Epic Policy Mistakes – Addendum

Epic Policy Mistakes – Addendum

Following up on my recent article, I wanted to highlight some U.S. employment and debt data to illustrate the stark difference between today’s crisis and the Great Financial Crisis (GFC).

During the GFC, the Obama administration passed a massive stimulus bill in March 2009. This package coincided with the bottom in risk assets and helped unleash the S&P into a torrid bull market.

Under today’s circumstances policymakers will be spending almost three times more than what was deployed during the GFC. But lets compare the conditions.

In early 2009, before the stimulus bill was passed, the unemployment rate was near 8%. Today it is at a record low of 3.5%! (See chart below). (It is unclear how much this will rise in the near future since the economy might recover quickly from this medical emergency).

Initial unemployment claims were also rising for many months in 2008 and 2009 before the Obama spending bill was written into law. Compare that with current conditions. Yes, claims increased by a record amount last week, but the COVID-19 virus might be an afterthought in three months, bringing claims back down near the record lows they have hovered around for several years.

Problems in the labor market are absent compared with the huge headwinds faced during the GFC.  

Importantly, while the labor market might repair itself quickly in the near future, fiscal spending will not be rolled back, leaving the economy with a huge stimulus. So why did policymakers open the spigot?

In one word: politics. Its an election year and governments are always afraid of being blamed for taking an insouciant approach toward a national crisis.

I think this could unleash a serious inflation, and also reduce the ability of future governments to respond to future crises (please see my article: “Epic Policy Mistakes”).

Last, and potentially most important, government debt is currently at record highs! When the Obama stimulus was passed, the public-debt-to-GDP ratio was about 65% (see chart below). Today it is solidly above 100%. This makes additional stimulus much more costly as it pushes the government toward its fiscal limits (there is academic literature on this point for those that are interested).

The most likely way that this huge debt pile will be reduced is through inflation. History has taught us that lesson very well (see Reinhart & Rogoff, “This Time Is Different”).