Washington Weekly: New Stimulus Bills

• Stimulus 1, 2 and 3. The first three stimulus bills are still being implemented and cost close to $2 trillion. It is difficult to assess the effectiveness of these funds, since most of them have not yet been allocated to the intended recipients. However, the government support has been effective in boosting financial markets and in giving some hope to patients, workers and businesses (among many others) that needed help is forthcoming. Imagine how bleak things would be if the government had not stepped up with this commitment of support. We will scrutinize this crisis response with greater hindsight and accuracy in the coming months and years. Some programs will work, while others will fall short. For as long as this crisis persists, lawmakers and the Trump administration will continue to commit significant resources to address it and worry about consequences later (budget deficit, effectiveness of programs). Politicians know that inaction will not get them re-elected.
  
• New Stimulus Bills. Congress is likely to act soon on further stimulus. In the coming weeks, we believe Congress will reach agreement on and pass a smaller stimulus bill that will be dubbed "stimulus 3.5." The urgency around this bill will be driven by the need to replenish funds for a critical small business lending program (see below). While it is all but certain to pass, its timing remains unclear – it could pass as early as next week or as late as the first week of May. A subsequent stimulus bill ("stimulus 4") could follow in June or July – while its composition will depend on the magnitude of the crisis at that time, it likely will focus more on true economic stimulus measures rather than the more mitigation-oriented measures we've seen thus far.
  
• Small Business Lending. The Paycheck Protection Program (PPP) has been perhaps the most economically impactful program of the stimulus 3 legislation that passed last month. The PPP provides a government guarantee on loans to small businesses (<500 employees). Loans are forgiven to the extent that proceeds are used for eligible purposes (employee retention and salaries as well as payments for utilities and rent/mortgage). Given those features, this $349 billion program has been oversubscribed and currently has no capacity for new loans (1.6 million loans have been made to small businesses). The Trump administration has asked Congress to replenish it with an additional $251 billion. While this program has strong bipartisan support, the next round of support through stimulus 3.5 likely will impose new conditions on it. For example, Democrats would like to ensure that a portion of the aid is specifically allocated to minority businesses. Debate over conditions surrounding this aid may delay the approval of stimulus 3.5, but we believe it has strong enough support to be approved by the House and Senate in the next few weeks.
  
• Composition of Stimulus 3.5. The PPP (preceding bullet) will be the anchor of a new stimulus 3.5 bill. It will be the single provision that unites both Democrats and Republicans as part of a new bill, notwithstanding the spat over new conditions for the program. While Republicans favor a bill containing only an increase in the PPP, Democratic leaders have additional priorities for the bill that will likely be accommodated in order for a bill to pass through the Democratic-majority House. Democrats have requested that the bill also contain $150 billion for state and local governments, $100 billion for hospitals and an increase to the maximum benefits under the federal food stamp program. The longer a new bill takes to materialize, the more lawmakers will look to add to it. The political reality is that the priorities of both parties will need to be represented in this bill. Therefore, much of what the Democrats have asked for likely will be included in stimulus 3.5 (along with the PPP increase that Republicans have requested). Other issues may emerge that could complicate this bill's passage, but if it stays within the scope that we have outlined, such a bill could pass both the House and Senate in the next few weeks.
  
• What will Stimulus 4 Include? It all depends on what the crisis looks like in June. Critical needs at that time will be prioritized, but there will be dozens and dozens of other requests made by lawmakers who will view this as perhaps the last stimulus bill that will move forward this year. As such, they will try hard to get provisions they feel strongly about in the bill. This is the bill where more familiar ideas like infrastructure spending, payroll tax forgiveness and the reinstatement of the full SALT tax deductions will be considered. There will be proposals to increase the size of the checks that some taxpayers are receiving and to increase funding in many of the areas that were included in the first four bills. The biggest need for a stimulus 4 bill will be to make corrections to some of the initiatives in the previous stimulus bills to ensure funds are being effectively disbursed. This could drive a strong need for a stimulus 4 bill, but partisan fights over bigger provisions (some mentioned above) will likely make this bill tougher to pass.
  
• Federal Budget Deficit. All of this additional spending will be put on the national credit card and will balloon an already large annual US budget deficit. Many estimates were made this week by outside groups, and the consensus was that this year's annual deficit would settle at about $3.7 trillion, up from the $1 trillion estimated before the crisis hit. These estimates only account for the first three bills passed, so these figures will rise over the coming months as other stimulus measures are approved. As a percentage of GDP, the new deficit figures will exceed 20%. By contrast, the deficit-to-GDP ratio during the recession of 2007-2009 never exceeded 10%. The costly responses to this crisis only add to the major challenges that Congress and the White House will have in the future to identify ways to reduce the deficit, an exercise at which they have never been particularly good.
  
• Oversight, Oversight, Oversight. The stimulus funds are barely out the door, yet there is already a focus in Washington, especially in Congress, on providing oversight over the three bills passed. The Trump administration appointed an inspector general to oversee its own implementation of the bills, while stimulus 3 also created an oversight panel that will rely mostly on congressional investigators. House Speaker Nancy Pelosi (D-CA) also has created her own ad hoc oversight committee, though this will require support from House Republicans. As much as Washington's focus is now on the coronavirus, the attention in the late summer and fall is likely to turn to oversight of the Trump administration's handling of the crisis. Oversight can sometimes take a breather on Capitol Hill, but it never ends.
  

The Final Word

Will Biden Really be the Nominee? Yes. This week, former Vice President Biden received the endorsement of former President Obama as well as former rival presidential candidates Bernie Sanders and Elizabeth Warren. He is now the de facto Democratic nominee four months before the Democratic National Convention. Despite Biden's clear pathway and his endorsements from the entire spectrum of the Democratic Party, there continues to be questions about whether he will end up being the Democratic nominee. We chalk these rumors up to a combination of factors, including a lack of excitement about his candidacy among some Democrats and possible concerns about his age, particularly given COVID-19's heightened risks for older individuals. While there will continue to be daydreaming among some Democratic voters of alternatives to Biden, such as New York Governor Andrew Cuomo, Biden will be the nominee unless a serious health development emerges and prevents him from being able to serve.