The Economy Will Require More Medicine From Washington
Author: Greg Valliere
June 3, 2020
AN ECONOMIC AID PACKAGE COSTING AT LEAST $1 TRILLION is slowly taking shape in Washington, as officials concede that the pandemic — and now the urban riots — could slow the expected second half economic pickup.
OUR SENSE AFTER TALKING to Congressional staffers is that the next aid package is many weeks from enactment; it could take until late July, as both parties wrestle with competing provisions.
WASHINGTON WILL GET A WAKE-UP CALL on the economy this Friday, when the May unemployment rate is expected to approach 20% — setting off a new round of media comparisons to the Great Depression, when joblessness was in the 25% neighborhood.
IT’S TOO EARLY TO PRECISELY CALCULATE the impact of the riots, but it appears this will have a major impact on retailers; not only have they suffered losses, but jittery customers may be reluctant to return to shopping and dining. And once again, state and local governments are facing another blow to revenues, while their emergency spending surges.
THIS IS UNIFYING WASHINGTON again over the need to spend more. Despite growing anxiety about the long-run impact of huge budget deficits, we’d guess that 95% of Democrats and 60% of Republicans will back a $1 trillion-plus package. President Trump, who worries little about red ink, is on board for another bill.
THE ISSUE, OF COURSE, IS THE DETAILS: There’s no consensus yet, but here’s our thinking on major provisions:
Aid to state and local governments — at least $500 billion, this is mandatory for the Democrats.
Liability protection — Democrats will have to compromise; Republicans will not agree to a bill that doesn’t protect businesses from lawsuits. There will be a deal on this.
Unemployment benefits — They expire on July 31, and Republicans are determined to scale back (or eliminate) the $600 weekly payments, which they think is a disincentive to returning to work. Some type of tax credit to incentivize people to return to jobs may replace the weekly credit.
Another stimulus check — There are several plans; some would provide tax credits, others would send another check. Much of the initial stimulus hasn’t been spent but the Democrats will insist on another one; it’s unlikely that this will be as generous as the initial $1,200 checks.
Small business aid — There’s grumbling about the Federal Reserve’s complicated Main Street rescue program, so still another package of small business aid is likely — with strict curbs on who’s eligible.
Aid to hospitals — A no-brainer, this will be included, perhaps with more money for
testing and tracing.
Lots of tax incentives — The Wall Street Journal reports this morning that White House officials are considering tax incentives for people who dine out or take vacations. And there could be tax incentives to lure American companies to bring back their manufacturing to the U.S., a clear shot at China.
THIS ISN’T A COMPREHENSIVE list, but our back-of-the-envelope math indicates the cost could approach $1.5 trillion. Mitch McConnell and many Republicans had hoped to keep the price tag at $1 trillion, but the riots and looting have many urban businesses on the ropes.
THE QUESTION WE GET MORE THAN ANY OTHER from clients is how we’ll pay for all of this; the deficit in this fiscal year, which ends on Sept. 30, could exceed $4 trillion, and it will far exceed $2 trillion next year.
THERE’S NO EASY ANSWER: Interest rates probably will stay remarkably low, which will help with debt servicing costs. But major belt-tightening is coming later this decade, as spending cuts, entitlement reform, and significant tax hikes loom regardless of who’s unlucky enough to win the 2024 presidential election.
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