The last time a single party controlled the House, Senate, and the Presidency, Barack Obama ushered in the Affordable Care Act (ACA) and the American Recovery and Reinvestment Act of 2009 (ARRA) – a $787 billion economic stimulus package intended to save jobs and stimulate the economy in the wake of the Great Recession. The likelihood for substantive, legislative change over the next year is high.
Today, despite continued momentum in the equity markets and the initial rollout of vaccines, the U.S. economy remains plagued by high unemployment, social distancing restrictions, and an overhang of economic, political, and cultural discord. And, while the Fed, Treasury, and Congress have answered COVID-19 with a flurry of countermeasures through much of 2020 – many from prior crisis playbooks (rate cuts, QE, TALF) – these efforts have mitigated the damage, but failed to stimulate a sustained recovery or get people back to work.
With that context in mind, we looked back at another historical playbook, the New Deal, to see if it offered more lessons we might draw from today.
The New Deal – A Refresher
Following the Great Depression, President Roosevelt’s New Deal introduced a litany of bold public works projects along with financial and regulatory reform initiatives throughout the 1930’s – many still endure today (social security, labor standards, SEC, FDIC, etc.). It was an ambitious and wide-ranging policy response to aid economic recovery. Notably, many of The New Deal’s programs focused on shoring up structural problems in our national financial system and on putting people back to work. A massive infusion of capital to fund government programs and expand American infrastructure ensued, and though cause and effect are still debated today, progress toward recovery began.
While the cause of the current crisis and our world today look very different, there are key similarities between the circumstances now and then.
- A substantial unemployment problem - The New Deal followed an economic crisis which itself preceded a decade-long economic boom, before a huge stock market crash in 1929. Mass unemployment (nearly 25%) followed across the United States. Today, real unemployment in the U.S. is currently reported at close to 12% - down from a high of almost 23% in April of 2020.i It’s important to note that these numbers are not the ones commonly referenced in the press (6.7% for December), though they too come from the Bureau of Labor Statistics (BLS). The measuring stick used to report on unemployment has changed over time and the 6.7% number only counts people without jobs who are in the labor force and who looked for a job recently; it does not include “the underemployed, the marginally attached, and discouraged workers).ii
- A growing rise in income inequality – The New Deal came in the wake of a decades long rise in income inequality, which created significant socio-economic and political tensions. It’s notable that the current unemployment statistics are often 50-100% higher for minorities – numbers that have persisted throughout the pandemic.iii
- A fractured national system in need of repair (financial, then – health care and infrastructure, now) – The New Deal heralded an unprecedented wave of financial regulation and expansion intended to address glaring problems in the fabric of our financial systems.
Nearly 90 years later, much has changed. Yet, the United States government faces perhaps its biggest crisis of confidence since FDR held office. A fractured and divisive political environment, numerous issues around pervasive racial and social inequalities, and a series of missteps on the world-stage for the U.S.’s handling of COVID-19 have cast doubt among many.
Why Private Markets?
So, why is this context relevant to private markets? Mainly, because many private-market investments often ride broader industry sector economic growth trends. It’s also likely the U.S. government will ultimately need to harness the power and capital of private market managers to bring about a sustained economic turn-around. Here are a few reasons:
1.) Private Companies Represent a Large Part of the Economy. As levers for economic growth go, private companies now represent a far greater percent of the economy than ever before. According to a recent New York Times article, ”in 1997, there were roughly 7,500 publicly traded companies in the United States. That number has since fallen by half, to around 3,600 – a startling trend when you consider that the economy has more than doubled in size over that same time.”iv
2.) A Record Amount of Dry-Powder. Private market asset managers have amassed an unprecedented amount of dry powder – an estimated $1.7 trillion.v And, despite the economic turmoil, the fundraising environment for private market funds is expected to remain healthy in 2021. Analysts at Pitchbook “predict fundraising will surpass the $316.9 billion high-water mark set in 2019 as institutional investors allocate more to PE.” vi The combination of existing dry-powder and a healthy fund-raising environment means private capital could, if harnessed and focused appropriately, provide an extraordinary boost to a sustainable economic recovery.
3.) Big problems call for big solutions. Biden has already announced plans for a $1.9 trillion stimulus plan on the heels of the recent $900 billion stimulus program President Trump signed on December 27th. Look for President Biden to steer clear of the reconciliation process (requires a simple majority of votes in the Senate) in lieu of a bi-partisan process that will require 60 votes – and more compromises. Either way, infusing this kind of capital into the U.S. economy will have an outsized impact on key industries and, in so doing, the private market funds that invest in them.
