The Capital Letter: Stimulus Politics, Taxes, Big Tech & Deficits

Sen. Majority Leader Mitch McConnell (R-KY) speaks to the media after the Republican policy luncheon on Capitol Hill in Washington, D.C., September 22, 2020. (Joshua Roberts/Reuters)

The economics and politics of stimulus, taxes everywhere, the tech wars, the deficit, South Sudan, and more.

Writing in this space this time seven days ago, I agreed with Mitch McConnell when he said that a coronavirus stimulus package was “unlikely in the next three weeks.” Despite comments yesterday from Treasury Secretary Mnuchin that President Trump will press Senate Republicans to accept a massive coronavirus relief package if a deal (probably of around $2 trillion) with Democrats emerges, my view on the likelihood of a deal has not changed. I don’t think McConnell’s has either.


McConnell said last month that the idea a $2 trillion bill would be considered the a GOP-controlled Senate is “outlandish.” McConnell said that the Senate will vote on its own slimmed-down coronavirus relief proposal later this month. He told reporters in Kentucky on Thursday that “we’re in discussions with the secretary of the Treasury and the speaker about a higher amount,” but said “that’s not what I’m going to put on the floor.”

When specifically asked if there could be a compromise within a $2 trillion range, McConnell said “I don’t think so.” “That’s where the administration’s willing to go. My members think what we laid out, a half a trillion dollars, highly targeted, is the best way to go,” McConnell said.

I cannot help wondering whether McConnell has read the polls, decided that a Biden victory lies ahead, and is now maneuvering for a post-Trump world. If that is the case, my suspicion is that it will be more uncomfortable than he imagines. I cannot help thinking back to the prediction made by Ted Cruz (also noted in last week’s Capital Letter), which was that Republicans could see “a bloodbath of Watergate proportions” if voters were “angry and broke” when casting their ballots this year.

In an editorial over on the home page this week, NR’s editors were not unsympathetic (in fact, the opposite) to the idea of a more carefully targeted relief package, but added:

The federal debt remains a long-term concern, it shouldn’t foreclose economic assistance during an unprecedented public-health emergency. No less so because fiscal inaction would, according to Goldman Sachs Research, cut fourth-quarter economic growth in half, reducing long-run tax revenues and exacerbating the debt issue. The protracted economic damage of widespread business closures and high unemployment far outweighs the cost of additional spending, especially at a time of near-zero interest rates….

The COVID-19 pandemic and the resulting economic disruption are far from over. Washington should act like it.

So far as economic disruption is concerned, the latest signals have been mixed. As I write (12:45 p.m.), the S&P is (very) slightly down on the week, but up 0.36 percent on the day, encouraged by a strong retail sales number, although, as The Wall Street Journal highlighted, this may have been a catch-up after a disappointing August:

The Commerce Department on Friday reported that retail sales rose a seasonally adjusted 1.9% in September from a month earlier, easily besting economists’ expectations for a 0.7% gain. It was also a step up from August’s disappointing 0.6% gain.

Among the standouts were department stores, which registered a seasonally adjusted 9.7% gain on the month, the category that includes sporting-goods stores, which rose 5.7%, and clothing stores, with an 11% gain. Department-store and sporting-goods-store sales fell in August, while clothing stores managed a gain.

Over on Twitter, Mercatus’ David Beckworth noticed another encouraging data point. Household nominal income growth expectations have picked up sharply (something that might defuse some of that anger that Ted Cruz was worrying about), but then Cato’s George Selgin wondered what assumption (if any) these forecasts made about future stimulus (relief) measures. Good question.

Less encouragingly (via The Wall Street Journal):

U.S. industrial production fell in September, snapping four months of growth, in another sign of a slowing recovery.

The Federal Reserve on Friday said its index of industrial production—a measure of output at factories, mines and utilities—fell a seasonally adjusted 0.6% in September, following an unrevised 0.4% rise in August. Output remains 7.1% below where it was in February, before the pandemic hit, the Fed said.

The decline in industrial production shows “a concern that the industrial recovery appears to be stalling with output well below its pre pandemic level,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in a note to clients.

Whatever happened to that “V”?

Also from the Journal:

The number of Americans filing new applications for unemployment benefits rose last week to the highest level since late August, with fresh layoffs adding to other signs the economic recovery is losing steam as the coronavirus pandemic continues.

Claims increased to 898,000 last week, holding well above the pre-pandemic high point of 695,000, the Labor Department reported Thursday. After declining from a peak of near 7 million in March, weekly claims have clocked in between 800,000 and 900,000 for more than a month as companies readjust their head counts.

