Why the US pandemic response risks widening the economic divide | Free to read
We’ll send you a myFT Daily Digest email rounding up the latest Coronavirus economic impact news every morning.
Sherrod Brown, the 67-year-old Ohio lawmaker and top Democrat on the Senate banking committee, came to a virtual hearing on Tuesday with Jay Powell, the Federal Reserve chair, armed with a stark message: US policymakers, he said, risk repeating the same mistakes they made more than a decade ago.
The Treasury and the Federal Reserve had “helped financial markets and corporations” during the coronavirus crisis, he said, but “you are not holding up the other end of the deal”.
“We ask you to make sure that working Americans remain employed and safe,” said Mr Brown, who is known for his leftwing populist views on economic issues. “We saw how this all played out in the 2008 financial crisis.”
In terms of raw numbers, the US economic response to coronavirus has been overwhelming. As well as the $3tn in fiscal stimulus that has been introduced so far, there has also been a massive injection of liquidity into the financial system by the Fed. Steven Mnuchin, the US treasury secretary, has hailed the rescue effort for saving millions of jobs. “This economic positioning is the direct result of the Trump Administration and Congress working together to pass bipartisan legislation to provide necessary liquidity to workers and markets,” he said last month.
But as the initial emergency appears to pass, Mr Brown is not the only leading voice who is warning that the official response to the crisis risks widening income inequalities at a time when American society can least afford it.
While Wall Street has been stabilised by the crisis-fighting measures and companies and the wealthy have received substantial tax benefits that in some cases could last for years, the economic fate of America’s middle and lower-income households remains very much in limbo. Many of the measures aimed at ordinary people are set to fade or expire soon and, given opposition from many Republican lawmakers, it is not at all clear that they will be extended.
That uncertainty comes at a time when poorer families feel that the pandemic has disproportionately ravaged their neighbourhoods and when the country is in a ferment over racial injustice and police brutality, which has triggered mass protests in recent weeks.
The result is the uncomfortable parallel raised by Mr Brown about the 2008 financial crisis. In the immediate aftermath of the crisis, the American authorities mounted a decisive bailout of the banking sector. But that effort was not matched by sustained support for the rest of the economy.
For many economists and analysts, the lopsided response to the financial crisis led to a slower recovery, especially in wages, and fuelled a new wave of economic populism that included the election of Donald Trump. Now some believe Mr Trump’s administration risks repeating the same cycle.
“We are very much at risk of having this exacerbate inequality just like the financial crisis did,” says Heather Boushey, executive director of the Washington Center for Equitable Growth, a left-leaning think-tank. “In the US after the financial crisis, it was the wealthy who saw their incomes and wealth come back fairly quickly, in the first couple of years, while the rest of America had to wait, and for many, in fact, wealth never recovered.”
In political terms, Democrats are starting to call attention to the perception that big business and finance are getting more favourable treatment in this crisis. “People making $40,000 a year who are not in a position to pay for lobbyists, lawyers and polling firms [or] contribute to big trade associations and muscle their way around, they get left behind,” says Sheldon Whitehouse, another Democratic senator from Rhode Island.
Mr Powell, who spent more than two decades working on Wall Street as a corporate lawyer, investment banker and private equity investor, has already been obliged to defend the central bank from criticism that its actions artificially inflated equity values.
“We’re not focused on moving asset prices in a particular direction at all. It’s just, we want markets to be working and I think partly as a result of what we’ve done, they are working,” he said earlier this month.
Some analysts warn that the end of stimulus measures for ordinary Americans in the coming months is one of the biggest risks to the economy. “A political stand-off that extended into the fall could result in a slower and more painful recovery,” warns David Kelly, chief global strategist at JPMorgan Funds.
Even Mr Powell has cautioned lawmakers that they need to offer more of a fiscal cushion for those struggling to cope with the pandemic.
“I would think that it would be a concern if Congress were to pull back from the support that it’s providing too quickly,” Mr Powell told Congress on Wednesday.
Call for renewal
The Cares Act — the late March legislation that has been a cornerstone of coronavirus stimulus measures passed so far — was the largest economic rescue package in American history.