Yet, despite the size of the stimulus being discussed, it is still more politically expedient to stimulate the economy through a combination of direct capital infusion ($600, $1,400, or $2,000 checks) and indirect legislation in the form of tax policy changes - strategic incentives and tax breaks intended to encourage private investments. Biden’s initial stimulus plan is focused on bringing more immediate relief to everyday Americans impacted by COVID-19, but stimulus checks will only go so far. Look for even more changes to tax policy in Biden’s first 100 days.
Two New Deal Programs Reimagined
Below are two, relevant highlights from the original New Deal that could have transferable implications today:
1.) Works Progress Administration (WPA).,The WPA only existed for 8 years, but was responsible for putting roughly 8.5 million Americans to work. The WPA also built more than 4,000 new schools, 130 new hospitals, created roughly 9,000 miles of storm drains and sanitary sewer lines, built 29,000 new bridges, constructed 150 new airfields, and paved or repaired 280,000 miles of roads.vii Though cause and effect are still debated today, progress toward recovery began and by the time the U.S. entered World War II, unemployment had dropped from almost 25% to 2%.
Today, infrastructure in the United States is failing. The American Society of Civil Engineers (ASCE) gives the U.S. infrastructure a D+ grade and most experts agree the nation is overdue for a massive infrastructure revitalization program. To date, Democrats and Republicans have been unable to find common ground. This crisis could provide the political spark to consolidate support for a new infrastructure investment program. In addition to bridges, highways, airports, and railways, any new conversation is likely to include the expansion of 5G broadband access for all and a more sustainable energy infrastructure – all of which could put millions back to work. Look for private market capital to play a significant role in making a multi-trillion dollar national infrastructure program easier to sell politically.
A re-envisioned WPA? Here are four sectors to watch:
- Broadband and Digital. If nothing else, this crisis has confirmed our reliance on our digital infrastructure and, for many, poked meaningful holes in the comfortable pattern of commuting to and working from a traditional office environment. As evidence, check out the success of Digital Colony – a $23 billion private fund manager focused on digital infrastructure. Look for the Biden administration to tax incentives to prioritize rolling out 5G and significantly expanding access to broadband throughout much of rural America, tripling the funding for Community Connect broadband grants and reforming the "Lifeline” internet and phone subsidy program for low-income participants.viii
- Warehouse and Logistics. As with broadband and digital, this sector was already experiencing impressive growth prior to COVID-19, but it looks likely the crisis only accelerated the shift from traditional retail to online. Can brick and mortar retail recover? Can the digital economy keep up? This sector is highly nuanced, both geographically, and within industry subsectors. Just look at the dichotomy of what’s happening to food producers in America right now. Shipping to restaurants? Ouch. Shipping to grocery stores – a win. Instacart anyone?
- Sustainable, Green Infrastructure. Perhaps the most politically contentious, the prospects of a government-funded variation of a Green New Deal in the U.S. is likely. Look for the Biden administration and a Democratic majority in the Senate to usher in significant programs to encourage investments in infrastructure, technology innovation, and job creation that spans renewable energy, digitizing our nation’s power grid, and accelerating investments in electric vehicles and high-speed rail. Given the massive stimulus the government has already spent responding to COVID-19, it’s likely that any new programs will need to rely far more heavily on public private partnerships, as private financing has proven far easier to sell politically. In parallel, sustainable and/or impact investing has become an increasing priority for some of the world’s largest LP’s – alignment that could help supercharge an already growing private market asset class.
- Automotive. The automotive industry has been a bellwether for a decades-long decline in American manufacturing and the jobs that come with it. But, the industry is in the midst of unprecedented technological disruption (see also: Tesla) and, with that, comes opportunity. It’s no secret that many of the key swing states have been hit hardest by declining market share for America’s Big 3 Automakers. And, it’s notable that President-Elect Biden’s pick for Secretary of Energy, Jennifer Granholm, hails from Michigan and brings strong connections to the automotive industry and a progressive policy focus on renewable energy in the US. Credit here to the folks at MiddleGround Capital for the following key disruptive trendsix:
- Electrification – Tesla has grabbed most of the headlines, but it’s perhaps even more telling that the Ford F150 – the best-selling vehicle in the US for 38 straight years, - has a V6 hybrid engine standard in their 2021 base model that gets over 700 miles on a single tank of gas.
- Light-weighting – replacing traditional components in the car to yield greater fuel-efficiency. Look for significant industry innovation in automotive parts and automotive supply chain – particularly those using aluminum or higher-grade, lightweight steel.
