Washington Weekly: Stimulus 4 Red Lines

The Senate approved various executive branch nominations and failed to override the veto of a bill by President Trump that would limit his ability to take military action against Iran. The House as out of session.

The Senate will consider a number of executive branch nominations.  The House is scheduled to remain out of session. 

Stimulus 4 - Who Goes First?

House Speaker Nancy Pelosi (D-CA) and House Democrats will soon unveil a proposed stimulus 4 bill before Senate Republicans introduce their package. Speaker Pelosi received input from her House Democratic members this week about potential content and will craft a comprehensive proposal in the next week. There is a tactical advantage in being the first chamber to propose a bill – it gives the majority-party members a specific bill to rally around and puts the majority party of the other chamber on defense to explain why they aren't acting on it. Speaker Pelosi's challenge in crafting a bill will be to accommodate the dozens of demands made by her party members without ballooning the cost to a degree that defies credibility. Nonetheless, we expect a big House Democratic bill to emerge (in the neighborhood of $2-3 trillion) in the next two weeks, and it could pass that chamber by the end of May. While the Senate will reject much of the House bill, the House action will still put pressure on the Senate to advance its own bill or negotiate ways to revise the House bill with the Trump administration.

Stimulus 4 Red Lines.

House Speaker Pelosi, Senate Majority Leader Mitch McConnell (R-KY) and President Trump all have issued their own "red line" conditions for any stimulus 4 bill. Speaker Pelosi is insisting on state and local government funding, while Senate Leader McConnell is demanding legal liability protection for small businesses, health care providers and first line responders. President Trump said last weekend that he would only sign a bill if it contained meaningful payroll tax relief. All three are jockeying for leverage to get their top priorities in the bill, knowing that they will need to acquiesce to some other provisions they don't support in the spirit of compromise. A compromise on a package that encompasses all three priorities is possible in the weeks ahead, but the payroll tax idea stands out as the biggest question mark. Support for it among lawmakers (even among Republicans) is tepid, but the reality is that the President will have to sign the bill in order for it to become law, so he does have leverage in making this request.

Merger Ban?

In the past couple of weeks, a few Democratic lawmakers have proposed a ban on most business mergers and acquisitions during the current crisis. The supporters have couched the bill as a means of protecting smaller businesses from larger corporations and private equity groups, while detractors point out that mergers and acquisitions can be an effective way to save jobs in a crisis. Moreover, the government response has been to focus on helping small and medium businesses stay afloat by providing hundreds of billions of dollars of grants and low-cost financing through programs like the Paycheck Protection Program (PPP) and the Federal Reserve’s Main Street Lending facility. This proposal functions more as a messaging vehicle than a bonafide policy solution, but the anti-big-business message has had an impact. Notably, several larger chains returned PPP funds in the face of public criticism and businesses owned by private equity funds have largely been shut out of the PPP and Main Street programs. While the merger ban is unlikely to be included in a final stimulus 4 bill, the broader critique of big business will be an issue on the campaign trail and could have potency and staying power as a political message depending on the depth and length of the economic damage.

More Broadband Access

As students, workers, businesses and everyday people engage more in telecommuting and distance learning, lawmakers from both parties are paying more attention to the need to expand broadband access to more people, particularly the 21 million Americans that lack high-speed internet access. The stimulus 3 bill, passed in late March, contained $200 million to make available more tele-health programs to hospitals. This initiative and others to increase broadband access to workers, students and rural residents will likely see a sizeable funding increase in the stimulus 4 bill. House Democrats and the Trump administration in particular have made it a big priority, and we expect to see those efforts reflected in the next bill.

Stimulus 4 Issue Tracker

Our running list of proposals that lawmakers and the Trump administration have requested be included in this bill can be found here.

What to do about China

With many lawmakers and President Trump blaming China for the global spread of the virus, US action against China seems very likely in the near future. A stimulus 4 bill is likely to include tax provisions designed to reduce dependence on Chinese suppliers for certain products like pharmaceuticals by encouraging US companies to relocate manufacturing facilities back to the US. President Trump is also considering options to counter China for its suspected role in suppressing COVID-19 developments out of Wuhan. He has mentioned the possibility of new tariffs on Chinese imports, though they seem to make no political or economic sense given the state of the US economy. Other policymakers have talked of stripping China of its "sovereign immunity," an action that would potentially enable the US Government and COVID-19 victims to sue the Chinese government. This option is complex, and we believe Congress would have to act on this, which would be a challenge. President Trump wants to be tough on China in part for political purposes, but he also doesn’t want to risk losing the gains made from the bilateral phase one trade agreement if China retaliates so he will have to walk a delicate line here.

Two-Way Street

No one should expect meaningful US action without corresponding Chinese retaliation. New US tariff increases would be met with higher Chinese tariffs on agriculture, a politically-soft spot for President Trump. This is one reason why we are skeptical of more US tariffs as a response now – less than six months before the presidential election. Worse, China could further reduce their holdings in US Treasuries. Depending on the scope of any potential sell-off, the world economy doesn't need more economic chaos. For all of these reasons, we believe the Trump administration's near-term response will be less impactful than some others anticipate unless US and allied intelligence is more conclusive on what happened (or didn't) in Wuhan.

Remote Regulators

The Senate Banking Committee next week will hold a remote hearing featuring the federal banking regulators (the House Financial Services Committee also will hold a virtual roundtable with these regulators). In particular, Federal Reserve Vice Chairman Randal Quarles will get questions from lawmakers on the status of new and unprecedented lending and liquidity programs, including ones to support state and local governments, corporate borrowers and mid-sized businesses. These programs, which are backstopped by funds provided to the Treasury in the CARES Act (stimulus 3), were publicly announced weeks ago but generally are still not yet up and running. The Fed also will be called by some lawmakers to further increase its support for state and local governments and to set up a liquidity support facility for mortgage servicers who have faced liquidity challenges as many homeowners seek forbearance. Some Democratic members of the committee will criticize the Fed for expanding its Main Street Lending facility to cover larger and more highly indebted firms, including oil and gas companies. Beyond the significant focus on the Fed programs, an emerging area of debate will be on the need and duration of regulatory relief measures designed to ensure that banks have sufficient flexibility to help customers in this time of economic strain.

Third Party Impact

Last week, Congressman Justin Amash (I-MI) announced that he would run for president as a Libertarian. This was not a surprise as he has fed rumors that he could be a presidential contender since he switched his party affiliation from Republican to Independent last July. However, his impact will most likely be very limited. While the Libertarian party is on the ballot in 35 states currently, many states require candidates to obtain signatures from a sufficient number of residents in order to appear on their ballots. This is no easy task in the current environment of social distancing. The states requiring signatures include a few like Minnesota, Pennsylvania and Wisconsin that will be key difference makers in November. The signature requirement has already begun to be challenged in court. Without a favorable resolution to those court cases in the relevant states, Congressman Amash's bid as a Libertarian will likely fail to be impactful.