Georgia on my Mind too!

Ray Charles, you were spot on. Your lyric of 60 years ago still rings true!

Democrats’ victory in both runoffs in Georgia will shift the balance of power in the US Senate. Rather than the many significant political developments of the past week, I shall focus on economic issues in this piece. With Friday’s employment figures suggesting that the economy lost jobs for the first time since April, President-elect Joe Biden suggested that the fiscal package would be “in the trillions of dollars.”

The Treasury bond market took notice. Just this week, the yield on 10-year obligations rose from 94 basis points just before the Georgia results were known to close the week at over 1.11%. With more details on the fiscal plan expected during the coming week, the yield could rise further as investors think about how the surging fiscal deficit will be funded. And with the dollar under pressure since last month in anticipation of new spending, could foreign investors in Treasurys go on strike?

The incoming administration can ignore the flashing yellow light in the bond market only at its own peril. While the plight of the unemployed is indeed stark, especially among low-income service workers, a $2,000 per adult check may do little more than postpone the day of reckoning. Once the funds are spent and the economy feels the impact of renewed business shutdowns in the first half of the year, expect chatter from Washington about the need for yet another stimulus check.

That, in turn, could result in a further sharp move upward in bond yields that could eventually abort a nascent economic recovery. One way to avoid this vicious circle would be to accompany the stimulus checks with efforts to set up training programs to prepare for jobs that are in greater demand.

After providing fish to meet the urgent need for food, returns to society would be greater if the same individuals were taught to fish!

This was a key part of the proposals that I made in a recent article for Milken Review. While targeted fiscal spending combined with worker training help alleviate the immediate requirements of the unemployed, my suggestion is that “taxpayer dividends” be included so that stockholders and managements are not the only ones benefiting from taxpayer-bailout of firms. Finally, giving permanent residency to foreign students trained in US universities in science and engineering would help improve productivity and the pace of economic growth in the long-run.