Trump's ‘Big & Bold’ Idea for the Next Stimulus

Trump's ‘Big & Bold’ Idea for the Next Stimulus

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Plus: A grim forecast from Goldman Sachs
Tuesday, March 31, 2020

Trump Calls for $2 Trillion Infrastructure Plan as Part of Coronavirus Response

As lawmakers set their sights on a fiscal stimulus plan to follow their $2 trillion coronavirus relief package, President Trump on Tuesday said that a $2 trillion infrastructure program should be part of Congress’s agenda.

“With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill,” Trump wrote on Twitter. “It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

The need: There’s widespread agreement that the United States needs to address its infrastructure. “The American Society of Civil Engineers has said more than $2 trillion in additional funding is needed for U.S. infrastructure by 2025 alone,” Bloomberg’s Mark Niquette reports. “The World Economic Forum this year ranked the U.S. 13th in matters of infrastructure, according to its global competitiveness report. Nations listed higher included Singapore, Hong Kong, Switzerland, Japan, Korea and Spain.”

The politics: Trump has long sought to enact an infrastructure plan — and, in principle at least, it was one area where the White House and Democrats both wanted progress. But the administration’s repeated “infrastructure weeks” evolved into a joke on Capitol Hill as they routinely got overshadowed by Trump-related scandals other developments. Trump’s talks with Democratic leaders for a potential $2 trillion infrastructure package collapsed last May when the president walked out of a meeting at the White House, fuming over comments House Speaker Nancy Pelosi had made regarding investigations into his administration.

House Democrats, including Pelosi, have also suggested in recent weeks that infrastructure spending should be part of the economic response to the coronavirus pandemic, so there may be room for compromise.

The big question: The issue, as always, remains how to finance that additional spending. The Trump administration had proposed to have the federal government provide seed funding, with states, municipalities and private investors ponying up the vast majority of the money needed for a variety of projects. But state and local government budgets are bound to be hit hard by the pandemic and the resulting economic downturn. Will the administration be open to having the federal government pick up more of the tab?

Trump’s tweet suggests he’d favor borrowing to finance new projects, but other Republicans may be less amenable to adding more debt.

“Democrats have historically suggested raising the gas tax. Republicans, by and large, have resisted that. Has that changed?” Politico’s Playbook team asks. “Trump would have to change the minds of almost every elected Republican on this topic. Or does he want to skip revenue increases, and just pay for this by adding it to the nation’s debt? If so, is that a politically palatable option in the middle of an election year -- even given the dire circumstances?”

Other questions: There are plenty, including whether Democrats and Republicans can agree on the kinds of projects to be included in any package. Timing is another key consideration. “Some experts pointed out that a pandemic may be a poor time to ramp up construction projects, given that federal health officials are urging workers to stay home if possible and avoid personal contact,” The Washington Post noted.

Pelosi Floats Stimulus Idea That Would Benefit High Earners

Pelosi has floated another suggestion for the next round of fiscal stimulus: a retroactive rollback of the 2017 Republican tax law’s limit on state and local tax deductions.

In an interview with The New York Times, Pelosi said that a stimulus plan should do more to get money directly to individuals and suggested that a rollback of the $10,000-a-year deduction limit would be one way to do that. The Democratic-controlled House voted last year to repeal the cap, which has predominantly hurt top-earning households in high-tax blue states such as New York, Illinois and California, but the effort went nowhere in the Republican-led Senate.

“A full rollback of the limit on the state and local tax deduction, or SALT, would provide a quick cash infusion in the form of increased tax rebates to an estimated 13 million American households — nearly all of which earn at least $100,000 a year,” the Times’s Jim Tankersley and Emily Cochrane explain.

A Pelosi spokesman tweeted Monday night that “action on SALT would be tailored to focus the benefits on middle class earners and include limitations on the high-end.” But it could be difficult to have any rollback benefit significant portions of the middle class.

