The Fed isn’t Saving Us. The $600/Week Unemployment Benefit Is. It Lapses July 31. Does Congress Screw it Up? I Fear They Will.

Next month, Congress risks making an epic policy error.  Will they let the $600 a week unemployment benefit lapse in July? It only require a failure to act.  And politicians are pretty good at failing to act…

That extra $600 a week is carrying a lot of the economy’s weight right now.  Most obviously supporting consumption.  But also carrying asset markets dependent on consumer rents and debt payments – credit cards, auto debt, mortgage debt, student loans are the biggies.

The weekly checks are doing the heavy lifting, but the Fed is getting the headlines.  I worry the Fed myth is so strong that Congress fails to act.  Pitching us into free fall.  Similar to Congress’s original failure to pass TARP – hoping the Fed could keep doing all the work – in 2008.  I worry Congress will make that error.  Why?

1).  There is so little coverage and focus on that $600.  When it is mentioned, the focus is on the partisan dynamic and/or how many people are “making more on unemployment than they would if they are working.”  The catastrophic, immediate risk of letting it lapse isn’t part of the dialogue.

2).  Faith in the Fed is so strong.  In popular myth, a wall of Fed money has saved us in every past crisis.  So why not just sit back and let the Fed do its magic once more?  Avoid the tough choices?  That is OK if Fed intervention is “working” mostly by impacting the real economy.  It is not OK if Fed intervention is working mostly by lifting animal spirits while that $600 a week benefit keeps the real economy limping along.  If the Fed is just the Wizard of Oz – an old man behind a curtain – the Wizard can’t save us.  We must save ourselves.  Dorothy and the Cowardly Lion figure that out.  But what if we don’t?  See my prior posts for more on Fed impotence.  Or just note that the Fed hasn’t actually done very much real-world buying or lending of any real money so far.  Outside of emergency dollar swaps with other central banks, it has all mostly been moral suasion and animal forces to date.

3).  That $600 benefit is hated and feared by a lot of core Republican paymaster constituencies.

  • Business owners hate it because it raises the prevailing wage.  They recognize it is a back-door route to a $15 minimum wage.  Which is a lot closer to a living wage.  Which is a lot more efficient than my paying taxes to top up the meager wages of people who don’t earn a living wage – taxes to fund food stamps, free school meals, section 8 housing vouchers, etc etc. But a lot of businesses would prefer to keep “those people” down, dependent on capricious government programs, and docile.
  • A lot of Red states like the out-of-State Federal subsidies (from blue states) that help pay for those programs. This dynamic gets overlooked in the whole “makers vs takers” debate.  But us well meaning liberal types are the ones writing those checks.  To folks who delight in biting the hands that feed them.
  • Older, affluent people are terrified of inflation.  Raising the prevailing wage would, eventually, feed through to higher prices.  The economy as a whole would benefit massively from higher inflation.  We are teetering on the precipice of deflation as it is.  But affluent older folks would suffer from inflation.  And older affluent folks vote Republican.
  • Racism.  A lot of Republicans just like anything that keeps “them” down.  More to the point, the vicerally attack anything that might help “them.”  And lets not pretend “they” aren’t poor and non-white.   Most Republican’s airbrush out all the white faces in any picture of the poor.

Democrats love that $600 a week because the longer it goes on, the further it drives us further towards a $15 minimum wage. It also validates the need for fiscal policy responses to futre crises.  And helps their core voters most.  All of which are further good reasons for the Republicans to hate it.

But won’t Trump prove the deciding vote?  Just push it through?  He just wants to get re-elected.  Any checks going out now are good checks, right?  Yes, but Trump has been utterly silent on the subject so far.  While at least some of his advisors – serving the interests above – seem inclined to kill it (see below).  Trump doesn’t necessarily listen to his advisors, but if he hasn’t yet figured out how critical it is to his future, we’re on pretty thin ice.

Kudlow said the $600-a-week bonus payments made to some Americans laid off during the coronavirus pandemic will end as planned on July 31 to prevent a “disincentive” for workers to return the jobs market.

So that leaves us in a depressingly familiar battle.  On one side, the interests of the economy, Democrats, and the general welfare of most Americans.  On the other side, crony capitalists, affluent older folks, Red State politicians protecting their subsidy streams, and a decent-sized minority of racist deplorables.

Which side wins?  Ask yourself which side has has won in the past?  Now you see why I’m worried.

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