DEFINITIONS AND THEIR IMPORTANCE

Any measure to boost Customer Demand is good for the economy in its present condition.

The stock-market is the least best at determining the strength or lack thereof of any economy. It is not even mentioned in the accounting for GDP

In fact, the usage of GDP in such a context exists only tangentially as defined here:

Having said that, anyone who is heavily involved in the stock-market fantasy should keep an eye on that value. It can be found here: Stock Market Capitalization to GDP for United States

I, personally, make no comments regarding the stock-market because I happen to think it is beyond the purview of "economics". It's just not relevant in a purely economic sense. If people buy stocks, aside from some stockbroker-salaries, I don't see the economic consequence of the matter. Someone's personal wealth, and even the aggregate of that wealth, does not influence significantly General Demand for goods/services (GDP).

Wealth (tiny & great) just sits there and behaves according to market-demand criteria. I suppose when it goes up very much or down very much it could affect the calculation of GDP (the primary Economic Indicator). If it had an effect upon Consumption. But only should it affect Consumption, and I cannot see the economic significance of that effect.

I can see the reverse, however. Whenever individuals are living-well, they might be prompted to place a large part of their savings into the stock-market. But that remains a "chancy" investment and it does not have the impact upon the economy as if the money were employed to buy a new-house. Whyzat?

Because Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time_period. Goods and Services is what people buy and sell, which is why they are produced! That action is the very heart of any economy on earth ...

 

Well written and reasoned. Thank you. You explain your views precisely and with sense. I come across people like you. Literate. Logical. You are a dying breed. Carry on and feel free to join the rest of us in irrational, emotional, subjective rants.

 

I disagree, not when there's a big part of the economy that's in a bubble.

If you can help the economy (including increasing consumer spending) that's in a long-term sustainable way, then yes, of course that's good.
But what we are talking about here is different. It's more like a shot of caffeine in the arm, or spending on credit cards. "Stimulus" is not long-term growth of the economy.
If there's spending levels in the economy that cannot be maintained, you don't want to throw more spending into that economy that cannot be maintained to stimulate it.
It's analogous to a drug addict taking more drugs to avoid crashing after the drugs they took previously wears off. Of course, when they do eventually crash, it will just be worse.

The government's job should be to try to cautiously deflate the stock market now, closer to a sustainable level. But of course they know that could likely initiate the crash, and the crowd in Washington, DC running the country don't want to do that because it will make President Biden look bad.

(A big part of the issue is if the stock market starts going down, it could alienate a lot of the moderate conservatives and Wall Streeters that cast their support for Biden, hurting Democrats' chance in the next election. Same exact reason they wanted to see the economy take a little crash during Trump's Presidency)

 

In one sense that's true, but in another sense that's not. Remember what happened in the wake of the 2007 Recession when older people drastically cut back on their spending (and started putting off retirement) in response to seeing the value in their retirement savings investments wiped away.
If the stock market crashes, that will trigger a drop in consumer spending, especially amongst the more affluent middle class.

When there are people treating increases in (apparent) wealth as personal income, it does.

 

Look, that's a good argument, and in some sense I agree with the logic in your reasoning here, but it just doesn't end up translating to reality. The reason why is because it translates into unemployment and poverty. Your logic might hold true (or more true) if everyone in the economy played an equal role.
Right now, people think they have more savings than they actually do. When they realize they don't, they will try to cut back on spending to save. Due to the nature of the economy, the cut-back in income won't be on everyone equally. Typically the poorest, and lower middle class, get hurt the most, in these situations.

 

Pretty much all mainstream economists believe recessions are triggered by major drops in consumer spending levels.
I'm not saying the majority of mainstream economists cannot be wrong, in certain situations, but that does appear to be a big hurdle that the reasoning in your argument here would have to overcome.
And we know that sudden disappearance of apparent wealth (whether it is in the stock market, personal home equity, or decrease in expected future income) can cause a decrease in consumer spending.

