May 2021 Perspectives Newsletter

At the time of this writing, 145,000,000 Americans have received at least one vaccination shot against COVID-19, representing 43% of the population. Ninety-one million people, or 29% of our population, are now fully vaccinated. The temporary pause in the Johnson & Johnson vaccinations caused an 11% reduction in the five day average daily inoculation rate; however, the average remains above 3.0 million per day. Assuming that there aren’t further events to erode the adoption rate, current models have us approaching a 70% fully vaccinated population by the end of July. Though the research on effectiveness of antibody suppression of the disease for those who have previously contracted COVID-19 is incomplete, by July it is probable that an additional 32.0 million Americans will have recovered from the disease and will have some level of immunity as a result. The aggregate of those immunized and those with antibodies will approach 80% of the population. While it is natural for the media to focus on the extremes, exceptions, irregularities and the outright bizarre oppositions to vaccinations, the data is currently confirming that adoption is steady and the range in rates of vaccinations between states is pretty similar. There are a handful of states at the 50% level, most are in the low to mid 40% range, while a few are slightly below the average of the entire population. Consistency remains important because people travel and exposure doesn’t stop at state lines.

It is natural that COVID-19 fatigue increases the closer we get to higher levels of immunity. We are now in our 15th month of our war against this pandemic and the COVID-19 virus. States will begin more aggressive relaxation of restrictions as immunity grows, partly due to the recommendations of the CDC and partly due to economic pressure and COVID-19 fatigue restlessness. Relaxation of restrictions will have an incrementally positive impact upon employment statistics, economic activity and consumer confidence. I used the term incrementally intentionally, as we shouldn’t expect that the often used terms of “opening the economy” will result in significant changes in employment and consumer data. As is often the case in economic recoveries, the final 2.5% improvement in the unemployment rate comes grudgingly slow and the reduction of unemployed to the pre-pandemic low of 5.7 million from the current 9.7 million will be achieved in small increments of 60,000 per month rather than 600,000 seen earlier in the recovery.

The majority of the remaining unemployed currently seeking work were employed in small businesses associated with hospitality, food and beverage and travel. Many of their former employers are bankrupt and out of business. The shift in opportunity, and skill set will be challenging given the absence of employers. New guidelines released this week for SBA programs targeted at these industries suggest that the SBA now understands the issues. They have specifically created requirements for applications that focus on businesses not owned by larger joint ventures and corporations, but rather individually owned and at risk. Reverend Martin Luther King Jr. was credited as saying “The time is always right to do what is right;” however, this targeted assistance should have been enacted on the front end of the COVID-19 SBA assistance cycles. Unfortunately, for many small individually owned businesses in these industries time has run out, and so has the opportunity for those that fed their families by being employed in these businesses.

The Consumer Confidence Index rose to 121.7 from the March reading of 109.0. Optimism about the forward cycle grew moderately, while the short term outlook remained stable. Results were augured by continued expansion of unemployment benefits and optimism about vaccination trends. The test for recovery remains in the future. Organic economic growth must be the result of consumer confidence driven by employment and demand. Q1 of 2021 advanced GDP releases indicated the economy grew, as measured by GDP, by 6.4%. Fed Chairman Powell, however, was quick to caution that COVID-19 stimulus was supporting this growth, and ultimately organic growth must take the place of government stimulus, which is why the Fed is sticking to a steady approach to interest rates — further signaling that inflation at a 2.5% annualized rate is both manageable and desired.

Presidents earn political capital over hard fought elections, and they lose the political capital that they have earned very quickly. It is why all Presidents lay out a 100-day agenda and try to go big on legislative initiatives that respond to those that elected them and solidify their base in preparation for the ever present next election cycle. Three of the last four Presidents have had huge economic challenges that sucked the wind from their first one hundred days. President George W. Bush, President Obama and President Biden had either deep recessions or pandemics to battle as they took office. Both Bush and Obama earned enough political capital to achieve a second term, but neither achieved their desired legislative agendas in their eight year terms. Historians will have an easier time — in the luxury of the longer term rear view mirror — parsing out the reasons why their agendas weren’t achieved, but it seems clear that economic, global or domestic crisis can derail political strategy and lay waste to platform promises. The erosion of political capital is also amplified by the opposition’s seemingly increasing knowledge that the most important election cycle is the midterm election following the presidential election and, thus, their only obligation is obstruction not governance. By the way, this strategy is equally employed by both parties.

On April 28, President Biden addressed Congress and revealed his plan for the next budget year which begins October 1, 2021, but he also introduced his robust agenda titled the American Family Plan. Both his budget and the American Family Plan come on top of the $1.9 trillion stimulus plan passed upon party lines by Congress. The combination of the stimulus plan, increased discretionary budget spending proposal of $300 billion and his American Family Plan at $1.8 trillion is nearly $4.0 trillion dollars of additional spending over the next decade. President Biden’s stimulus plan is focused on infrastructure, though the opposition quickly argued that the details were not consistent with their interpretation of infrastructure. His American Family Plan focuses on child care, universal pre-school, paid family leave, free community college and eight hundred million dollars in tax cuts and tax credits for working class families, whose definition hasn’t been clarified, but will probably land at taxable incomes below $100,000 for a family of four.

Assuming the merits of the infrastructure and American Family Plan are solid, the obvious question is “How will we pay for it?” In the current fiscal year, our federal budget is approximately $4.4 trillion. Federal income will land at approximately $3.5 trillion, thereby adding close to $900 billion to the deficit prior to stimulus spending. Clearly the current level of spending is unsustainable, and the gap between spending and income will ultimately require a solution before additional spending earns a place at the proverbial negotiation table. How does a President in the later yet critical stages of a pandemic and economic recovery garner the political capital to achieve the legislative success necessary to pass broad expensive and expansive government programs even if they have important benefits for the country?

Thus far, the answer seems to be focused on the top 1% of earners. We have 335,000,000 American citizens and, as of the 2019 tax year, 153,000,000 taxpayers. The top 1% of earners represent 1.6 million taxpayers and thus relatively few votes, though they have substantial influence in party politics on both sides of the aisle. The most important question, though, isn’t the political will necessary to achieve the fiscal capacity to pay for these programs as well as deficit reduction, but whether or not the top 1% have the capacity to do it. I would be the last person to suggest that politics pays attention to facts, but it is always interesting to check the math.

Individual federal income taxes account for about $1.5 trillion annually or 36% of the federal budget. Payroll taxes provide roughly $1.6 trillion dollars annually and US(C) corporation taxes contribute approximately $252 billion or 7% of federal budget revenue.

Current proposals to pay for the additional $4.0 trillion in program spending target three solutions: higher marginal income, capital gains and payroll taxes on the top 1% of earners, and elimination of the step-up allowance on inherited assets and higher corporate taxes. Aggregating $400 billion in increased annual tax revenue from the identified targets suggests that the $870 billion dollars of tax revenue paid by the top 1% and C corporations will have to increase by 46%. Federal tax policy is far more nuanced and complicated than what I have laid out, however, in the end the math must be accounted for. Not doing so is what brought us to our current deficit level. The math calculations are in no way critical of the desired investments of President Biden’s proposal. I actually like the idea of investing in education, making college and technical school opportunities more accessible, and improving childcare for families and healthcare for all. I want greater investment in our ports, highways, airports, utility grids, internet structure and National Institute of Health. All of those investments make sense. What seems lacking at this point is the math that realistically shows a pathway to paying for those investments.