Last dance for US fiscal spending

Republican Senate Leader McConnell waited for this last minute to begin negotiating this“stimulus” package because he knew it would limit the bill’s scope. No side wants to see critical aspects of the CARES Act just end, namely the $600 top up on unemployment insurance.There are about 14 million people getting this money, about $8.6bn per week or about 2% of GDP on an annualized basis. That is a lot of money to disappear suddenly for an economy with record levels of unemployment and no open routes back to full employment. With the July 31 deadline looming, negotiations will be intense but histrionics relatively limited for this type of bill at this point in the election cycle and given the many mixed messages on the economy’s direction. Conservatives want this bill to be the beginning of the wind down of government support. Anyone who thinks next year simply brings some massive multi-trillion multi-year infrastructure plan, green or otherwise, should heed the current debate.

McConnell must negotiate with competing factions on his side, as well as the Democrats(he needs some of their votes in the Senate and most of their votes in the House). Many on his side of aisle, including the White House, have competing views, heightened by the calendar moving to the party conventions and then full-throttle campaigning. He must balance what the White House wants, stimulus checks and payroll tax cuts and enhanced unemployment insurance, with the (dwindling number of) Republican fiscal conservatives looking at the deficit with increasing concern (see charts).

The view rising among conservatives is either the economy is in a “V” recovery making such aid less necessary, or the virus has permanently changed the economy. If it is the latter, then better to let the capitalist system winnow out the losing businesses and free up capital rather than have government locked into supporting zombie firms in zombie industries.While their sentiment may be pure (unless the zombies are particularly impactful on their states), they have undue confidence that the bankruptcy courts could efficiently handle the surge. They are also turning a blind eye towards the collapse of commercial real estate (office and retail) that would ensue and the banking crisis such a collapse would create. Just as one could say the lock-downs were an attempt to keep local health systems from being overwhelmed, these rolling stimulus packages are meant to similarly keep the economic shock from overwhelming. With a nod to his Senate colleagues, McConnell is setting a cap on the spending number first (he will go over the $1trn but not reach the Democrats $3trn) with an eye towards this package being the start of a winnowing down of Federal support.

Unlike the last recession, this time there is broad support for enhanced unemployment insurance, just not as enhanced as it was. The enhancement should come in at around $400,or scaled to local wages, and phase out through the year based on improving local employment conditions. Politics, as always, plays a role in this, and as we see in the table below, unemployment among some income groups critical to the Republicans has risen in the past month, based on recent high-frequency Census surveys.

Our expectation is that the package will come in at $1.5 trillion. It will include the enhanced unemployment insurance noted above; another round of stimulus cheques but with more income restrictions and the White House will not get its payroll tax cut – although some front loading of corporate tax credits as a quid pro quo for hiring is possible. We expect $25bn to upgrade state-level testing, liability protection for schools and businesses (non-negotiable Republican position), another round of the Paycheck Protection Program that offers small businesses a second round of grants (there may be some equity component to this, remember conservatives do not want to underwrite zombies). There will be financing to put broadband into rural areas, around $100bn to help schools (perhaps universities as well) restart operations, and state aids. (You can be assured that on a per capita basis, Kentucky will get more than California.)

In sum, this program is as an attempt to balance Trump’s election agenda against the bubbling up of the Reagan-religion that government is the problem. Barring economic collapse this is the last program until next year, when Trump or Biden offer up stimulus packages. Passage of a massive spending bill will not be easy nor assured.