Trump Undermines McConnell on Stimulus Plan

By Yuval Rosenberg

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.

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