As Tankersley and Cochrane note, the congressional Joint Committee on Taxation estimated last year that a repeal of the SALT limit for 2019 would have cut federal revenues by about $77 billion, with $40 billion of that going to taxpayers earning $1 million or more and most of the rest benefiting households with incomes of $200,00 or more. The Tax Policy Center estimates that only 3% of households in the middle quintile of American taxpayers would receive any benefit from the SALT cap repeal.

Republicans dismissed Pelosi’s proposal as part of a partisan wish list. Tax experts and budget wonks, meanwhile, reacted with horror:

  • “Nooooooooooooooooo,” tweeted Nicole Kaeding, an economist with the National Taxpayers Union Foundation.
  • “It certainly gets money into hands. But I’m not sure it’s the correct hands,” Kyle Pomerleau, a resident fellow at the conservative American Enterprise Institute, told the Times.
  • “Weakening or eliminating the SALT cap would be regressive, expensive, poorly targeted, and precisely the kind of political giveaway that compromises the credibility of emergency spending,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement. “As stimulus or economic relief goes, I’m not sure one could design a less targeted policy.”
  • “[T] here are about 1,000 better ways to get help to middle-income people right now,” Michael Linden, a liberal wonk who is executive director of the Groundwork Collaborative, tweeted. “This is a road not worth going down.”

Quote of the Day

“It is a big country. We can carry 10% more debt. It is not ideal but we can certainly do it. And if there was ever a time where you wanted to do something like this, now is that time.”

– James Bullard, president of the Federal Reserve Bank of St. Louis, in an interview with Bloomberg Television, suggesting that the United States can afford to take on the trillions in debt being added for coronavirus relief. Bullard noted that interest rates are very low and will probably stay that way “for quite a while.”

Economic Outlook Has Grown Even Darker, Goldman Sachs Says

The economy is expected to shrink at an annualized rate of 34% in the second quarter this year, according to the latest estimate from economists at Goldman Sachs.

The new analysis paints a darker picture of where the economy is headed than even the notably pessimistic report from Goldman released less than two weeks ago, which predicted a 24% decline in GDP on an annualized basis in the second quarter. Goldman says that the "sky-high jobless claims numbers" along with anecdotal evidence of weakness led to the most recent revision.

The economists expect GDP to shrink 9% on an annualized basis in the first quarter, worse than the 6% decline they predicted in the previous report. As this CNBC chart makes clear, that would mean that the first two quarters of 2020 would be the worst for GDP growth since 1948 by a considerable margin.

For the full year, Goldman projects a 6.2% decline in GDP, which would be the worst annual figure since the Great Depression.

Unemployment is also seen as coming in worse than expected. The Goldman team had projected 9% unemployment by the end June, but now foresees it rising to 15%.

Light at the end of the tunnel: The economists say that the current emergency monetary and fiscal programs are setting the stage for a rapid recovery in the second half of the year, and could produce a 19% jump in economic activity on an annualized basis in the third quarter, up from the 12% rate projected in the last report. If that scenario pans out, the third quarter would be the best quarter for growth since at least 1948.

Or maybe not: Some economists are starting to doubt that there will be a V-shaped recovery along the lines predicted by Goldman Sachs. “We have no certainty the virus will be gone by the end of the second quarter,” Nobel prizewinner Joseph Stiglitz told Bloomberg News. If the pandemic “lasts through the summer, then all the effects will be amplified” and the economy will continue to suffer.

Instead of a V-shaped recovery, with a sharp decline followed by an equally sharp rise, Moody’s Analytics economist Mark Zandi is forecasting something more like a “Nike swoosh.” Zandi thinks the economy could drop 25% in the second quarter, rebound about 15% in the third, but then stall, limping along for an extended period of time.

“Past pandemics lasted years, not months,” says Tom Orlik, chief economist at Bloomberg Economics. “Scientists at Imperial College London are warning containment measures may have to stay in place for 18 months.”


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