What to Make of the American Rescue Plan

Editors’ Note: MarketMinder’s commentary is intentionally nonpartisan. We favor no politician nor any political party and assess political developments exclusively for their potential economic and market impact.

Last Thursday, now-President Joe Biden introduced his COVID relief package, the American Rescue Plan (ARP). The $1.9 trillion price tag grabbed eyeballs, as did some of the provisions (e.g., raising the federal minimum wage). Many cheered the proposal, but it is just that—a pitch, with nothing set in stone. In our view, while coronavirus aid isn’t the most partisan issue by any stretch, Biden’s relief plan will likely still provide investors a look at the gridlock we expect to grip the Beltway this year, keeping radical legislation at bay.

Here are some of the ARP’s headline items:

• $400 billion for COVID relief efforts, including $50 billion for testing
• $400-a-week unemployment insurance and an extension of pandemic-related unemployment insurance programs
• $350 billion for state and local governments
• Federal minimum wage increase from $7.25 to $15
• Raise child tax credit to $4,000 for one child and $8,000 for two or more and make it refundable

While we are sure aspects of this plan will cause a stir on both sides of the aisle—for what it includes and what it lacks—many mainstream economists think the proposed spending is necessary to support the economy until most Americans are vaccinated. We don’t dismiss the benefits of additional lifelines while some business restrictions remain, but the ARP won’t juice a recovery, in our view. Like its predecessors, Biden’s plan is more lifeline than stimulus. Some measures’ effectiveness—e.g., direct payments—is murky, too. A recent Wall Street Journal op-ed pointed out that since the 1970s, Democratic and Republican administrations alike have tried stimulating growth via one-time cash payments. The effect was negligible.^[i]

The CARES Act’s direct payments offer a timely example. According to a National Bureau of Economic Research survey, only 15% of those receiving one-time payments reported spending it.^[ii] Most saved it or paid down debt. We suspect another round won’t be different. Payments may help those struggling, but it is likely too simplistic to assume they get spent fast—undercutting the multiplier effect typically associated with stimulus. Beyond that, child tax credit expansion also helps many families, but it is a long-term change, not a one-time instant boost. Presuming it even passes, households wouldn’t reap the benefits until 2022 unless it is made retroactive.

Now, traditional stimulus could arrive later. Beltway observers expect Biden to announce a second package including infrastructure spending during his first joint meeting of Congress in February. In the meantime though, we recommend keeping expectations in check—including for the ARP. Some provisions are already watered down from the initial chatter, including the size of direct payments. We wouldn’t be shocked if political wrangling chips away at it further.

In our view, this saga gives us an early look at a gridlocked Congress “in action.” After Democrats won both Georgia Senate runoffs, many cheered (or feared) a torrent of big bills to come. We have seen analysts discuss Senate Democrats leveraging “budget reconciliation,” which allows the upper house to pass legislation with a simple majority instead of the 60-vote supermajority necessary to overcome a potential filibuster. Yet reconciliation is no silver bullet. It is limited to spending, revenues and the debt limit, with a maximum of three reconciliation bills in a year (one for each subject).^[iii] According to some experts, using reconciliation would gut key parts of Biden’s proposal, including aid for state and local governments.

Plus, even reconciliation wouldn’t guarantee passage. The Democrats’ House edge is their slimmest since 1900. The Senate is split 50 – 50, so Vice President Kamala Harris would cast the tiebreaking vote—and that happens only if the vote is 50 – 50 to begin with, requiring Democratic unanimity. We don’t think that is likely on any controversial issue. The party’s moderate and “progressive” wings are already bickering over less-contentious topics, including COVID relief. The proposed federal minimum wage hike likely stirs more heated discussions, as its proposed extension to tipped workers could amount to a pay cut for many. Those disagreements likely provide plenty of opportunities for moderation, particularly with swing-state Senators playing a decisive role. They don’t want to jeopardize their own re-election chances by supporting radical legislation that would alienate their constituents. Winning over these Senators will require compromise and horse-trading—which tends to water down legislation. One early example: West Virginia Democrat Joe Manchin’s opposition to $2,000 direct payments likely influenced the reduction to $1,400.

Gridlock doesn’t kill all legislation. Congress could yet find common ground here and there. But whether you love or hate the ideas circulating today, don’t lose sight of gridlock’s generally moderating effect. In our view, stocks probably already recognize Congress won’t be able to do as much as hyped—part of a quieter political backdrop globally this year, in our view.