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August 2020 Economic Roundup

STATE SPENDING

From 4/1/20-6/30/20, state and local tax revenues will fall by $150 billion, exceeding the $100 billion decline experienced during the entire Great Recession. Moreover, spending has soared as states boost expenditures on unemployment insurance, healthcare and police. Worse, budget shortfalls will be large even in FY21 and FY22, necessitating draconian cuts to public services during a recession/pandemic as most states must run balanced budgets. Quick federal aid will be necessary to stave off further negative repercussions to the economy.

HOUSEHOLD HOLDINGS

In the Great Recession of 2008-9, household net worth declined by more than 80% of annual income. In the current recession, household wealth has fallen by 20% of income, which is one-fourth as much. This is due to several factors, including a fast-moving and hard-driving central bank; massive and near-immediate federal assistance to households and businesses both big and small; and forbearance/eviction relief. Collectively, these programs stabilized stock and bond markets and, in turn, housing markets.

PAYCHECK PROTECTION PROGRAM (PPP) PARADOX

Businesses that received most of the $500 billion in PPP money laid off fewer workers between late February and early April, when the PPP money first became available. Ironically, those businesses happened to be in sectors untouched by Sars-CoV-2, which means they were less likely to reduce headcount as a result of the pandemic. That said, the PPP funds may have reinforced decisions by business leaders to keep headcounts unchanged.

CARBON COMPLICATIONS

The "rebound effect" in energy conservation occurs when monetary savings achieved via conservation result in other types of spending that actually boost emissions. This negates about 59% of emissions reduction, according to research. A second phenomenon is "moral licensing." This occurs after the purchase of energy saving light bulbs or reusable shopping bags is followed by the purchase of energy intensive products such as red meat or aluminum foil.

STRANGE SPENDING

At the beginning of the global pandemic, spending by the poor (bottom 25%) fell by 23% and the wealthy (top 25%) fell by 31%. Spending by the poor has recovered, while among the wealthy, it remains down 17%. It seems that the wealthy elect to self-isolate by not frequenting high-contact service providers like beauty salons and restaurants. This, in turn, increases unemployment for such workers, who tend to be poorer.

 

Source: Elliot Eisenberg, PhD is Chief Economist for consulting firm GraphsandLaughs, LLC, serving a variety of clients across the United States. All rights reserved.

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