Near-Term Concerns

Chief Economist Scott Brown discusses current economic conditions.

The news on vaccines has boosted optimism for the economy for 2021. In contrast, near-term developments have been unfavorable. COVID-19 cases have surged and in all likelihood will rise further in upcoming weeks. Lawmakers remain in a stalemate on further fiscal support as a number of benefit programs and eviction moratoriums are set to disappear at the end of this month. Investors appear willing to look beyond these concerns.

As we look back on 2020, the good news is that it could have been worse. Back in April, it wasn’t clear whether the pandemic would lead to a broad financial crisis and a snowballing of economic weakness.

The Fed responded by quickly cutting short-term interest rates, restarting emergency lending facilities that it had employed during the 2008-09 financial crisis (and creating some new ones), and boosting the size of its balance sheet. The Fed’s actions would not have any impact on the virus, but the central bank ensured that the financial system would have more than enough liquidity. Some of that liquidity surely found its way to the stock market.

Lawmakers in Washington responded to the crisis with massive fiscal support, boosting healthcare expenditures, providing aid to small businesses, sending out recovery rebate checks (or depositing funds directly into bank accounts), extending unemployment benefits, and providing support to the states (who have suffered from a loss in tax revenues). The fiscal support added to the federal budget deficit, but so what? Government borrowing costs are low (ten-year projections of government interest payments are lower now than before the pandemic). That support was a key factor in shoring up economic activity in the late spring and summer.

As with any economic crisis, and government efforts to counter the downturn, there are some excesses, fraud, and abuse. Large firms were able to tap into support that should have been reserved for small businesses. The extension of unemployment benefits to the self-employed, part-time workers, and those who had exhausted regular unemployment benefits before the pandemic, led to a massive surge in claims – over six million per week in early April. State unemployment systems were not set up to handle this. Frustrated, many individuals re-filed, often repeatedly. Fraud has been noted across states. The mailbox of an unrented apartment in California received dozens of unemployment checks with different names. People who hadn’t applied received benefits (scammers had likely hoped to get to their mailbox first). The weekly claims figures, while lower than in the spring, have remained relatively high by historical standards. However, it’s unclear how much they are inflated. The number of individuals receiving some sort of unemployment benefits totaled 19.0 million in mid-November, while the official number of unemployed was 6.7 million (according to the November Employment Report). Again, this type of stuff goes on in every downturn. In the aftermath of the 2008-09 financial crisis, there was a surge in Social Security disability. Still, none of this means that unemployed workers aren’t hurting.