Government is coming to the rescue of the economy. As you probably realize, this means a lot can go wrong.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress with overwhelming, bipartisan support. The Treasury Department explains, “This over $2 trillion economic relief package delivers on the Trump Administration’s commitment to protecting the American people from the public health and economic impacts of COVID-19.
The CARES Act provides fast and direct economic assistance for American workers, families, and small businesses, and preserve jobs for our American industries.”
That’s a lot of money, and it’s directly targeted to do good things. What could go wrong?
Potential CARES Act Side Effects
Consider the chart below which highlights the unintended consequences of another government program. The red line shows the murder rate in Mexico. The blue line represents ethanol production in the United States. Both are scaled to equal 100 in 2004. The two lines are linked by an unintended consequence of U.S. law.
Mexico cracked down on crime and made significant progress with an 8% reduction by 2007.
Meanwhile, in the U.S., Congress passed the Energy Policy Act of 2005. That required the use of 7.5 billion gallons of renewable fuel by 2012. Later, the Energy Independence and Security Act of 2007 raised the target to 36 billion gallons by 2022.
Making that much ethanol required billions of bushels of corn from American farmers by increasing production. But they overplanted and prices have generally been trending lower.
Economists looking at the problem in “From Maize to Haze: Agricultural Shocks and the Growth of the Mexican Drug Sector” found that “plummeting corn price leads farmers to shift to growing poppies or marijuana, which then spurs violence as cartels fight over control over the newly created drug production.”
While ethanol in gasoline may be good for society, there were unintended consequences associated with legislation mandating this good. Among those consequences were thousands of murders in Mexico and the U.S. related to drug cartels.
This was not considered when politicians were buying votes in the Iowa caucus. They wanted to boost markets for grain farmers. No one asked if this would add to the power of drug cartels.
Now we have a chance for new unintended consequences.
With more than $2 trillion being spent in the CARES Act, all we know for sure is there will be unintended consequences and side effects. In reality, we don’t even know if the Act will deliver the intended results. We simply know that years from now, researchers will identify unexpected results of the Act.
• Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the editor of Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at New York Institute of Finance. Michael also is the former editor of the CMT Association newsletter Technically Speaking.
Follow him on Twitter @MichaelCarrGuru