Stimulus Stalemate: McConnell Eyes Narrow Bill, Trump Says, ‘Go Big or Go Home!!!’
As the stalemate over another coronavirus relief package continues, these three things all happened on Tuesday:
• Senate Majority Leader Mitch McConnell (R-KY) announced that the Senate will take up a narrow aid package when it comes back in session next week. The “targeted” package will be similar to one blocked by Democrats last month, including an extension of enhanced unemployment benefits, a renewal of the Paycheck Protection Program of small business loans, money for schools and liability protections for businesses, among other provisions. The package will reportedly total roughly $500 billion.
Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows had urged such a narrow bill focused on the small business program in a letter to lawmakers Sunday.
“Secretary Mnuchin and Chief of Staff Meadows are right: There is no excuse for Democrats to keep blocking job-saving funding for the Paycheck Protection Program while other conversations continue,” McConnell said in a statement. “Republicans do not agree that nothing is better than something for working families. The American people need Democrats to stop blocking bipartisan funding and let us replenish the PPP before more Americans lose their jobs needlessly.”
• Within minutes, President Trump undercut McConnell by tweeting: “STIMULUS! Go big or go home!!!”
• House Speaker Nancy Pelosi and Democratic House committee chairs detailed their numerous objections to a $1.8 trillion proposal offered by Mnuchin last week. “A fly on the wall or wherever else it might land in the Oval Office tells me that the President only wants his name on a check to go out before Election Day and for the market to go up,” Pelosi said in a letter to House Democrats. “Tragically, the Trump proposal falls significantly short of what this pandemic and deep recession demand.”
Where does that leave things? Nowhere closer to a new round of relief.
The president seems to have realized that pushing for — or at least publicly calling for — a larger relief package could help him politically. But it may be too late. Trailing in the polls with just three weeks to go before Election Day, it’s not clear whether Trump has enough sway in his own party to overcome a sizable Senate GOP backlash to a bigger stimulus. “Trump’s current political standing seems to have hurt his ability to persuade Senate Republicans to embrace more deficit spending,” Politico’s Burgess Everett and John Bresnahan write.
So Republicans and the White House can’t get on the same page, Democrats may again block the Senate GOP bill and Pelosi shows no signs of relenting to some calls from members of her own party to accept the White House’s $1.8 trillion offer — let alone of caving and agreeing to piecemeal legislation she has long opposed.
“We need an agreement, but we cannot get an agreement just by folding. Our leverage has never been greater,” Pelosi reportedly told her members on a conference call Tuesday.
Why it matters: Economists continue to warn that a failure by Congress to provide additional aid could result in more job losses and suffering. “There are millions of people in a desperate position right now,” Michele Evermore, a national unemployment expert at the National Employment Law Project, told The Washington Post. “And without further action, this economic pain will spill out into the community.”
Number of the Day: $16 Trillion
The coronavirus crisis will cost the U.S. about $16 trillion, according to a new analysis published in the Journal of the American Medical Association by former U.S. Treasury Secretary Lawrence Summers and Harvard University economist David Cutler.
Roughly half the cost is associated with a reduction in gross domestic product that will linger for years, with the other half coming from health-oriented issues including premature death and long-term impairments. If the estimate is accurate — and the economists say they are “optimistically” assuming the pandemic will have been largely contained by next fall — Covid-19 will end up being far more costly than the Great Recession.
“Output losses of this magnitude are immense,” the authors say. “The lost output in the Great Recession was only one-quarter as large. The economic loss is more than twice the total monetary outlay for all the wars the US has fought since September 11, 2001, including those in Afghanistan, Iraq, and Syria. By another metric, this cost is approximately the estimate of damages (such as from decreased agricultural productivity and more frequent severe weather events) from 50 years of climate change.”
