Macro Thinking

There is a lot of buzz going around about the size of the latest Covid relief bill and the national debt. $1.9 Trillion is a lot of money. Democrats call it the minimum amount of support needed to help individuals struggling through the pandemic, while Republicans call it a “liberal wish list” of pork barrel spending. I think we can be confident that the truth lies in between these two analyses.

There are many ways to define a modern economy. I find it helpful to think of it as the exchange of money for goods and services. Add in banks for lending and corporations for the pooling of assets, and you have dollars exchanging hands in a constant flurry of activity. Slow down the speed at which dollars move around or shrink the size of currency in circulation, and economic activity decreases.

This is why I had my moment of terror last spring, when we temporarily shut down entire sectors of our economy to combat the pandemic. If the money stops flowing around, isn’t it all a house of cards? I take this from the perspective of someone who lives in a city dependent on tourism dollars. No tourists, no hotel taxes, no sales taxes, and we’ve just blown a massive hole in our city budget. I’m not talking about funding public employee pensions. I’m talking about funding for education, police and fire protection, and critical infrastructure.

Luckily, government stepped in. We had complete gridlock in Washington DC last spring, yet Congress that couldn’t agree on anything, passed the largest (at the time) fiscal stimulus package on record. It provided direct payments, increased unemployment benefits, and funds sent directly to small businesses who agreed to keep their employees on payroll. It was designed to keep the economy afloat for a few months, when everyone assumed life would return to normal. As we know, we didn’t resume normal life last summer.

In macroeconomics 101, I learned the expenditure calculation for GDP (gross domestic product).

GDP = C + I + G +/- Net Ex


C stands for Consumption, or consumer spending, and is the largest portion of economic activity. I represents Investment by businesses and individuals. G stands for Government spending, and Net Ex is the difference between a country’s imports and exports. According to John Maynard Keynes’ expenditure theory, government can step in and bolster an economic decline by increasing its spending. Last year, we tested this theory and proved it to be right.

The question today becomes, how much government spending is too much? When will we see consequences from overspending and too much debt? Remarkably, interest payments on U.S. debt have fallen, even as the debt piles on. Lower interest rates makes borrowing less expensive. As frustrating as it might be, we cannot compare the federal budget to a household. The government does not have to live within its means, especially it times of crisis, when additional spending is needed most. And rather than retire the debt, we will continue to grow out of it, returning the percentage of debt-to-GDP to more manageable levels.

Prior to the pandemic, U.S. GDP was approaching $20 Trillion. The total Federal debt has now surpassed 100% of GDP, and is projected to reach 109% in 2021. Throw in the U.S. Treasury financing some of the debt from its enormous balance sheet, and my brain starts to do somersaults. I do not know how much is too much, but we may be testing the limits as we speak.

These are a few of my takeaways from the past year, in no specific order.

  • The Federal government can be extremely effective with fiscal stimulus during emergencies, and we are getting better with time and experience. We should embrace this concept and strive to improve its impact in the next crisis.
  • Incentives matter and should guide policy decisions as we return to normal times. It would be a big mistake to incentivize people NOT to work, but on the other hand, there are too many people in the U.S. working full-time who cannot afford the basics.
  • The divide between the ‘Haves’ and the ‘Have Nots’ grew this year, and could be the biggest threat to our society long-term. The ‘Haves’ will pay higher taxes to try to fix this.
  • There’s a lot of money floating around out there as well as a lot of pent-up demand. We should expect a boom in late 2021, continuing in 2022.
  • Inflation has struggled to get above 2% for twenty years. It’s not the end of the world if we see 3-4% inflation for a couple of years.
  • The increased Child Tax Credit is a true experiment in Universal Basic Income, and I am fascinated by it. Anyone with young children knows that child care costs are unaffordable for many families. When my daughter starts pre-school in August, my child care payments will be the largest expense in my household. If we get this right, it could be a game changer. More children means more payers into the social safety net in the future.
  • I used to worry more about the Federal deficit and the debt, but now I worry more about how to increase wages for the middle class.
  • You have to keep your head down when investors get manic over shiny objects. From Bitcoin, to GameStop, to NFTs, I would be slaughtered trying to speculate in these areas. Slow and steady, asset allocation with rebalancing, is the only way I know to grow and preserve wealth with any consistency.

Thank you for indulging me on my TedTalk about economics.



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