Remember during the 2007 Recession, most economists cite consumers no longer being able to pull equity out of their homes (after home prices deflated) as one of the major factors resulting in a reduction in overall consumer spending in the economy.
They were using increases in personal wealth (value of their homes) to fuel a lifestyle. (an unsustainable one, but it had wider effects on the rest of the economy)

 

LafayetteBis, if you don't think the stock market has any effect on the economy, then tell me, what do you think was the cause of the 1929 Great Depression??

 

It's passed! Over and done. Crank up the presses and print another couple of trillion $. Sooner or later all Americans will be millionaires with the dollar being worth almost nothing.

 

Unemployment and poverty are consequences that cannot be avoided. There is no "magic cure". Just a lot of academic BS about how to handle such disasters when they happen.

All we can do is manage slightly the consequences and try to avoid unmitigated societal disasters. (And a brainless Donald-Dork as PotUS has shown us viidly how such management is more a danger than it is worth!)

It's like the sun-rising. Grin and bear it ...

 

Yes, indeed. But there is no economy on earth that will NOT fail from time-to-time. Covid has cut drastically the European economies. But, just watch. When the anti-virus is finally inoculated throughout, the economy will kick back in. And very quickly attain its past values.

The fundamentals have not changed. Except for this factor that some are talking about keenly, "Can Covid re-warp into a more dangerous version forever ..." (We are now on our third version since two-years. The first version went away unnoticed, but came back as Version-2 in December of 2019.)

 

I repeat what I am seeing from economist writings in the press.

Repairing from Covid will not be that difficult. The consumer-uptake will be very quick to rebound.

Of course, that could be just some wishful-thinking. Time will tell ...

 

Are stocks of key importance to the American economy?

Yes, they have a certain importance. But, whether they go up or down is simply a manifestation of the general economy.

Stock increases depend upon a positive-looking future in terms of GNP (because that enhances the sureness of continued profits of which stock-market prices are key). That is, firstly, it's all about the economy ...

The stock market is not "the tail waging the dog" ...

 

Look, I'm not saying the stock market is indicative of how well the economy is doing, but I am saying if there's a big crash in the stock market (like 25 or 35%), it WILL have big reverberations on the rest of the economy.

I'm also not saying let's prevent the crash. Rather I'm saying it's not a good idea to throw more fuel on the fire that will make stock market prices rise higher, because then the chances of a crash somewhere down the line will be higher and it will be worse.

 

If you have actually done the calculations, you would see that the present stock market is substantially overpriced (by historical trends) even if we take into account the pandemic never happening.

For multiple reasons, it's unlikely the fundamentals of the stock market would bounce back to exactly where they would have been without the pandemic having happened, but even if we assumed that was the case, the present prices in the stock market would still be overvalued.

 

Then you are against Biden's proposed Covid relief bill?

I don't see how you can have it both ways.

Either the country doesn't need to worry, and more stimulus is not needed, or it does need to worry, and stimulating the economy at this time is not a good idea if things are already overheated, in a bubble.

 

It's not just that, it's wasteful, unnecessary, and could prohibit the economy from the full recovery which we are on the verge on hitting. Unemployment has almost recovered, GDP is strong with projections having just been increased to 9% 1st quarter. There is PLENTY of demand where we need to increase is supply side and that means getting people off unemployment and back on the job EARNING their money and making the products people want to buy. A huge chunk of this money doesn't even get spent for years, LOTS payback to unions and handouts pet causes that have NOTHING to do with COVID or relief or stimulus.

"Yet even if the economic outlook were as negative as the Democrats claim, Biden’s proposal would do little to improve it. More than one third of the so-called stimulus won’t be spent until 2022 or later. Public-education grants are expected to last until 2028, even as teachers’ unions refuse to reopen schools. That’s partially because $113 billion in education aid from the last relief bill remains unspent.