Given the staggering cost, policymakers should reconsider the government’s approach to health care, Summers and Cutler say. “Currently, the US prioritizes spending on acute treatment, with far less spending on public health services and infrastructure,” they wrote. “As the nation struggles to recover from COVID-19, investments that are made in testing, contact tracing, and isolation should be established permanently and not dismantled when the concerns about COVID-19 begin to recede.”
Why Big Deficits Are Here to Stay (for Now)
From billions in income supplements for households to trillions in guaranteed loans for businesses, fiscal policy has taken a central role in the government’s response to the Covid recession. According to Bloomberg’s Alaa Shahine, the new emphasis on fiscal management marks a major shift in policymaking circles, one in which central bankers are ceding the power they have held as primary managers of the economy since the 1970s.
“Fiscal policy is the big game in town now,” Stephen King, senior economic adviser to HSBC Holdings, told Shahine. “As a central banker, you have to accept in that sense you’ve lost a bit of power to the political process.”
Why fiscal policy has seen a revival: Central bankers have a limited set of monetary tools to respond to a crisis, centering on the use of interest rates to inject liquidity into the financial system. But those tools have little effect when interest rates are already historically low, and they do virtually nothing for workers losing their jobs and small businesses facing a crushing drop in demand.
Fiscal policy, on the other hand, allows lawmakers to get money directly into the hands of the unemployed and business owners, providing a cushion for the economy to soften the blow of a recession. And it can target specific groups that need extra help, such as restaurants, airlines, schools or hospitals.
The lessons of 2008: The recovery from the 2008 financial crisis was sluggish, and much of the world found itself in the position Japan had stumbled into decades earlier, when interest rates dropped so low that monetary policy had little effect. “It was an early-warning sign that the world’s central banks might run out of steam, and bring fiscal policy back to the fore,” Shahine says.
Policymakers responded to the 2008 crisis with substantial fiscal stimulus — but withdrew it too soon, most experts now say. Since then, an increasing number of economists have changed their tune on the need to reel in fiscal stimulus quickly. Financial markets, too, seem to have lost their concerns about increased government spending, with bond buyers, including central bankers, soaking up all the new debt the U.S. Treasury produces, and at very low rates.
Paul McCulley, the former chief economist at Pacific Investment Management, recently told Bloomberg's Joe Weisenthal and Tracy Alloway that he expects the expanded use of fiscal tools will be a permanent feature from now on. “Any pretense is over,” McCulley said. “We’re clearly living in a fiscal-policy dominated world.”
But there’s always a hitch (or two): One problem for the fiscal approach is that it relies on policymakers – which means politics are always involved. Most economists agree that the U.S. needs another round of stimulus spending, but lawmakers can’t agree on the size and scope of a new relief package (see above). Shahine notes that politicians’ inhibitions about public spending are the last major barrier to deploying fiscal tools more extensively.
The other issue associated with the increasing reliance on public spending is bigger deficits, in the U.S. and other advanced economies (see the chart below, which shows how much larger deficits are now relative to GDP). And it looks like there’s a good chance those deficits will continue, at least in the short run, as both economists and financial markets come to see ongoing fiscal support as essential to sustaining the recovery.
- The Ugly Partisan Truth Behind President Trump's Stimulus Roadblock – Zachary Karabell, Time
- Covid-19 Vaccines Are Chance at Salvation, Financial and Beyond, for Drug Makers – Jesse Drucker et al, New York Times
- What to Do With Covid Debt? – Thomas Piketty, Le Monde
- How Have Households Used Their Stimulus Payments and How Would They Spend the Next? – Olivier Armantier et al, New York Fed
- Amy Coney Barrett Push Papers Over Rift Between Trump and GOP – Burgess Everett and John Bresnahan, Politico
- A Dose of Optimism, as the Pandemic Rages On – Donald G. McNeil Jr., New York Times
- Fraud and Ineptitude Are Undermining Covid Relief – Timothy L. O’Brien, Bloomberg
- America's True Unemployment Rate – Felix Salmon, Axios
- Deflationary Trends Are Growing More Powerful – Gary Shilling, Bloomberg