FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 30, 2020

IN THIS ISSUE:

1. Findings of the Latest Consumer Spending Study

2. Surprise – The Rich Have Cut Spending the Most By Far

3. Traditional Tax Cuts & Spending Increases Aren’t Enough

Findings of Latest Blockbuster Consumer Spending Study

Brooklyn Heights, NY sits across the East River from Lower Manhattan. It's filled with multimillion-dollar brownstone residences and until recently, were loaded with Range Rovers, Mercedes, BMWs and other luxury cars. These days, however, locals report it's easy to find a parking place in Brooklyn Heights.

Observers say the brownstones are mostly dark at night, and the place is more like a ghost town. And the neighborhood's upscale restaurants, bistros, wine bars and Pilates studios are either closed or mostly empty. The problem is, the wealthy people who live there have stopped going out, thus destroying millions of service industry jobs.

That's one of the key insights of a blockbuster study that was published on June 17 by a group of economists led by Harvard University's Raj Chetty. If you don't know who Chetty is, he's a star economist and policy wonk. He and his colleagues assemble and crunch massive data sets and deliver insights that regularly shape core economic debates.

This new study focused on the economic impact of COVID-19 and the government’s response to the pandemic. On the day the study came out, Chetty participated in a Zoom webinar sponsored by Princeton University to explain all the findings of their latest research. Chetty and his team crunched mountains of data to offer some precise insights about changes in consumer spending, jobs and the geographic impact of the crisis. The result was several important findings, including some bombshells.

Surprise – The Rich Have Cut Spending the Most By Far

First up: consumer spending. Chetty said typically recessions are driven by a drop in spending on durable goods, like furniture, appliances, automobiles and computers. This recession is different, he says. It's driven primarily by a decline in spending at restaurants, hotels, bars and other service establishments that require in-person contact.

Yet what’s most surprising about this recession is the data show that the current decline in spending is occurring mostly in rich ZIP codes, where businesses have seen a 70% drop-off in their revenue. That compares with only a 30% drop in revenue for businesses in poorer ZIP codes. Normally, you would think wealthy people would be the last to cut spending in a recession. Not this time!

Second: jobs. The 70% fall in revenue at businesses in rich ZIP codes led those businesses to lay off nearly 70% of their employees on average. These laid off employees are mostly low-wage workers. Businesses in poorer ZIP codes laid off only about 30% of their employees. The bottom line, Chetty said, is that "reductions in spending by the rich have led to loss in jobs mostly for low-income individuals working in affluent areas."

Third: the government’s rescue effort. Chetty’s team concluded it has mostly failed. The $500 billion Paycheck Protection Program, which has given forgivable loans to businesses with fewer than 500 employees, doesn't appear to have done much to save jobs. When the researchers compare the employment trends of businesses with fewer than 500 employees with those with more, the smaller businesses eligible for PPP haven’t seen a significant boost after the program went into effect. It looks like the program didn't achieve its overall goal of saving jobs.

Meanwhile, the stimulus checks, while increasing spending, did not have much stimulative effect because the spending mostly flowed to big companies like Amazon and Walmart. The money didn't flow to the in-person service businesses in rich ZIP codes, which are most affected by the downturn. Overall, the federal rescue package, they found, has failed to rescue the businesses and jobs getting hammered most by the pandemic.

Finally: state-permitted reopenings. They don't seem to boost the economy either. Chetty and his team compared, for example, Minnesota and Wisconsin. Minnesota allowed reopening weeks before Wisconsin, but if you look at spending patterns in both states, Minnesota did not see any boost compared with Wisconsin after it reopened. Chetty and his team:

“The fundamental reason that people seem to be spending less is not because of state-imposed restrictions. It's because high-income folks are able to work remotely, are choosing to self-isolate and are being cautious given health concerns. And unless you fundamentally address that concern, I think there's limited capacity to restart the economy."

Put differently, as long as rich people are scared of the virus, they won't go out and spend money, and workers in the service sector will continue to suffer. Low-income workers -- especially those whose jobs are providing services in rich urban areas -- are in for a difficult recession. Many of these workers are getting a lifeline in the form of unemployment insurance, but some of these benefits will expire soon if the federal government doesn't act.

Economists have learned from previous shocks like this one that the labor market doesn't easily adjust and rebound. Workers have a hard time moving and retraining. For example, after over a million manufacturing jobs disappeared in the Rust Belt with the explosion of Chinese imports in the early 2000s, people stayed in the places that lost jobs and failed to get new ones. Unfortunately, many of them in despair ended up turning to alcohol and drugs, with tragic results.

Traditional Tax Cuts & Spending Increases Aren’t Enough

Chetty and his team’s conclusion: The traditional tools of economic policy -- tax cuts and spending increases to boost demand -- won't save the army of the unemployed. Instead, they say we need public health efforts to restore safety and convince consumers, especially the wealthier ones, that it's OK to start going out and spending again.

Until then, they argue, we need to extend unemployment benefits and provide assistance to help low-income workers who will continue to struggle in the pandemic economy. Next month, many of the federally funded unemployment benefits passed by Congress to help Americans during the pandemic are set to expire.

Chetty’s groundbreaking study provides a strong case to Washington to think about extending them. Doing so, however, is controversial and will spark heated debate in Congress.

COVID-19 Could Wreak Havoc on the November Elections

Recent political primaries in states like New York, Kentucky, Wisconsin, Georgia and others have revealed serious voting problems which have troubling implications for the November presidential election.

Among them is the fact that the number of primary polling places was significantly reduced in most states due to the COVID-19 pandemic. That meant many voters had to wait in long lines, for hours in many cases, and others were turned away when the polling places closed for the day.

In states like New York and others, there were widespread reports of voters not receiving absentee ballots they had requested. Voters in Atlanta reportedly had to wait up to seven hours to vote because of malfunctioning voting machines and shortages of poll workers.

Meanwhile, people have voted by mail in record numbers due to COVID-19 concerns, and states have struggled to process the unprecedented surge in mail-in ballots. Many voters who  did receive the mail-in ballots they requested found that their ballots cast by mail were rejected for minor errors or because they arrived too late to be counted. In some states, it’s taken weeks to count the results. All of this bodes ill for a smooth election in November.

In Michigan, for example, one million people voted by mail in the primary, a new record for the state. This November, that number will likely triple, predicts Michigan Secretary of State Jocelyn Benson, with two-thirds of the electorate voting by mail.  One of her biggest worries is whether the Michigan election system can handle that volume. “Now the system has to process three times as many [mail ballots] as it typically does,” says Benson, a Democrat.

Most other states are expecting similar rises in mail-in voting in November. It is not clear if voters realize there is a higher chance that their ballots may be rejected or could be lost in the mail. That remains to be seen.

My biggest worry is that the November election could turn into a circus, or worse. What if there is news on election night that large numbers of mail-in ballots were rejected, or if we learn later that a lot of mail-in ballots were not received in time, or simply lost, and thus were not counted? If that is the case, things could turn very ugly very quickly! 

With the widespread protests and riots across the country, the political climate is as emotionally charged as most of us have ever seen it. At the same time, supporters of President Trump and former Vice President Biden are riding high emotions.

Just imagine what could happen if it should appear that either candidate won (or lost) unfairly. The mainstream media would be quick to fan the flames, especially if President Trump is deemed the winner.

I sincerely hope it doesn’t come to that but as the recent state primary elections proved, there is a lot that could go wrong in November, and it remains to be seen how we, as a divided people, will react to it. Something to think about…

I’ll leave it there for today. Happy 4^th of July everyone!

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

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