The US government’s initial spending burst this year — which has included a $1,200 cheque to every individual earning less than $75,000 per year, an extra $600 per week in jobless benefits and more than $500bn in forgivable loans to small businesses — has helped to cushion the pandemic’s blow for many Americans at the lower end of the income ladder.
The impact of those measures has already been reflected in economic data, which unexpectedly showed a rebound in job creation in May after the deep losses suffered in April.
Yet negotiations on a renewal of those key provisions are stalled on Capitol Hill. Republicans and some White House officials are holding out against additional aid for the jobless on the grounds that it disincentivises the search for work, and they oppose aid to states and local governments on the grounds that it rewards budgetary profligacy.
“We’re paying people not to work. It’s better than their salaries would get,” Larry Kudlow, the White House economic council director, said on CNN on Sunday. “The jobs are coming back and we don’t want to interfere with that process.” The White House and Republicans are proposing a compromise that includes a government bonus for the newly employed but it is unclear if that would be acceptable to Democrats, and would not help those unable to find a job.
Before the coronavirus pandemic hit, the US economy boasted record-low unemployment of 3.5 per cent. It also started to generate some wage gains for workers at the bottom end of the income spectrum — a welcome development after years of stagnation in the wake of the financial crisis.
But even those gains — which had still failed to narrow the wealth and income gap suffered by low-income households, particularly African Americans — came to a halt once the virus spread through America in March.
Not only were low-income families most likely to suffer illness and death due to Covid-19, but they were far more vulnerable to the disease’s economic fallout as they often work in service sector jobs that rapidly disappeared.
Yet crafting a policy response that seeks to address that disparity has proved difficult and could be even tougher in its next stage. The Fed itself is limited by the fact that it only has lending powers, rather than spending powers, which are the purview of Congress.
The Trump administration is dominated by economic officials, such as Mr Kudlow and senior adviser Kevin Hassett, who believe in supply-side solutions centred on cutting taxes, and are deeply sceptical of a new round of spending.
Peter Navarro, the manufacturing and trade adviser, last weekend backed a broader new round of stimulus, worth as much as $2tn, but the specific details of his proposal are unclear.
Influential Republican lawmakers, such as Pennsylvania Senator Pat Toomey, have pointed to improved economic data to bolster the argument that the spigots may need to be closed.
“I’m not for a minute suggesting that we’re out of the woods . . . [but] I would remind my colleagues there’s no such thing as a free lunch,” he said on Tuesday. “We should be very, very careful in evaluating what’s necessary before we go forward”.
The wealthy catch a break
The uncomfortable reality for economic policymakers is that while many households remain on the edge, many of the nation’s wealthiest individuals, investors and corporations have been helped by a combination of direct government bailout money, business tax breaks and the Fed’s multiple moves to shore up markets — including this week’s launch of a corporate bond-buying programme.
“Big corporations have done very well, and their chief executives and major shareholders have been bailed out, either directly by the Treasury, or indirectly by the Federal Reserve board,” says Robert Reich, the former US labour secretary under Bill Clinton.
The Fed has defended its moves by highlighting the seriousness of the market distress in March and the risks that a deeper crash would have posed for poorer households.
But the fiscal stimulus also provided great succour to higher-income families.
For individuals, the Cares Act lifted a $500,000 cap on tax deductions on business losses that had only been introduced in 2017, and allowed investors to spread out losses over five years. Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, says this “unlimited pass-through deduction”, as it is known, is a “heads I win, tails I win too” scenario for investors in hedge funds and real estate developers, who will now be able to deduct 100 per cent of their business losses to reduce taxes paid on profits made between 2018 and 2020.
Even oil and gas investors and owners of sports teams stand to benefit from the changes to business loss provisions, as they will be able to use revenue losses that occurred in recent months to receive tax deduction payments from profits booked in past years.
“We’ve shovelled billions of dollars of relief to wealthy Americans,” says Mr Rosenthal. “We should be concerned about the restaurant workers, health aides, people who don’t have shelter over their heads.”
A report by the Joint Committee on Taxation found that 82 per cent of those who stood to benefit from these provisions earn at least $1m and only 5 per cent make less than $200,000 annually. The independent congressional watchdog estimated that the tax breaks for those earning more than $1m a year would cost the government $195bn over a decade.
