What would Milton do?

In yesterday’s post, I pointed out that the fear that many Americans – and in particular some GOP Senators – have about the effects of passing a huge new coronavirus relief bill aren’t justified simply by examining the facts. There’s no reason to fear that we’ll just be giving more control of our debt to the Chinese, since it’s likely that the great majority of the debt created will be held by the Federal Reserve – we’ll literally owe the debt to ourselves. There’s also no reason to fear that the huge bill will cause either interest rates or inflation to jump, since the markets clearly don’t fear either eventuality, and there’s no inherent economic reason why either interest rates or inflation should go up because of the bill.

However, I realize that it still doesn’t seem right. After all, if I decided to shore up my family’s finances by taking on a huge debt with no realistic likelihood of paying it back anytime in the foreseeable future, I’d be justly condemned – and of course I wouldn’t be extended the funds I wanted anyway. Yet it seems we’re asking for a free lunch. How can that work?

Perhaps the person most associated with the words “There is no such thing as a free lunch” is Milton Friedman, who wrote a book titled exactly that (the phrase originated long before him, though). Yet, having studied with Friedman at the University of Chicago a long time ago, I can assure you that he wouldn’t use that to argue against another big relief bill at this time – or the three other huge bills that have already been passed.

This is because you have to look at what Friedman believed was the ultimate driver of economic fluctuations: variations in the money supply. He tried to demonstrate this in his huge study (with Anna Schwartz) of the US economy since the Revolutionary War: “A Monetary History of the United States”. In that, he tried to show (and basically succeeded, IMHO) that the biggest downturns in the US economy had been driven by big drops in the money supply, or even just a slowing of the constant rate of growth that he advocated for good times and bad – around 2% a year.

When I took courses with him, he had become well known for attacking the Federal Reserve for allowing the money supply to expand too rapidly in the late 1960’s and early 1970’s. This led to a huge bout of inflation in the 1970’s, culminating in a 12.4% rate of growth in the Consumer Price Index in 1980 (which of course made Jimmy Carter a one-term president).

However, in the two courses I took with him, he regularly went off topic – the subject was microeconomics – and pointed out why the Great Depression had been so bad: The US money supply had fallen by about one third during 1931 and 1932, the last two years of the Hoover administration, by far the largest drop in history. People didn’t trust the banks and pulled their money out, making many of them insolvent. When the banks failed, the businesses that depended for them on credit failed. And the resulting unemployment simply snowballed because unemployed people don’t have money to spend.

What could Hoover have done to keep this fall from happening? For one thing, he could have just told the Federal Reserve to print lots of money and made the banks whole (even though some of them had failed because of the effects of fraudulent activity they’d engaged in, that led to the stock market crash in 1929). He could have mailed checks to everybody who was unemployed – of course, there was no unemployment insurance at the time. Even better, he could have started large-scale public works projects like those that Franklin Roosevelt launched a few years later, which put millions of people back to work.

But of course, Hoover did none of these things, because he couldn’t see beyond the prevailing ideology – and certainly the consensus of economists at the time – that, when a country starts to see tough times, it needs to do just what a family would do: cut back its spending. Unfortunately, that’s literally the opposite of what needs to be done. A dollar I send at the store is a dollar that others receive as income. If consumers are all retrenching, it’s up to government to step in and fill the gap with spending of their own. And the deeper the downturn, the greater the amount of spending that’s needed.

Of course, we learned this week that US GDP fell in the second quarter by 9.5%, or about 34% at an annual rate. This is the biggest fall since at least the demobilization after World War II, and perhaps since the Great Depression itself (modern economic statistics weren’t compiled until the postwar period). Sure, we’ve spent something like $5 trillion already. But this obviously isn’t enough, especially since employment is falling steeply again, after rebounding some in May and June. We need to spend a lot more. And Friedman would agree with this.

So is there really a free lunch to be had in this case? No. However, you could call this a lunch we’ve paid for in advance. The huge GDP drop last quarter greatly reduced overall demand. We’re just stepping up and restoring some of the demand that was lost then. The point is to do what we can to keep these from becoming permanent losses, meaning our economy and our country would be permanently shrunken, for no reason other than that we were worried about having a free lunch.

The numbers

These numbers are updated every day, based on reported US Covid-19 deaths the day before (taken from the Worldometers.info site, where I’ve been getting my numbers all along). No other variables go into the projected numbers – they are all projections based on yesterday’s 7-day rate of increase in total Covid-19 deaths, which was 5%.

Note that the “accuracy” of the projected numbers diminishes greatly after 3-4 weeks. This is because, up until 3-4 weeks, deaths could in theory be predicted very accurately, if one knew the real number of cases. In other words, the people who are going to die in the next 3-4 weeks of Covid-19 are already sick with the disease, even though they may not know it yet. But this means that the trend in deaths should be some indicator of the level of infection 3-4 weeks previous.

However, once we get beyond 3-4 weeks, deaths become more and more dependent on policies and practices that are put in place – or removed, as is more the case nowadays - after today (as well as other factors like the widespread availability of an effective treatment, if not a real “cure”). Yet I still think there’s value in just trending out the current rate of increase in deaths, since it gives some indication of what will happen in the near term if there are no significant intervening changes.

Week ending	Deaths reported during week/month	Avg. deaths per day during week/month	Deaths as percentage of previous month’s
March 7	18	3
March 14	38	5
March 21	244	35
March 28	1,928	275
Month of March	4,058	131
April 4	6,225	889
April 11	12,126	1,732
April 18	18,434	2,633
April 25	15,251	2,179
Month of April	59,812	1,994	1,474%
May 2	13,183	1,883
May 9	12,592	1,799
May 16	10,073	1,439
May 23	8,570	1,224
May 30	6,874	982
Month of May	42,327	1,365	71%
June 6	6,544	935
June 13	5,427	775
June 20	4,457	637
June 27	6,167	881
Month of June	23,925	798	57%
July 4	4,166	595
July 11	5,087	727
July 18	5,476	782
July 25	6,971	996
Month of July	26,102	842	109%
August 1	6,846	978
August 8	7,269	1,023
August 15	7,486	1,069
August 22	7,828	1,118
August 29	8,185	1,169
Month of August	32,596	1,051	125%
Total March – August	188,820

I. Total deaths

Total US deaths as of yesterday: 155,306

Deaths reported yesterday: 1,466

Yesterday’s 7-day rate of increase in total deaths: 5% (This number is used to project deaths in the table above; it was 5% two days ago. There is a 7-day cycle in the reported deaths numbers, caused by lack of reporting over the weekends from closed state offices. So this is the only reliable indicator of a trend in deaths, not the three-day percent increase I used to focus on, and certainly not the one-day percent increase, which mainly reflects where we are in the 7-day cycle).

II. Total reported cases

Total US reported cases: 4,635,226

Increase in reported cases since previous day: 67,189

Percent increase in reported cases since 7 days previous: 9%  

III. Deaths as a percentage of closed cases so far in the US:

Total Recoveries in US as of yesterday: 2,285,613

Total Deaths as of yesterday: 155,306

Deaths so far as percentage of closed cases (=deaths + recoveries): 6%

For a discussion of what this number means – and why it’s so important – see this post. Short answer: If this percentage declines, that’s good. It’s been steadily declining since a high of 41% at the end of March. But a good number would be 2%, like South Korea’s. An OK number would be 4%, like China’s.

I would love to hear any comments or questions you have on this post. Drop me an email at tom@tomalrich.com