Weekly figures can be volatile, but the four-week moving average for claims rose as well, to 866,250, a sign more workers are losing their jobs.

“We’ve seen a number of large firms report layoffs, some of it because the pace of recovery is slower than maybe they had hoped for,” Ms. Bostjancic said.

A Wall Street Journal survey found more than half of business and academic economists polled this month said they didn’t expect the labor market to regain all the jobs from the pandemic until 2023 or later. That is a slower timeline than economists predicted six months ago.

Not for the first time, I fear for the sanity of some economists. An economy cannot just be switched off and then on just like that. As I’ve mentioned before, the shutdowns in March were, in more senses than one, like the tearing of a spider’s web. An economy, like a spider’s web, is made up of countless intricate connections: It was always going to take time to put right. A long time.

The Journal:

Multiple factors are converging to hinder the economic recovery. For one, states are lifting restrictions on business activity more slowly than in the early summer and as the rate of new coronavirus infections accelerates. Many types of in-person services—such as travel, live entertainment and indoor dining—are still closed or operating at limited capacity. Many consumers remain cautious about resuming their pre-pandemic spending habits. Economists say the pace of the jobs recovery now depends largely on whether businesses see demand for goods and services pick up.

I suspect that something else is at play, something hinted at in the phrase “states are lifting restrictions on business activity more slowly than in the early summer.” Companies deciding whether to hire or invest, and consumers wondering whether to buy, have to contend not only with the fear of a resurgence of the coronavirus, but also the fear of a resurgence of an incompetent government reaction or, quite possibly, overreaction to it.

Completing my gloomy reading of the Journal today was this:

Emergency pandemic relief doubled the savings of unemployed Americans over the spring and summer, but most of that cushion was depleted by the end of August, new research shows.

In a study released Friday, economists at the University of Chicago and JPMorgan Chase Institute looked at how economic-relief measures enacted this year, including an extra $600 a week in jobless benefits and one-time $1,200 payments to most households, affected the savings and spending of unemployed workers.

They found that workers who had received benefits pulled back spending moderately in August, after the extra $600 benefit payments expired July 31. In the first month without the extra payments, they also spent about two-thirds of the savings accumulated during the previous four months…

The findings may help explain why overall household spending in August was stronger than economists expected, despite a drop in incomes after unemployment checks shrank. They also point to a vulnerability for the U.S. economy in the months ahead: With savings dwindling and no further economic relief in sight, nearly 11 million jobless workers may curb spending even further or fall behind on debt or rent payments.

What was that Ted Cruz said about “broke”?

Forget everything I have just written. We opened the week on Capital Matters with Alexander William Salter arguing against, well, stimulus:

In theory, fiscal policy — that is, spending by Congress designed to give the economy a shot in the arm — can achieve desirable macroeconomic goals, such as lowering unemployment. In practice, however, it rarely works. Effective fiscal policy, as economists say, should be ‘timely, targeted, and temporary.’ Unfortunately, we have no reason to expect any of these conditions to hold, given the dysfunction in both Congress and the White House. Economic indicators suggest businesses and households have weathered lockdowns, and GDP growth has picked up. The timeline of negotiations means that assistance would be delivered early next year, past the point of timeliness…

There are two additional problems with fiscal stimulus. First, it usually reshuffles resources rather than putting idle ones to work. As Thomas Hogan, a researcher at the American Institute for Economic Research and former chief economist for the Senate Banking Committee, writes, “Targeted fiscal policies benefit particular groups of citizens, such as the relief programs for out-of-work Americans. But such policies require Congress to decide who receives funds and who does not, which is less efficient than distributing funds through monetary policy and the financial system.” Hogan concludes that “Fiscal policy is not effective at influencing aggregate demand. It is not an effective complement to monetary policy by the Fed.”

Second, fiscal expansion makes our dire deficit situation even worse. The CBO projects a record $3.3 trillion deficit for 2020. Ineffective policy is bad enough. But ineffective and expensive policy is simply intolerable.

And as for the Fed chairman calling for more fiscal stimulus, let’s just say that Salter is not impressed.

On the other hand, on Friday Robert VerBruggen looked at the Chase data on the supplementary federal relief (the $600 top-up and so on) that I mentioned above and concluded:

One takeaway is that it might not have been such a bad thing for Congress to pause the boost for a while, given how generous the boost was and how much was saved — though of course that doesn’t help people who lost their jobs after the expiration. The other, though, is that the accumulated savings are probably gone by now, and the economy is far from fully recovered, with an unemployment rate of about 8 percent in September. Congress really should get its act together and pass another, smaller round of stimulus to get us through this (hopefully) last stretch of turmoil.

