The OH SNAP of 18% Unemployment in the Age of COVID-19
Masks. Social Distancing. Neighbors yelling salutations across cul de sacs and apartment hallways. Grocery shopping in one direction. No gatherings of more than 10 people. Arbitrary rules in an unprecedented moment. As Thomas Paine declared, “these are the times that try men’s souls” (and all the genders sheltering at home).
Thanks to the COVID-19 response, civil liberties violations increase daily, but most people, in fear of their health or the health of others, are playing nice with the US experiment in totalitarianism as governors shut down businesses, ban elective medical procedures, close parks, schools and hiking trails, mandate shelter at home and threaten criminal charges on violators. 22 million people have lost jobs. Unemployment is set to reach 18%. The Federal Reserve reports the largest industrial production decline since the end of WWII. This is bad.
For perspective, in 1939 the US unemployment rate-despite the first and second New Deals- held at 19% (higher depending on what statistics are observed). When President Calvin Coolidge said, “The final solution for unemployment is work,” he forgot to add a caveat: unless the government says you can’t. And, it seems right now many Americans can’t. Right to work is selectively applied to some professions and not others. When a knee surgery can’t be done but an abortion can- Michigan’s COVID mandate the example- and medical personnel are losing their jobs because clinic visits are down and operating rooms- with the exception of NY city- sit unused due to bans on the evasively termed “elective” procedures, something is terribly wrong. This COVID-19 crisis elicits an important question: when will citizens reach their limit?
Despite the overwhelming public compliance with rigid state mandates, when it comes to limitations on consumption, mobility and the right to work, Americans have a tipping point. It’s here. US citizens aren’t used to being confined by government, and this experience with what some consider martial law has been palatable ONLY (food availability aside) because Medicaid, SS, Medicare, Disability, Food Stamps, HUD and all the programs that 70% of the non-discretionary budget (aka entitlement) funds have not been affected. If you want an apocalypse, cut these payments off.
What’s troubling is the revenue that funds this portion of the budget is dependent on the producing class. The mandatory economic shut down and subsequent collapse of the economy has crippled the nation’s producing class, unfortunate timing as private sector employment has in recent years been on the rise. This group pays income and payroll tax, the primary sources of government revenue at the state and federal level. Those who pay income and payroll taxes are the true economic victims of this virus, and their inability to pay into a system dependent on their productivity will bear some bitter fruit in the months ahead. Why? The payroll tax- this includes Social Security and Medicare- has increased as income taxes have lowered since the introduction of the Tax Cuts and Job Act (2017).
The Tax Foundation states: “The payroll tax is regressive, with the highest average rate falling on Americans with the lowest incomes.” Think furloughed workers… “For people making between $30,000 and $40,000, the average payroll tax rate is projected to be 8.8 percent, while for those making between $500,000 and $1 million, the average rate is projected to be 5 percent.” Hence, the logic behind Trump’s payroll tax holiday idea.
Approximately 56% of Americans pay federal income tax and payroll taxes. 44% do not pay federal income tax, yet of this group, 65% pay payroll taxes. Although they pay no income tax, they pay sales taxes, excise taxes, property taxes and some receive tax credits for earned income. The chain impact of these individuals not producing and operating at the pre-virus level will impact state and federal revenues that are already impacted by the extension of tax filings to July 2020.
Moreover, small businesses are paralyzed as the Paycheck Protection Program, part of the CARES Act, has run dry of funds. Those lucky businesses that did receive money before the funding drought must use 75% of the money to cover payroll and maintain staff at 100% of the pre-virus numbers to receive loan forgiveness. Utilities, rent and operating expenses are to be paid with the remaining 25%. With an 8-week expiration on the loan, it looks like many small business owners will pay workers to not work. Restaurants, for example, face diminished revenue as they remain take out only with dining rooms closed by state orders. Those that missed the window to file for PPP can seek relief from the second bill passed by Congress that extends an additional $485 million in aide to small businesses.
Things are at a boiling point. If anything, Congress should be in session 24/7 to address this crisis. Not to single her out, but Nancy Pelosi in front of her well-stocked 25K refrigerator is unsettling when many middle-class Americans have lost their jobs. And, many of these are high-paying, white-collar jobs deemed essential professions.
When America needs leadership most, Congress is the only group in the nation that does not need to shelter in place. This is an economic melt-down of magnificent proportions, and without the pre-virus revenue from income and payroll taxes, combined with the shortfall from states that are dependent on sales tax as a primary revenue source, the horizon is bleak. Right now, the US is 25 trillion dollars in debt, and the debt to GDP ratio is 115%. God only knows what it is going to be in a few weeks. With the high-water mark of 121.7% in 1946, things are not looking too good when the US is just 8 points away from setting a new national record. Remember, 60% is the ideal ratio. What happens when the next pandemic hits?