What Saturday’s Executive Actions Likely Will—and Won’t—Do

Editors’ note: As always, our political commentary is non-partisan by design. We favor no political party nor any politician and believe markets have no preference, either. We assess political developments solely for their potential economic and market impact.

The tussle over extending expired CARES Act assistance continues, with President Trump issuing four executive actions aimed at restoring some of the programs on Saturday, prompting some lawmakers (from both parties) to argue the president was acting unconstitutionally by usurping Congress’s power of the purse. That debate continued into Monday, when the orders spurred both sides to return to the negotiating table, which many claim was their actual aim. This is an epic round of political theater in an election year, and we won’t hazard a guess as to how it will go. That said, nothing in these orders strikes us as make or break for stocks’ young bull market. Further, we don’t think the much-discussed deferral of payroll tax collection is all that likely to do significant damage to Social Security, either.

In a nutshell, the four executive actions do the following:

• Direct the Treasury to defer collection of payroll taxes for all workers making less than $104,000, with payments for the rest of 2020 due next year
• Use the federal disaster relief funds to extend extra federal unemployment assistance through early December, but with weekly payments reduced from $600 to $400. Of that $400, $300 is from the feds; the order asks the states to kick in an extra $100 per week
• Asked the Treasury and Department of Housing and Urban Development to study ways to provide funding for people struggling to make housing payments; asked the Federal Housing Finance Agency to see what authority it has to prevent evictions
• Extend student loan relief through the end of the COVID crisis

The debate over constitutionality and the separation of powers centers on the first two items. Congress holds the power of the purse, which in plain English means it decides all taxing and spending. But with a Federal emergency declared and funds already set aside for relief via earlier legislation, the White House argues it has the power to disburse disaster relief funds. As for the payroll tax, because the Treasury would simply be deferring collection, the administration argues this isn’t an actual change to the tax code. The money would still be due, just later.

You are free to draw whatever conclusion you like of that notion. We will leave it to the lawyers and constitutional scholars to hash this all out, if it even comes to that. In an election year, it would be a really strange look for politicians on either side to mount a legal challenge against measures that give their constituents assistance these same politicians argue is paramount, even if they disagree on the particulars. Best as we can tell, this mostly looks like a big game of election year politicking aimed at giving the Trump campaign some talking points and spurring new negotiations in Congress. The general consensus among the punditry is that new legislation to render these orders moot was the goal all along. Time will tell if they are correct. Either way, considering markets normally look beyond the very near future in a young bull market, we doubt the outcome is make or break for stocks. Extending extra unemployment benefits will undoubtedly benefit struggling households, but it likely has little bearing on corporate earnings in 2022 and 2023—which we think stocks are weighing today.

One measure the White House and Treasury hope becomes permanent is the payroll tax holiday. To (according to their legal counsel) keep the measure constitutional, the Treasury would allow employers to stop deducting the tax from workers’ paychecks for the rest of the year. That gives households a temporary take-home pay increase, but the benefit would be short-lived as the taxes would still be due eventually, probably on Tax Day 2021. That is a very odd predicament in which to put low and middle-income households, the chief earners that would qualify for the holiday. Do you spend the small windfall now knowing you will have a balloon payment due in a few months? Would employers even bother waiving the deduction, knowing it would put employees in a sticky situation next year?

Trump and Treasury Secretary Steven Mnuchin have said their preferred solution is for Congress to turn it from a temporary deferral into an official tax cut—at least for the rest of 2020, and maybe even beyond. The Trump administration has been pushing for this since the crisis broke out, without much traction in Congress. Lawmakers in both parties argue it wouldn’t help much given it helps only employed workers, while the millions of folks sidelined by COVID and not earning paychecks are the ones who need help most. We can see the logic in that argument. But we can also see some logic in the administration’s proposal, considering that the payroll tax has always been a weird animal. Its sole purpose is to fund Social Security, which is fine. But because it doesn’t apply to any income earned in excess of $137,700 annually, it is regressive. As a percentage of total income, low and middle-income earners have a higher burden than higher earners. In a tax system that is supposed to be progressive, that is … a little weird. We aren’t arguing for or against it. But … weird.

However, Congress doesn’t seem to think it is all that weird, and lawmakers have generally refrained from messing with it much. In 2010, debates over what to do about the expiration of the 2001 and 2003 tax cuts culminated in President Obama signing legislation that allowed most of these cuts to live on—but lawmakers also included a 2 percentage point payroll tax cut effective for tax year 2011. It was later extended for 2012. But most government officials don’t believe this stimulated much economic activity, and Congress’s stance against that particular tax cut seems to have only hardened (and become more bipartisan) in the intervening years. Hence, we have a hard time imagining Congress doing away with it regardless of how November’s election goes. We could see making this year’s cut official, as we doubt either party wants to be the Grinch in December, but that is about it.

Still, even just the proposal to touch the payroll tax has many suspecting there could be big fallout for Social Security’s solvency, requiring severe changes to the program. But we think all that chatter is juuuuuuuuuuust a bit premature. Considering how the elimination of dedicated taxes—and turning the program into another line item in the federal budget, competing for tax dollars with all other federal spending—will affect the program long term is an academic issue. An interesting thought exercise, but not one worth losing precious sleep over or reorienting your financial plan around. In our view, it is just another iteration of the handwringing over the trust funds’ long-term solvency, which we have addressed many times in the past. Our arguments haven’t changed. Congress could tweak the program a number of ways to keep it in the black, including raising the retirement age, amending the inflation adjustment calculation, or raising or deleting the income cap for the payroll tax (i.e., making it more progressive like the rest of the tax code). We guess you could add deleting the payroll tax and jacking up income or other taxes to that list, but given Congress’s repeat aversion to sweeping tax code overhauls, again, we have our doubts. At any rate, considering Congress tends not to act on Social Security shortfalls until the last possible minute—as was the case in 1983, the last time Congress tweaked the program—any potential changes are probably about a decade or more out. Markets look to the future, but not that far to the future. The limit is generally about 30 months or so, as anything beyond that is likely just an unforeseeable possibility—and markets move on probabilities, not possibilities.

We suggest investors limit focus to what markets care most about: probabilities within the next 3 to 30 months. Over that span, regardless of what politicians do to continue helping struggling households in the very near future, we will likely eventually arrive at a point where a vaccine or other factors have sapped COVID’s economic stranglehold, letting life return to some semblance of normal and enabling corporate earnings to grow. That future, not near-term assistance, is what we think markets are digesting day in, day out.