Hopefully . . .

I returned to the topic of Sweden’s handling of COVID-19, noting forecasts that economically it may outperform its Nordic neighbors both this year and next. I also noted some research published in the British Medical Journal:


Objective: To replicate and analyse the information available to UK policymakers when the lockdown decision was taken in March 2020 in the United Kingdom…

The model predicted that school closures and isolation of younger people would increase the total number of deaths, albeit postponed to a second and subsequent waves. The findings of this study suggest that prompt interventions were shown to be highly effective at reducing peak demand for intensive care unit (ICU) beds but also prolong the epidemic, in some cases resulting in more deaths long term…


As one of my colleagues observed this morning, it may well be that in ten or twenty years we won’t be studying COVID-19 so much as the response to it.

Sadly, the late Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds (1841), will not be around to give us his thoughts, but I think it is fair to say that he would have been unimpressed — and unsurprised.

Joseph Sullivan, our chart guy, checked out the Biden-Harris tax plan and:

No one can doubt that Joe Biden plans to raise taxes on households earning over $400,000. The question is how the Biden-Harris tax plan, if implemented, would affect households earning less than $400,000. On cue, during last Wednesday’s debate, Senator Harris and Vice President Pence sparred over the subject.

The answer? Most households would face a tax increase under the Biden-Harris tax plan. In fact, as the chart shows, unless your household income is less than $45,600, there is more than a 90 percent chance that the Biden-Harris plan, if enacted, will raise your taxes. In the exact middle of the household income distribution, over 95 percent of households can expect a tax increase if the Biden-Harris plan becomes law. Overall, 82.6 percent of American households can expect a tax increase.

These estimates come from the Penn Wharton Budget Model at the University of Pennsylvania’s Wharton School of Business, not exactly a friend of President Trump’s economic agenda.

Michael Strain wasn’t too enthusiastic about the Biden tax plans either:

A top priority of the Biden White House would be to raise taxes on high-income Americans and corporations. This is wrong-headed. Hiking taxes while the economy is so weak would set the recovery back by leaving people with less income to spend. And a President Biden would only have so much political capital. His first priority should be to use that capital to advance the recovery by supporting the economy’s productive capacity.

And even in a strong economy, the corporate tax rate should not be increased.

And I looked at plans to increase taxes in Illinois:

Rather surprisingly, Illinois’s state income tax is a flat tax, charged at 4.95 percent. That may change if a ballot measure for November proposed by the state’s Democratic governor, J. B. Pritzker (a billionaire from the Hyatt hotel dynasty), and backed by the Democratic legislature, is approved. The measure would replace the flat rate with a “progressive” structure topping out at 7.99 percent, the so-called “Fair Tax.” There will be a new lower rate of 4.75 percent, but observed the Wall Street Journal, “taxpayers in that range can expect savings barely enough for an order of deep-dish pizza.”

Flat taxes are, in my view, a good thing . . .

And then I turned my attention to Arizona: Arizona!

California, to be expected, Illinois too, but Arizona? It’s a measure, perhaps, of that state’s changing politics that it may soon be seeing an increase in income tax — and not a small one.

Writing before Twitter took what CEO Jack Dorsey later described as “unacceptable” and “wrong” actions with respect to the New York Post’s story on Hunter Biden, Iain Murray worried that Republicans were in danger of joining Democrats in getting it wrong on high-tech:

Before the highly publicized release last week of a report on “Big Tech” by the House Judiciary Subcommittee on Antitrust, a draft minority response was leaked to Politico. It represents an attempt to square a circle — agreeing with the majority-staff report that Big Tech is an antitrust problem, but rejecting most of its big-government solutions. However, even that rebuttal concedes far too many points. Conservatives should be wary of letting their anger with Silicon Valley’s liberal leanings lead them to compromise on principle.

To begin with, it is significant that ranking member Representative Jim Sensenbrenner did not author the draft response. Sensenbrenner said during the recent Big Tech hearings that he is unconvinced any changes to antitrust laws are necessary and that existing antitrust laws are sufficient to deal with any problems that regulators might find. He is right on this, and conservatives should do what conservatives are supposed to do best — follow tradition.

