Pelosi, McConnell Meet to Break Stimulus Stalemate

Pelosi, McConnell Meet to Break Stimulus Stalemate

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Plus, state and local tax revenues better than expected
Tuesday, December 15, 2020

Congressional Leaders Meet to Break Stimulus Stalemate

The months-long stalemate over another coronavirus relief package may finally be coming to an end.

Congressional leaders met for an hour Tuesday afternoon and said they will be meeting again tonight to continue their talks on Covid-19 relief and an omnibus year-end spending bill.

"We’re still talking to each other and I think there’s an agreement that we’re not going to leave here without the [spending bill] and the Covid package," McConnell said after the meeting, according to The Washington Post. "We’ll get an agreement as soon as we can agree."

House Speaker Nancy Pelosi (D-CA) had invited McConnell, Senate Minority Leader Chuck Schumer (D-NY) and House Minority Leader Kevin McCarthy to meet today as they try to finalize a compromise on the virus aid plan and a spending bill needed before funding for the federal government runs out after Friday. Treasury Secretary Steven Mnuchin reportedly joined by phone after speaking with Pelosi for more than an hour earlier in the day.

The signs of progress come after a bipartisan group of lawmakers led by Sens. Mitt Romney (R-UT) and Joe Manchin (D-WV) released a $908 billion proposal split into two bills — one a $748 billion package covering unemployment benefits, small business aid and a host of other provisions with broad bipartisan support and the other including $160 billion in state and local aid with legal liability protections for businesses. The second bill pairs the provisions that have proven to be most contentious throughout months of talks.

McConnell on Tuesday again called on lawmakers to move forward on the areas where they agree and set aside the aid for state and local governments and the liability shield. "We all know the new administration is going to be asking for yet another package," McConnell said. "It’s not like we won’t have another opportunity to debate the merits of liability reform and state and local government in the very near future."

The bottom line:
This is the first time in months that congressional leaders have met in person to try to work out a deal, but there’s still plenty of wrangling to be done. The Post reports, for example, that "people close to negotiations believe state and local aid appears likely to fall by the wayside as lawmakers move closer to a final agreement." And it’s not clear yet whether another round of stimulus checks might still be added to the package, as some lawmakers have proposed. The next 24 hours will determine a lot.

State and Local Tax Revenues Better Than Expected

Many economists worried that local tax revenues would fall sharply in the wake of the coronavirus pandemic, creating a long-lasting drag on the economy as payrolls shrank and public investment declined, but state and local finances have held up surprisingly well, according to a report out this week.

"In the early stages of the pandemic we warned that a plunge in the tax receipts of state & local governments was likely to result in major budget shortfalls, which could total between $300bn and $400bn over the 2020 and 2021 fiscal years," Andrew Hunter of Capital Economics said in a research note Monday. "With most governments legally required to run balanced budgets, that raised the risk of severe cuts to spending, which could weigh on the recovery for years to come."

That dramatic fall in revenue hasn’t played out. Tax receipts did fall sharply in the early days of the pandemic, but by less than economic models predicted, Hunter said. Income tax revenues were particularly resilient, reflecting the skewed nature of job losses, which were – and still are – concentrated among low-income workers, who pay less in taxes. Additionally, the massive fiscal stimulus passed in the spring provided replacement incomes for millions of workers, and the economic rebound in the third quarter helped drive state and local tax revenues significantly higher — higher, in fact, than they were a year ago.

"As a result, the revenues of state & local governments for FY2020 (ending on 30th June) were only about $30bn smaller than their pre-pandemic forecasts," Hunter wrote, adding that shortfalls were expected to remain roughly at that level in the next fiscal year as well.

Still, the drops in tax revenue are having a negative effect, Hunter said, noting that state and local employment is down by 1.3 million since February. "[F]urther fiscal support for state & local governments would still be worthwhile," Hunter wrote, even if the scale of the problem has proven to be smaller than first feared.

How the Size of the Stimulus Will Affect the Economy

The road to economic recovery will depend on the successful rollout of coronavirus vaccines and the size and scope of any additional relief package Congress provides.

"The entire policy response has been to bridge businesses and individuals to the other side. The vaccine is the other side," Harvard Kennedy School economist Megan Greene tells Politico’s Ben White. "If we can’t roll it out effectively or we don’t continue to bridge even further until it’s rolled out then it would be very difficult to avoid another recession."

A new analysis by Standard & Poor’s Global Ratings illustrates just what’s at stake in the congressional negotiations happening now. The report finds that, based on an average projected boost from stimulus measures, a $1 trillion aid package would see the U.S. economy return to its pre-pandemic GDP by the third quarter of next year.

"Not surprisingly," the report says, "an even bigger, largely demand-driven stimulus package of $1.5 trillion in place by the start of next year would provide even more juice to the recovery, with the U.S. reaching pre-pandemic levels by second-quarter 2021. Meanwhile, should Congress fail to produce a package altogether, the U.S. economy would continue to suffer over the short run, not reaching pre-pandemic levels until first-quarter 2022, almost a year later than in our $1.5 trillion scenario."

Quote of the Day

"We need another injection to complete the job. Congress is debating that right now, and I just hope very much that they extend the PPP plan on a large scale to let people who may see light at the end of the tunnel get to the end of the tunnel."

Warren Buffett, chairman and CEO of Berkshire Hathaway, urging Congress to extend the Paycheck Protection Program during a CNBC interview on Tuesday.

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