Everybody is a socialist during a crisis
Bernie Sanders won’t certainly clinch the Democratic nomination, but he’s already won the elections. If politics is contestation for narrative dominance, he’s already home and dry. Free healthcare for all, direct transfer of wealth to the poor, free university education and a huge fiscal stimulus to help the 99% are all likely policy decisions that will be taken in the next 60 days. Like Gandhi, Bernie should stop aspiring for public office, declare victory and go around the US distributing free copies of Das Kapital while threatening the Congress and the President with the oncoming revolution.
He needn’t worry. Everybody is a socialist during a crisis.
Take the US airlines industry, standing right in front of the bailout soup-kitchen queue and demanding US$ 50 bn to rescue their industry (like Trump said, “no fault of theirs”). Over the last 6 years, they have been using spare capital buying back their stocks (American Airlines bought back US$ 16 bn during this time), raising EPS and paying their leadership teams nice bonuses. All the while piling on debts to overhaul their aircrafts or buy new ones. No one is flying now so there’s no revenue, no cash in hand and there’s interest to be paid. Dial 1-800-taxpayers.
Anyway, my theory is Trump wanted a bailout of US$ 500 bn for his industry friends. That obviously wouldn’t fly with John Doe. He would merely point out what’s the point of the bailouts if I don’t have money to buy things. So, Trump added another US$ 500 bn that he will send to the homes of ordinary Americans. To misquote Dirksen, a trillion here, a trillion there and pretty soon you are talking about real money.
Trump has gone full Castro to win a second term. Biden is winning the Dem ticket positioning himself as a moderate. Bernie wins nothing. Except everyone is a socialist now. Reminds me of VP Singh and Mandal Commission. Before the implementation of the Mandal report, different parties had stands that spanned the entire reservation spectrum. After it, there could only be one public stand. VP Singh didn’t come back to power again. But he won for the foreseeable future.
In summary, you can’t roll back populism in a democracy. There’s a policy lesson there.
How do you distribute US$ 500 bn?
A standard public policy 101 class has this case scenario. You have a gazillion amount of money that you want to distribute among citizens in a country. How would you identify the beneficiaries? There are many ways of doing it – from random lottery to equal distribution among all to some kind of merit-based approach. I kind of remember some 13 ways that are available clustered around the ways of distribution, recipient model and some kind of value-based approach.
The Trump administration has announced they will distribute US$ 500 bn over the next few weeks in two equal tranches to American citizens. The only thing I have heard so far is this will exclude millionaires which is a bit sad for Adam Neumann (Softbank seems to be backing away from the WeWorks deal and the man must be looking for a dole). Every public policy enthusiast will be keeping an eye on how this will play out over the next few weeks. Because there will always be questions. First, no matter how elegant and logical a scheme you design there will be aggrieved groups who will question the fairness of it all. This will lead to another set of protests. Second, considering about 120 mn US households that will qualify, the range of benefits each household will get will be between US$ 3000 – 5000. That should take care of an average household for a couple of months. What if the pandemic continues beyond that?
Once you have opened the tap, how will you close it? My view is to expect US$ 250 bn tranches for a while till the US economy is back on rails. Of course, the Federal debt and the fiscal deficit balloons unchecked. But who cares?
Giant Ponzi scheme
One theory about fiscal deficit is that it is a Ponzi scheme. The government keeps running up a fiscal deficit by spending more than it earns. It keeps printing money and kicks the can down the line. Like Ponzi schemes, the last person will be left holding the can and will lose his shirt. The problem with fiscal deficit Ponzi scheme is that last person will be someone’s grandkid half a century later. You don’t know her, and it is difficult to worry about the well-being of someone who is not born yet. That’s why human species finds it difficult to act on things like climate change whose benefits are uncrystallised and way into the future while the immediate benefits of present ‘development’ are visible and real.
The economist Graciela Chichilnisky once calculated “the present value of earth’s aggregate output discounted 200 years from now” and arrived at a figure of a few hundred thousand dollars. To put that in context (paraphrasing Chichilnisky), standard economics suggests the world today wouldn’t pay anything more than the cost of an apartment in mid-town Mumbai to prevent our species to be wiped out in two hundred years.
Little wonder we add to giant Ponzi scheme of fiscal deficit everytime there’s a crisis. Also, that’s why climate change deniers will always hold an upper hand.
Negative Interest Rates
The Fed cut interest rates to zero on Sunday. This is a good ploy by Fed. We’ve done all we could; now it is in your (government’s) court. The government then has to act on a fiscal stimulus. It has no other option. It is doing so.
The Fed has the option in future to go for negative rates. You can’t rule that out. Of course, then you would be better off taking your money out of the bank and stashing it inside your mattress. The economy might be tanking but you will get a good night’s sleep.
Isn’t that why you worked hard to earn all that wealth?