- Autonomous – The U.S. is uniquely positioned to succeed in the advanced driver assistance (ADAS) testing space. Its infrastructure makes it ideal for holding trial runs for self-driving vehicles. Compared with Europe’s tight infrastructure, North America’s wide and sweeping highways are optimal for testing large-scale driverless vehicles.x
2.) Civilian Conservation Corps (CCC). Reimagining one of Roosevelt’s most successful programs is interesting and the potential adaptations today are compelling. Similar to the WPA, the CCC had the dual benefits of addressing unemployment and building (natural resources) infrastructure. The CCC employed more than 2 million men in military-style camps. Over 9 years, the CCC planted 3.5 billion trees, restoring some of the nearly 700 million acres of timberland the logging industry had decimated – a major contributor to erosion of valuable farmland and the dust bowl. The CCC also created 711 national and state parks. And, for those of you who ski, the CCC was also responsible for the creation of America's first ski trails: Stowe, Wildcat, Cannon, and Sun Valley.xi
The CCC’s success has inspired numerous derivations, including many that exist today at the national, state and local level: AmeriCorps, California, Texas, Minnesota, Montana, Washington, and Vermont Youth Conservation Corps are just a few examples. In 2021, unemployment and access to labor is the key, transferable variable here for private market investors. A national program focused on addressing unemployment also has the capacity to impact industries. Many industries have been constrained by decades-long low unemployment and a dearth of talent. Within just a few short weeks, much of that changed early in 2020. And, an unprecedented number of highly educated and socially conscious college graduates are, at this very moment, looking to enter an uncertain employment market.
Could the Biden administration refresh the CCC to retool our labor force? Could he mobilize and focus our newly educated workforce? What impact could it have on industry? On unemployment and small business growth? In the near term, it’s clear COVID-19 is the focus. Among many other things, Biden plans to give 100 million vaccine shots in the first 100 days and to use FEMA to build mass-vaccination centers. But, this crisis has clearly surfaced structural issues with our national healthcare system that will need to be addressed. It has also reaffirmed healthcare as essential to the economic foundation of our country.
COVID-19 accelerated disruption that was already underway in the healthcare industry. Let’s consider three areas in the healthcare industry where an organized, government response coupled with a focused labor pool could make a sustained impact:
- Telemedicine (and the tech that enables it) – The rapid pivot from traditional, in-person healthcare visits to telemedicine during COVID-19 is a remarkable example of how quickly an industry can change. Within just a few short months, employers and payers removed restrictions on telemedicine and consumer adoption jumped drastically. According to a McKinsey study, “providers have rapidly scaled offerings and are seeing 50 to 175 times the number of patients via telehealth than they did [pre-COVID].” xii
- Testing & Vaccine Distribution –The pandemic tested the US’s embrace of a federalist form of governing, which decentralized social-distancing and health-care responses to state and local governments. The result has been a varied and ineffective set of policies, rules, and responses that has left 400,000 dead and, according to the Brookings Institute, produced “employment and health outcomes for the U.S. during the pandemic have been worse than in almost any other high-income country in the world.”xiii Look for Biden’s plans to distribute the vaccine to mature after the first 100 days and for a more robust national plan to handle testing, contact-tracing and vaccine distribution – both to combat the current crisis and to be better prepared for the next one.
- Supply-Chain & Manufacturing – The U.S. has been plagued with severe shortages in supplies and equipment (ventilators, N95 masks, test kits, gloves, etc.) throughout the pandemic. And, despite a plan to stockpile these necessities, it quickly became apparent the federal government had failed to adequately invest in both the supplies or in the ancillary systems required to manufacture, monitor and distribute these systems at any scale. Compounding this problem is the realization that far too much of our nation’s supply chain is dependent on foreign production (China exported 70.6 billion masks from March to May of 2020; the rest of the world produced around 20 billion in 2020).xiv
A new, national manufacturing, development, stockpiling and Amazon-like distribution capability for critical medical supplies (PPE’s, masks, ventilators, vaccines)? The key point here isn’t necessarily that government could bring back a new version of the CCC. Rather, it’s the idea that addressing a sticky unemployment problem can also be fertile ground for a focused application of subsidized talent and innovation. Private market fund outperformance is, oftentimes, built on identifying and capitalizing on industry growth trends. A reimagined CCC could be the catalyst.
Is it realistic to re-imagine these New Deal programs in 2021? Perhaps. But the key point here is that history has shown us that events like those we’re living through are often the catalyst for systemic political and policy change, which have a lasting ripple effect on industry growth and innovation. And, private market fund performance is, often, built on identifying and capitalizing on industry growth trends.
According to McKinsey, as of June of last year, governments worldwide had allocated more than “$13 trillion to stabilize economize and restart growth.”vi Those numbers have continued to grow, but much of those investments have been weighted more toward stabilization than a sustained recovery. For that, the U.S. economy will need an unprecedented level of funding over the long term – likely more than the recently enacted and proposed stimulus will deliver. Private markets offer an opportunity to pair and align impactful new government programs with both public policy and private capital and create a virtuous circle of mutual benefit.
Is now the time for a New New Deal?
The views and opinions expressed are for informational purposes only and do not constitute investment advice and are not intended as an offer to sell, or a solicitation to buy securities, services or investment products.