Good advice, and whatever mess Twitter may have made, it still holds true. Twitter was forced to retreat within a day. Would that have occurred if government had either made the sort of “mistakes” that Twitter made or compelled Twitter to block the material in question? The question answers itself.

Taking a step back Robert VerBruggen surveyed five lines of attack that big tech is facing:

As Big Tech’s power grew, pushback became inevitable. And in recent weeks, no fewer than five different assaults on the industry’s largest players have burst into the news cycle. Three different legal campaigns are underway, legislators are proposing changes that would make such suits easier in the future, and a Supreme Court justice thinks the judiciary has given tech companies more leeway than current law requires.

There are several philosophies as to how the government should treat these matters. Libertarians prefer a hands-off approach, relying on the market to discipline business. Populists left and right prefer more aggressive tactics, such as breaking up big companies so they don’t have the power to bully their competitors. Those in the middle, such as yours truly and some Republican politicians, balk at breakups but wouldn’t mind stronger rules to stop the worst anti-competitive practices.

There’s no telling where we’ll end up. But all five of these efforts, in one way or another, aim to knock tech giants off their pedestals.

In Thursday’s Capital Note I added a sixth assault — and one that is already well under way — from the EU.

Confronted by the reality of its failure to create the most competitive and dynamic knowledge-based economy in the world™ by 2010 (a year, ironically, in which the consequences of another of the EU’s adventures in central planning — the euro — had become all too visible), those leading the EU and some of its member states turned their hands to something at which they were better suited — destruction, rather than creation.

Specifically, they increasingly began turning their attention to ways in which they could hobble the high-tech giants that the U.S. kept producing. Most notoriously, they weaponized antitrust, a technique taken to absurd extremes by Margrethe Vestager, the EU’s competition chief, who argued that Ireland’s tax policy was too competitive (it was too favorable to Apple, you see). Even though the Irish government argued that it should not have the money, Vestager’s department attempted to insist that Dublin hit Apple with a retrospective tax bill of $15 billion.

This, as I noted back in July, was too much even for the usually docile European Court of Justice. It ruled that the Commission had failed to prove that Apple had received illegal state aid from Ireland through favorable tax agreements. Meanwhile, in addition to serving a second term as the competition commissioner Vestager has a new role. She is the Executive Vice President of the European Commission for A Europe Fit for the Digital Age, a pompous title, but don’t laugh too hard. When it’s awarded to a protectionist, that doesn’t bode well for American tech companies.

Although Silicon Valley is not covering itself in glory at the moment, those American politicians dreaming of tearing big tech apart should think long and hard about effectively aligning themselves with a European political class motivated not only by anti-American animus, but also by an unwillingness to accept why their failure to prepare the way for high tech champions was always doomed to fail in an EU in love with planning and hostile to free enterprise.

On Friday Andrew Wilford took on claims that the tech giants are monopolies:

In the wake of a recent House hearing on tech and antitrust, the Democratic majority released a report that called for a dramatic antitrust action against alleged tech monopolies. If this report focused on any other area of the economy, conservatives would be denouncing it as a dangerous and unwarranted intervention in the economy. But because many conservatives have grievances of their own against big tech companies, this dangerous proposal has largely flown under the radar.

The idea that tech companies have a monopoly on their respective industries is at the core of the House report’s recommendations, but it’s not confined to House Democrats alone. More than half of Americans support breaking up tech companies that have “too much power,” despite generally positive opinions of individual tech companies.

But the idea that tech companies have too much power generally comes from a misunderstanding of what their markets really are. After all, Facebook and Twitter are the major players when it comes to social media, but “social media” is not Facebook or Twitter’s market. Their markets are online advertising. “Social media” doesn’t make these companies money. What is profitable is the attention that they can command, which makes advertising on the platforms valuable.

That means that Facebook and Twitter are competing online not just with other social-media companies, but also with news outlets, blogs, job-search sites — any content that commands eyeballs, whether online, print, or video.

Only by using deceptive market definitions can one claim that companies such as Amazon and Apple have monopoly status.

Jerry Bowyer wrote in support of a proposed rule from the Department of Labor:

In September, the Department of Labor proposed a rule that seeks to reaffirm the principle that pension plans’ main focus should be the financial well-being of their beneficiaries, and asked for comments from interested parties. This rule aims to undo an Obama-era rule that was widely interpreted as compelling fiduciaries to vote proxies (see DOL quote below). The new rule would change that by focusing fiduciaries only on proxies that are materially relevant to the investment outcomes for those invested in the plans.

