Stimulus Impasse Risks Dragging to September, Imperiling Economy
(Bloomberg) -- With no talks scheduled on a virus-relief package seen as vital by Federal Reserve officials and market participants alike, the stalemate between Republicans and Democrats risks dragging on for weeks.
The four main principals -- Treasury Secretary Steven Mnuchin, White House Chief of Staff Mark Meadows, Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer -- haven’t talked since Friday. And Senate Majority Leader Mitch McConnell and Schumer continued to exchange rhetorical broadsides on the Senate floor Tuesday, without new ideas for a compromise.
The White House says Democrats must reduce demands for state and local aid and for $600 a week in unemployment relief to restart the talks. Democrats say the White House must agree to $1 trillion in spending beyond the $1 trillion it already put on the table.
President Donald Trump for the time being appears content to let his executive actions deferring payroll taxes and providing a $300 a week boost in unemployment aid to play out. With the stock market climbing toward all-time highs this month, there has been no pressure on him from that quarter lately.
“It may take a catalyst like a slide in the stock market to generate the political will necessary to pass legislation,” said Mark Zandi, chief economist at Moody’s Analytics.
A whiff of such risks came Tuesday afternoon, when the S&P 500 Index turned sharply lower in the final hour of trading on mounting pessimism over prospects for a deal. The pullback erased the prospect of an all-time high for the S&P 500, which looked to be in reach before sentiment soured.
The tumble came after McConnell said on Fox News that the talks were at “a bit of a stalemate.”
“Another day has gone by with an impasse,” he said. Pelosi told reporters Tuesday afternoon that she hadn’t had any contact with the White House negotiators.
For the moment, Trump’s executive orders might be helping avoid a bigger slide. But economists including Zandi have flagged their difficulty of implementing them, along with insufficient size.
“Even if they were magically fully implemented today, retroactive to the start of this month, they would provide only a $400 billion boost to the economy by year’s end,” Zandi said. That’s “well short of the $1.5 trillion I estimate is necessary to avoid backtracking into recession.”
Federal Reserve Bank of Richmond President Thomas Barkin said Tuesday that for the economy, Covid-19 threatened to become like a “sinkhole” in the road, which needs fiscal support to cover over. “If Congress takes away support too abruptly, you know what could happen to my metaphorical automobile.”
Nevertheless, some congressional staff are speculating that the political standoff could continue into September, when lawmakers will have to forge a consensus on how to keep the government running when the new fiscal year begins on Oct. 1.
Neither side at this point is actively working on such a bill combining stimulus and agency funding. The fiscal 2021 appropriations process stalled in the Senate over the summer, when Democrats said they would attempt to add police reform and Covid relief riders to otherwise bipartisan funding bills. Republicans, fearing moderates in their caucus might peel off to back the moves, then suspended work on the 12 annual measures.
That means a stopgap spending bill to keep the government functioning beyond Oct. 1 is all but assured -- offering a hard deadline for action on stimulus.
Pelosi on Sunday shot down the idea of combining virus relief and the appropriations process on Sunday, saying negotiators must get back to the table before then.
“Well, we have to. We have to,” Pelosi said during an appearance on CNN.
As of Tuesday afternoon, however, there still had been no direct communication between Pelosi and Mnuchin since Friday, according to an official familiar with the matter. Other congressional officials on both sides of the political aisle also said there had been no contact between her and McConnell, although they were holding out hope talks might be rejuvenated this week.
Both the Republicans and Democrats are trying to win the perception war, and appear as having done more to compromise with an unreasonable partner.
McConnell has homed in on Democratic demands to reinstate state and local tax deductions that benefit wealthy homeowners in high-tax areas and to transfer some $915 billion to state and local governments.
“When the Speaker and the Democratic Leader say they will not allow another cent for schools to re-open or for the job-saving PPP unless they get a trillion dollars for a state and local slush fund that’s completely out of proportion to actual needs, they are playing hardball against children and parents,” McConnell argued on the Senate floor.
Democrats focus on the top-line level of spending, saying they were willing to shift from their $3.4 trillion House-passed proposal.
“Democrats offered to come down by $1 trillion. We asked our counterparts, Secretary Mnuchin, Mr. Meadows, to come up by $1 trillion. Meet us in the middle. They said no,” Schumer said Tuesday on the Senate floor.
“Facing the greatest domestic crisis of the 21st Century, where Americans are hurting health-wise and economically, the Senate Republican majority ran down the clock, tossed up an air ball, and then subbed themselves out of the game,” Schumer said.
©2020 Bloomberg L.P.