Large companies have also been given the option to carry back losses. The Cares Act will allow them to immediately receive billions of dollars in tax refunds by deducting any losses they made in 2018, 2019 and 2020 from taxable profits over the previous five years.
Other key tax changes have allowed companies to deduct a larger proportion of their interest payments, up from 30 per cent to 50 per cent, and to immediately offset investments made to improve property, a measure for which the retail and hospitality industries have long campaigned.
Fast-food chain Chipotle, customer review website Yelp and energy group Noble Corp are just a few among the many companies which expect to receive or have received millions in tax refunds as a result of the legislation.
Supporters of the tax benefits that companies have received in the stimulus bills argue that they will rapidly bolster the cash flow of companies at a time when their revenues are being hit by Covid-19. By throwing a lifeline to struggling businesses, these measures will also save countless jobs.
“These modifications provided much-needed relief for businesses, and there is an opportunity to build upon them in the upcoming ‘Phase 4’ economic relief legislation,” says Garrett Watson of the Tax Foundation, a Washington think-tank.
Boost for bigger businesses
The changes in the tax code are particularly advantageous for private equity-backed businesses, which sometimes operate companies at a loss, say several tax experts. Buyout groups usually use a lot of debt to complete deals and the interest payments on that debt can result in statutory losses even if their operations are generating cash. Under the new provision, they will be able to also carry the statutory loss back.
Among them are AMC, the Silver Lake backed-cinema group, which expects to receive about $18.5m in tax refunds, and Extended Stay America, a long-term lodging company backed by investment firms Blackstone and Starwood Capital, regulatory filings show.
The US government has also come to the aid of small businesses over the past few months, most notably through the $669bn Paycheck Protection Program, whose main feature is loan forgiveness if 75 per cent of the money is spent on preserving payroll.
While demand for PPP loans has been strong, even this programme has been mired in controversy over claims it has tilted towards more powerful entities. Large chain restaurants such as Shake Shack and Ruth’s Chris Steak House were forced to return the millions of dollars they received following a public backlash. Mr Mnuchin, the Treasury secretary, is resisting growing calls in Congress for the government to disclose the names of beneficiaries, on the grounds that it is proprietary information.
Small restaurants and “mom and pop” stores — for whom the aid was intended — have been hesitant to tap it. Some found the restrictions too prohibitive and could not risk having to pay back the loan within two years.
Anger has also been directed at big companies that laid off workers despite receiving government help. American Airlines and Delta, the world’s two largest carriers, have announced plans to cut thousands of jobs a month after they respectively received $5.8bn and $5.4bn in government grants and low-interest loans.
The growing criticism of the stimulus bills comes at a time when the US is mired in a much broader debate about economic justice related to structural inequalities suffered by black communities.
“For a government to use a crisis in a disingenuous way to privilege a sector of the economy that’s already privileged at the expense of the American people, that’s a gross misuse of government,” says Darrick Hamilton, economist and executive director of the Kirwan Institute for the Study of Race and Ethnicity at Ohio State University.
Veronique de Rugy, an economist at the free-market Mercatus Center, questions the wisdom of offering tax cuts to individuals and corporations in the present situation.
Latest Coronavirus news
Follow FT's live coverage and analysis of the global pandemic and the rapidly-evolving economic crisis here.
“I want as little government as possible, but I also think that it's completely unfair at a time where we've accumulated so much debt, and we've added even more to respond to this pandemic, to be cutting taxes, because future generations are going to be paying for this,” says Ms Rugy.
Michael Strain, an economist at the American Enterprise Institute, a conservative think-tank, says that focusing on limiting inequality should not be the immediate priority, arguing that other problems such as low productivity growth are more important to tackle.
But as America tries to recover from the pandemic, other economists do believe reducing disparities needs to be a primary goal.
Mary Daly, the president of the San Francisco Fed who has called for increased spending on healthcare, infrastructure and education to tackle inequalities, said this week that the US was facing an “inflection point” as its social, economic and medical crises converged. “We have to choose long-term growth, we have to choose equitable opportunity, we have to choose inclusive success,” she said. “We can’t afford not to.”