James Glassman took aim at a recent executive order on drug pricing:

In a pre-election frenzy, the Trump administration has issued a raft of executive orders on drug pricing. One is particularly dangerous: It would deter future development of live-saving medicines such as the treatments President Trump received for COVID-19.

The order, issued on September 13, would set strict price controls on drugs for America’s 60 million Medicare beneficiaries. Pharmaceutical companies would be required to charge the lowest they charge to any other developed country. The White House has proposed similar policies before, but the new order is more expansive, affecting both Part B (drugs administered by physicians) and Part D (pharmacy prescriptions) — and it would push mandated prices even lower…

There are better ways than price controls to cut out-of-pocket costs for seniors. By making it easier to bring generics to market, the White House has already increased competition and helped hold down prices. CVS Health, the largest pharmaceutical benefit manager, reported that for 2019, drug prices fell 0.1 percent and even prices of the most innovative specialty drugs rose just 1.6 percent.

More can be done. What about a ceiling on out-of-pocket Part D Medicare expenditures? Or caps on monthly spending, as some states have already enacted? Or reform of the corrupt rebate system? Or an expansion of co-pay coupons to Medicare, where they’re now banned? These changes are relatively easy, and, contrary to index pricing, they improve Americans’ health rather than endangering it.

Douglas Carr warned that the deficit bill is already being paid:

“Who the hell cares about the budget” — Donald Trump. “Debt is money we owe to ourselves.” — Paul Krugman. “Future generations will pay the price for runaway national debt.” — Heritage Foundation.

The president may be right that no one cares about the budget, but the ballooning federal deficit contributes to a ballooning trade deficit he has failed to close. The liberal economist is factually wrong; increasingly we owe the national debt to foreigners, but, more important, the deficit is coming out of the hides of U.S. manufacturing workers Krugman ostensibly supports. The conservative think tank is right that younger generations will pay for the deficit in the future, but they also are paying dearly for it now.

The common presumption that the federal deficit doesn’t matter is entirely wrong. The deficit bill is being paid now in lower investment, slower growth, and vaporization of above-average middle-class jobs.

But at least we are not (yet) South Sudan. As Steve Hanke makes clear, that’s just as well:

In July 2011, South Sudan was carved out of the former Sudan. Since then, it has been engulfed in corruption and instability. Now, it is facing yet another severe currency crisis and economic collapse. Indeed, surging prices have forced shops across South Sudan to close their doors. In the face of skyrocketing prices, customers have gone on strike.

The central bank’s most recent official inflation release, way back in April, put South Sudan’s annual inflation rate at 37.2 percent. But, since then, things have deteriorated. My measurement for South Sudan’s inflation employs purchasing power parity theory (PPP) and the use of high-frequency, foreign-exchange-rate data. This allows me to measure inflation rates for countries with elevated rates of inflation very accurately each and every day. Today, by my measure, South Sudan’s inflation rate is 54 percent per year.

South Sudan could have easily avoided this punishing inflation. On the first day of South Sudan’s formal existence, renowned currency expert Warren Coats, my good friend and colleague at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, was in residence in Juba, South Sudan’s capital city. He was operating as a consultant to the Bank of South Sudan. At that time, Warren and I were both advocating for a South Sudanese currency board. This would have made the South Sudanese currency a clone of the U.S. dollar, which would have not only ensured currency stability, but would also have guaranteed low inflation.

For those unaware of what currency boards are, don’t worry, Steve explains.

And they are well worth learning about:

For over 170 years, currency boards have had a perfect record. In total, there have been over 70 — none have failed. Even the North Russian currency board, which was designed by John Maynard Keynes in 1918 during the Russian Civil War, never faltered.  It would have been no different in South Sudan. Indeed, Sudan had a currency board from 1957 to 1960, and it worked perfectly.

North Russia, South Sudan: Two opportunities missed.

Finally, we produced the Capital Note (our “daily” — well, Monday-Thursday, anyway). Apart from the EU’s sour grapes over American high tech, subjects covered included “stakeholder capitalism”, the renminbi, the economics of vending machines, Finland’s opposition to an EU industrial policy, lessons from the Spanish Flu, interest rates at four thousand year lows, the EU’s green new deal, Isaac Newton and the coinage, Edmond “comet” Halley as the father of life insurance,  the volatility boost to bank profits, ESG (again), a defense of the financial media, why studying economics will make you rich, China bulls, the Washington Consensus, China’s COVID export surge (no, not that one) and the end of ‘risk-free’ assets.


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