So too with $370 billion in state and local assistance, the lion’s share of which would sit unused until 2023. With some exceptions, state and local budgets are in good shape. The Committee for a Responsible Budget finds that state and local tax receipts grew by 10 percent in 2020. What the Democrats position as emergency relief is in fact a bailout of profligate public-pension plans and mismanaged blue states.

The money that will be spent this year — on checks to households and unemployment top-ups — is wasteful at best and contractionary at worst. Thanks to last year’s CARES Act, personal incomes are higher now than they were before the pandemic. Most Americans used the first round of checks to pad out their savings accounts and pay down debt. The second round, delivered in December, contributed to the highest bump in retail spending since 2009.

A deficit-funded subsidy to consumers might be a boon to economic growth if Americans went back to work, but the Biden administration is committed to making unemployment as attractive as possible. The proposed $400 unemployment top-ups, extended until September, would leave 60 percent of benefit recipients making more off-the-job than on-the-job. Not to mention Biden’s proposed federal minimum wage of $15, which would kill 1.4 million jobs according to the Congressional Budget Office."
https://www.nationalreview.com/2021...ough Friday 2021-02-26&utm_term=NRDaily-Smart

 

The fed doesn't plan to start increasing interest rates until the economy recovers. Until interest rates go up, investors have no choice but to try to weather stocks if they want to see a return of any sort. It will take at least a couple years to even fully understand what COVID's long term effects to the economy are likely to be. Without "stimulus" the fed may very well have to cut interest rates further, maybe even go into negative rates, to try to kick start the economy. Personally I am fine with doing nothing, but DC has a problem with patience when the House is in constant election mode.

 

Maybe that's all the more reason why it's a bad idea for the Fed to hold down interest rates, as some sort of solution to trying to help the economy recover.
For clarity, I'm not favoring interest rates being high or low, I'm just saying the Fed shouldn't be trying to exert pressure on what the interest rates are.

 

You do realize the whole idea behind stimulus assumes the economy is in a state where it can be kick-started back to some higher level to where it was before? I'll put forward that that's not always going to be the case.
There probably are some situations where the economy can't be kick-started up to any higher level (at least not sustainably).

Stimulus and low interest rates are NOT some formula for a permanent state of economic wellbeing.
If I can use the analogy, it's more like someone putting spending charges on their credit card to cover a short-term emergency.

Did it ever occur to anyone it might NOT be a desirable thing to keep throwing money at trying to kickstart an economy?

 

Lots of small and medium sized businesses have gone bankrupt. That's going to have a lingering effect on the economy, likely for several years, even if the pandemic ends.

However, it's probably not economically practical to keep these businesses in business, with the conditions lasting as long as they have. (i.e. no overall economic benefit to giving them free money just so they can stay open, despite business loses, since the costs of staying open for such a long time period are high)

 

Biden was just elected, so this should be interesting.
Normally this push to try to pump up the economy comes right before election time.
I don't know if they can use these tactics to keep the economy pumped up for 4 years, and if they can't there's not really a political election benefit to doing so.

One can only assume these people genuinely believe low interest rates and lots more stimulus thrown out there are going to rescue the economy.

 

Yeah, but the Left has traditionally been the side more favorable to Supply Side economics.
(And right now they have more control in government than the Right, to state the obvious for anyone reading this who doesn't keep up with US politics)

 

trump gave more.

 

We've already discussed this in other threads.
Trump just did that as a political talking point to try to make the Democrats look bad.
It was right before the election and he wanted to get maximum appeal to swing voters who may have been on the fence. And his proposal cut out all the special interest spending, to make the point that the Democrats were more in favor of spending on special interest pet causes than they were of a bigger relief package.

Trump's plan would have given each person more money (directly), but Biden's plan (now) spends more money.

Sorry to go off-topic, but dairyair, you have a habit of bringing up things in short rebuts that require a lot of explaining from the other side, to put them in proper perspective.
(It's kind of disingenuous or borderline trolling, in my personal opinion, but at the very least it's unfair, and kind of leads to threads getting pushed off-topic)