Over the years, the federal government has spent trillions of dollars more than it brings in, wracking up big deficits even in good times, when it ought to be paring debt down.
Now, as it struggles to repair the damage from the coronavirus epidemic, it’s getting ready to spend trillions more, pushing up this year’s deficit above $3 trillion.
“It’s mind-boggling. I never contemplated this,” says Douglas Holtz-Eakin, president of the American Action Forum, who headed the Congressional Budget Office under President George W. Bush.
“I can remember the quaint days when I was being yelled at because we had a $400 billion deficit and I was the CBO director. It doesn’t look so bad right now,” he says.
The economic rescue package approved by Congress and signed into law by President Trump contains $2 trillion in tax breaks and loan guarantees, throwing much-needed lifelines to troubled airlines, small businesses, hospitals, medical supply companies and municipal governments.
And more money will almost certainly be needed in the weeks to come, as the pandemic progresses.
“We are talking about massive amounts of money compared to anything we’ve ever done in this amount of time before,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
At one time, such huge levels of deficit spending set off alarm bells in Washington, where politicians such as Senate Majority Leader Mitch McConnell routinely bemoaned the lack of fiscal discipline in government.
In 2013, when the country was still recovering from the Great Recession, McConnell told CBS News: “We now have a debt of $16.4 trillion. That’s as big as our economy. That alone makes us look a lot like Greece. We have an incredible spending addiction.”
Today, the total amount owed by the federal government is about to top $25 trillion, and McConnell barely talks about it. Neither does President Trump, who has presided over a rapid increase in debt, thanks to the massive 2017 tax cuts and a big increase in defense spending.
Part of this is just raw politics, says Dean Baker, co-founder of the Center for Economic and Policy Research. Politicians tend to focus more on deficits when the other party controls the White House.
But Baker says the past few years have also brought a transformation in the way economists think about deficits.
Once, conventional wisdom said that too much federal borrowing would drive up interest rates, leading to higher inflation and reduced productivity, Baker says. But debt has soared in recent years, and interest rates are lower than ever, he notes.
“The classic story of why deficits are bad just hasn’t panned out,” Baker says.
He is among many economists now arguing that the quick collapse of the economy and the surge in layoffs is so serious that deficit concerns should be set aside.
“The amount of employment in the economy is going through the floor. And the deficit in that context … it’s almost a non sequitur. That’s not the sort of thing you should worry about,” Baker says.
Even MacGuineas, who’s something of a deficit hawk, agrees, saying times like these are precisely when the government needs to run deficits. But she says the government is that much less prepared to deal with the crisis because of deficits run up in good times, when it should have been paying off what it owed.
“It makes sense to borrow from the future today. We have a real emergency. But it also makes it harder for us to get our economy back on track once we get through this emergency,” MacGuineas says.
Copyright 2020 NPR. To see more, visit https://www.npr.org.
Have a 401k? You Can Now Invest In Private Equity Funds
There’s good news for investors who are looking to add a little spice to their retirement accounts. For the first time ever, defined contribution plans – like 401ks – have access to private equity investments.
U.S. Secretary of Labor Eugene Scalia said in a statement yesterday that this step “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”
Typically viewed as a way to outperform the stock market, the average private equity investment has actually underperformed the stock market over the last 10 years. According to a study by Bain & Company, private equity investments returned an average of 15.3% compared to 15.5% for the S&P 500. The study does mention that top-tier private equity funds did manage to outperform the market.
Scalia’s announcement went on to add, “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
You won’t be able to invest directly into private equity funds in your 401k. You’ll only have access through specific investment vehicles like target-date funds. Defined benefit plans – like pensions – have had access to private equity investments for some time now. So, as Scalia mentions, this move now levels the playing field for investors.
Securities and Exchange Commissioner Jay Clayton supports the decision to allow defined contribution plans access to private equity investments. He also mentions that the new capital coming in will increase the funding sources available to private businesses.
How It Should Be Perceived
Investors, however, shouldn’t look at the ability to invest in private equity funds as a panacea of retirement riches.
Private equity investments are often much riskier than traditional stocks. As we mentioned earlier, they don’t always provide greater returns.
In an interview with Fox Business, Ed Slott, founder of IRAHep.com, said that investment losses in February and March may have caused a sense of panic among savers who might be searching for larger returns.
“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”
You may lose money while investing in private equity funds. When that happens, you’ll likely have no recourse against your broker or fiduciary who put you in those investments.
As part of the announcement, Slott noted that there is a “liability shield” for fiduciaries. As long as they follow the guidelines set out by the Department of Labor, they will be within their fiduciary obligations. This makes it harder for investors to sue over losses.
The ability to invest in a private equity fund is alluring. However, the best advice comes from Alano Massi, the managing director of Palm Capital Management.
“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.
