Trump’s Virus Bailout Plan
WHAT is the likely impact – domestically and globally – of the $2 trillion economic rescue package passed by the US Senate on 25 March? Hailed as being bigger than the Congressional bailout that followed the 2008 financial crash, this stimulus plan is designed to offset the negative effect of the COVID-19 virus on the American economy and stock market, and through them on the rest of the world.
Will it work? And is there more to this seeming largesse than meets the political eye? Finally, are there any unintended economic consequences we should be worried about?
Let’s begin by noting the gigantic scale of the US rescue package. That $2 trillion is equal roughly to half a year’s federal budget. Plus, it comes on top of the $4 trillion of new liquidity already being pumped into the US financial system by the country’s central bank, the Federal Reserve – equivalent to a staggering 20% of US annual output. The latter is being hosed into the banking system to guard against rising unpaid debts and to encourage cheap lending.
All of which suggests the US authorities are expecting a hit to GDP of anything up to a third of third of annual output, caused by disruption from the virus. By comparison, US GDP contracted by 13% in 1932, at the onset of the Great Depression.
Everyone is hoping (and praying) that the contraction will be short, and that the economy will rebound quickly by the end of the year – in time to re-elect Donald Trump in November. Hence the unprecedented scale of the congressional bailout. For instance, JPMorgan Chase, the US investment bank, is predicting a quick, three-month contraction of 15% of GDP, then a recovery. At least that’s the plan.
MORE THAN MEETS THE EYE
The new stimulus package is a sprawling piece of ad hoc legislation and is full of pet schemes that will take a while to dissect politically. Expect America’s army of corporate lobbyists to feed on this dripping roast. But we can outline the basic details.
The bailout breaks down into four main bits. First, half a trillion dollars for guaranteed, subsidized loans to the airlines and big companies such as Boeing. This cash will be handed out by the White House itself, with no Congressional scrutiny. This scam is straightforward corporate bribery designed to artificially boost share prices – the cash will end up as dividends to shareholders.
This part of the bailout is perhaps the biggest political scheme for buying votes in US history. Boeing’s problems have nothing to do with COVID-19 and everything to do with a company that cut corners for profit and sold airliners that crashed and killed their passengers. As a result, Boeing shares also crashed. But since the bailout was announced, Boeing’s share price has risen from $97 to $167. This airline is headed for multiple lawsuits that will bankrupt it and probably send its corporate officers to jail. But so long as this inevitable outcome can be pushed beyond the date of the presidential election, Trump wins.
The second part of the bailout consists of $367 billion in grants, soft loans and wage support to “small businesses”. This is reasonable but the definition of “small” is actually quite elastic. This has led to fears that by luring what are essentially medium-sized firms into debt to survive the crisis, an opportunity will be afforded for private equity capital to swoop in and buy them up later. This will intensify the trend towards concentration and monopoly pricing in the US domestic manufacturing and services sector – a price structure higher than in Europe, yielding monopoly profits and reducing real living standards for much of the population.
Third, the package provides one-time, individual payments of $1,200 to every adult earning up to $75,000 a year and $2,400 to a married couple making up to $150,000, with $500 payments per child. The cash grant reduces as income rises above $75,000 and phases out entirely at $99,000 for singles and $198,000 for couples without children. That amounts to $3,400 for an average American family of four – roughly £2,800 at today’s (gyrating) exchange rate.
Of course, this is actually a tiny amount if you have to live on it for even a couple of months. The grant is a headline grabber with minimum practical impact. Politically, it is designed to suggest that the impact on jobs and incomes by COVID-19 will be very short-lived – witness Trump’s fatuous assertion “it will be over by Easter”.
Finally, there are a ragbag of other provisions, some of which are actually very useful. They are what Trump and the Republicans had to give up in order to get their corporate bribes incorporated in the legislation. For instance, there’s extra cash for the Federal Emergency Management Agency towards local response efforts and community services. And $15.5 billion for food stamps. State and local authorities will receive up to $150 billion in grants to fight the virus, care for their residents and provide basic services. There is also circa $130 billion for hospitals expecting a flood of COVID-19 patients, though given the profit-driven nature of US medicine one must hold judgement as to whether or not this will benefit patients rather than shareholders.
NO EARLY RECOVERY
The weakness in the bailout package – for bye its emphasis on subsidising big businesses and share prices – is the fact it assumes the economic impact of COVID-19 will be very short term. The confused response of the markets to such a large fiscal injection suggests not everyone is convinced that will be so. There are several reasons to think this is a systemic crisis.
First, we have been living through a share price asset bubble for a decade, based on central banks printing money (aka Quantitative Easing) to create an artificial boom in equities. The virus could have burst this asset bubble permanently. If so, a lot of fictitious capital wealth will have disappeared overnight. This, in turn, will wreak carnage among investors and funds and push zombie manufacturing companies into bankruptcy. Global output and trade will not recover its pre-virus peak.
Second, the market uncertainties unleashed by the virus have led to a global flight of cash from emerging markets, and a rush into cash in the form of US dollars. This, in turn, has impacted on global exchange rates. Even if this panic subsides, it will take a long while to do so – not a matter of weeks. Investor appetite will turn risk averse. This will add to deflationary pressures.
Third, these pressures will accelerate inter-capitalist competition, in the search for scarce profits. The three big blocs – America, the EU and China – will become more introverted domestically and more willing to challenge each other globally. This makes for a very unstable world – with semi-detached Britain stranded out on its own.
None of the global growth forecasts being offered by world agencies like the IMF or OECD are worth a damn at the moment, as there is so much uncertainty regarding the duration of the crisis. But there is going to be a big dip in growth and wold GDP, and the upturn will be slow and contested. Which will trigger even bigger bailout packages everywhere.
As to wee Scotland, the world economic view assumed in the SNP’s fabled Growth Report now seems from another age. For starters, nobody cares about fiscal deficits anymore. Quite the reverse, in fact. Either Scotland adapts to this new world with radical policies or the independence project is dead. Time to get our thinking caps on.