An Early Christmas Gift From Congress?

Editors’ Note: As always, our political commentary is intentionally non-partisan. We favor no party nor any politician and assess political developments solely for their market and economic impact.

After months of talks, Congress agreed on a $900 billion COVID relief package on Monday, and its finalization seemed like a foregone conclusion until Tuesday evening, when President Trump blasted it and asked for some upward revisions in direct payments to Americans. But the legislation passed both chambers with veto-proof majorities, so it seems unlikely that this suddenly implodes. Meanwhile, the president isn’t the only one debating the pros and cons and whether more “fiscal stimulus” is necessary—headlines have been at it for days. In our view, this argument is wide of the mark. While the bill will likely help some struggling households and businesses, we don’t think it will meaningfully boost the economic recovery even if a few more billion dollars are added to it as the president requested—especially since the spending isn’t true stimulus, in our view.

Barring any forthcoming changes, here are some of the highlights in the bill Congress passed.^[i]

• $166 billion in direct checks to individuals. Households will receive $600 for each adult and $600 for each dependent. The amount decreases when an individual’s 2019 income exceeds $75,000—and phases out completely for those who earned more than $99,000.^[ii]
• $120 billion in unemployment benefits. Eligible workers will get a $300-a-week federal unemployment subsidy for up to 11 weeks, starting as soon as December 27 and lasting through at least March 14. Workers may claim jobless benefits from state and federal programs for 50 weeks (most states allow for 26 weeks of benefits).
• $25 billion in rental assistance. The bill also extends the federal eviction prohibition until end of January 2021.
• $325 billion to small businesses. Specifically, $284 billion will go to the Paycheck Protection Program (PPP).

Though state and local governments won’t receive additional funding, they have an extra year to disburse unspent funds. Congress also compromised on a sticking point over the Fed’s emergency lending powers. Republicans wanted to end the Fed’s current programs at year-end and prevent the central bank from bringing back similar programs in the future. Democrats argued this would hinder the Fed’s ability to combat future crises. The middle ground: The Fed can’t create the exact same lending vehicles without congressional approval, though it maintains its broader power to create emergency lending programs, which amounts to kicking the can on the broader debate over Fed powers in general. Meanwhile, the bill will repurpose the Fed’s expiring lending vehicles’ unused $400 billion to other relief programs. While this compromise allowed the legislation to move forward, we wouldn’t be surprised if debates continued over the Fed’s role as lender of last resort for Main Street.

While we do anticipate this legislation helping households, like its predecessor, the CARES Act, it isn’t stimulus. Fiscal stimulus directly injects public money into the real economy to create new demand. Money goes to new projects—think infrastructure or construction spending—not to shoring up troubled businesses and households. Such spending can help spur activity when demand is tepid (e.g., the throes of a recession). After federal money gets spent, others re-spend it—and the money works its way through the private sector thanks to a phenomenon known as the multiplier effect.

Take the 2009 American Recovery and Reinvestment Act, which provided $48 billion for Department of Transportation programs. The Federal Highway Administration approves a “shovel-ready” resurfacing project—the first “spend.” A construction firm uses the funds to pay for its labor and equipment. The firm’s workers then re-spend their money on food, goods or fun, then those shops get more activity, lather, rinse, repeat—each spend adds to output. Meanwhile, the equipment manufacturer might make a new investment, which in turn recirculates, adding to GDP each step of the way. The benefits don’t emerge overnight, but eventually, that first government spend works its way to where it can be spent best, in our view—in the hands of businesses and individuals. That is also the general idea behind a temporary tax cut—individuals have more of their own money to spend as they see fit—although history shows the macroeconomic benefits may be a bit overstated.^[iii]

COVID relief spending isn’t in the same boat. Businesses can’t operate and people can’t work because of COVID-related restrictions. As well-intentioned as the policies are, they inevitably forestall economic activity—leading to the related consequences. Rather than creating new demand, Congress’s huge spending packages are a bailout or lifeline for those impacted—replacement of lost income and revenues, aimed at keeping households and businesses afloat until normal commerce can resume. That is key for those who can’t work through no fault of their own, but the economic recovery depends on a return to normalcy. Public spending and lending to distressed businesses and households is a cushion, not recovery rocket fuel.

The Oval Office aside, most mainstream reactions to the bill were positive, though not overly so, as comments ranged from “very helpful” to “a little lame.”^[iv] Many experts equated the package to a stopgap that may prevent another quarterly GDP contraction. However, a few economists estimated the package’s economic contribution next year, with one arguing the deal would add 2.5 percentage points to 2021 GDP growth.^[v] That is a curious projection, in our view, given the unknowns surrounding economic reopenings. However, those optimistic views are the minority. A majority still think more aid is necessary, and nobody seems to be arguing this bill will turbocharge a recovery—a sign expectations aren’t running ahead of reality.   

Recent headlines have noted an uptick in discussions about market froth and euphoria. Sentiment pretty clearly seems more optimistic to us, but if it were irrationally so, we expect people would be claiming this bill would set the economy up for gangbusters growth next year. The more measured reaction suggests people aren’t out of touch with reality, particularly with the dominant viewpoint presuming the economy depends on federal assistance in general. In our view, that is a sign the wall of worry still has some room.