- We Just Set A Record For The Greatest 50-Day Rally In Stocks
- Fed Economist: V-Shaped Recovery Requires Negative Interest Rates
- Need Income? Here Are 8 Safe Stocks That Yield More Than 2.5%
We Just Set A Record For The Greatest 50-Day Rally In Stocks
The S&P 500 just turned in its best 50-trading day rally since the index expanded to 500 companies in 1957, according to research from LPL Financial.
Over that time period, the index has returned 37.7%. If history is any indication, there are plenty more gains ahead.
LPL went back and looked at every 50-day rally since 1957 when the index expanded. Their research found that six and 12 months later, stocks were higher 100% of the time.
The average return for the six months following a 50-day rally was 10.2%. On the other hand, the average return for the 12 months following a 50-day rally was 17.3%.
After the longest bull market in history ended this year when the S&P 500 dipped all the way down to 2,191.86 on March 23, the market has been on a rocket ship higher. In just 50 trading days, the index has climbed 41.7% from the March 23 low. This puts it only 9% below the all-time high set in February.
Markets have been pushed higher by a combination of record stimulus packages and low-interest rates. In March, President Trump signed the $2 trillion CARES Act that provided financial aid to families and small businesses. Around the same time, the Federal Reserve cut interest rates to zero. Also, more recently it started directly purchasing Treasury bonds, mortgage-backed securities and even bond ETFs as it pledges an unlimited amount of asset purchases.
Uneven Recoveries Despite A Rally
While the stock market has surged higher over the last 50 trading days, recovery has been uneven, to say the least. This comes with some stocks – and entire industries – getting hammered by the economic lockdown caused by the coronavirus. Meanwhile, others, particularly those that benefit from people being home all day – and working from home – have lead the charge.
Amazon, Facebook and Netflix have all surged to all-time highs. Meanwhile, the video conferencing platform Zoom has jumped 228% this year alone.
On the other side are stocks like cruise line operator Carnival Corporation or American Airlines. Both have fallen 66% as the travel industry came to a standstill.
Despite the appearance of strength by the stock market, even the greatest 50-day rally in history can’t shake the doubters loose.
Since the rally began back in late March, the country has had more than 40 million people file for unemployment. Our country’s economic output is expected to drop by as much as 50% this quarter, and numerous CEOs refused to provide forward guidance for their companies as they just simply don’t know how bad and for how long the economy will suffer.
Throw in ongoing civil unrest and a very strong likelihood of a full-blown trade war between the US and China, and it remains to be seen if the economic recovery can continue to blossom in the coming weeks and months.
Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed
Senate Republicans have endorsed a bipartisan bill that would give small business owners more flexibility on how they choose to spend their PPP loans. However, at least one outspoken critic has said the program failed American workers.
Senate Majority Leader Mitch McConnell and Senator Marco Rubio, who chairs the Small Business Committee, both endorsed the Paycheck Protection Program Flexibility Act. This almost passed last week, in a nearly unanimous 417-1 vote.
“I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said during a speech on the Senate floor Monday.
The Paycheck Protection Program provides forgivable loans of up to $10 million to businesses. The money is for businesses with fewer than 500 workers that were affected by the coronavirus pandemic.
Originally, for the loans to be forgiven, the businesses had to abide by strict requirements. They need to let loaners know how the money could be used. Around 75% of the loan had to go towards maintaining the businesses’ payroll. This includes salaries, health insurance, leave and severance pay, as well as having to rehire workers by June 30.
Easing Up Restrictions of Programs
The bill endorsed by McConnell and Rubio that passed on Thursday would ease some of those restrictions. This includes allowing businesses to spend 60% of the money on payroll. It also includes freeing up 40% of other expenses like rent and utilities. The new bill would also remove the requirement of rehiring workers by June 30. Also, it gives businesses 24 weeks to spend their PPP money on. This is far longer than the current 8-week limit.
The new bill isn’t perfect. However, they created programs such as this in an effort to address concerns by small business owners. Many of these business owners think the loan forgiveness requirements can become too strict to meet their needs. Many are fearful of inadvertently violating the rules and being on the hook to repay the loans.
Nobel Prize-winning economist Joseph Stiglitz says that no matter how they structure PPP loans, they have failed the American worker.
During an appearance on CNBC, Stiglitz said “The problem wasn’t just the amount of money. It was how the programs were designed. Our programs have failed, and we have to admit that.”
He says the loans went to the businesses who were most connected, not the ones who were most in need.
“The businesses with the best connections with the banks, the best customers, got at the head of the line, and those weren’t the smallest businesses, they weren’t the people who needed it most,” he said.
He said a better way to keep workers employed is looking at a model from Denmark or New Zealand. In the said countries, the government paid companies directly to keep workers on their payroll.
Stiglitz added, “We just haven’t thought enough about how we get money to the businesses in ways that make sure they really keep the attachment to the workers with those businesses.”
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