Congress and the Trump administration are deploying a wide – and likely unprecedented – range of policy weapons to fight the health and economic impacts from the coronavirus (COVID-19) crisis. Below we outline this week's developments from Washington with a focus on the still-evolving "stimulus 3" bill that is expected to exceed $1 trillion and affect virtually every American.
President Trump signed the "stimulus 2" bill into law after it was approved by the Senate on Wednesday following passage by the House last week. The legislation contains a variety of COVID-19 response measures, including the following: funding for an expansion of federal health programs to cover testing and treatment of COVID-19, expanded sick leave for impacted employees, virus-related insurance coverage and paycheck replacement for affected workers, the purchase of emergency protective equipment for health personnel and continued coverage of federally-subsidized meals to eligible school children while schools are closed. This bill is estimated to cost over $100 billion.
The Senate began work on a stimulus 3 bill this week. That bill, which will focus on mitigating the economic impact of the pandemic, will be much larger than stimulus 2. A Senate Republican draft bill was circulated yesterday, but it will be revised over the next few days. Lawmakers from both parties seem committed to developing and passing a comprehensive bill as soon as possible. While there will be disagreements between the two sides regarding what provisions are most needed, the urgent nature of this exercise gives us confidence that these disagreements will be resolved without the drama we typically see in Washington.
President Trump has proposed a stimulus 3 bill that will cost $1 trillion. Senate Minority Leader Chuck Schumer (D-NY) and other Senate Democrats have suggested a plan that totals $750 billion. The size of the plan will surely grow as negotiations begin today, and we believe the final cost will be in excess of $1 trillion.
What might be in a final package? We believe some variations of the following provisions will be in the final package:
- Direct cash payments from the Treasury to all eligible Americans (through paper checks or direct deposit). President Trump will push very hard to get his proposal of sending all eligible Americans two separate installments of funds over the next two months into law. We expect this proposal, which has encountered resistance from only a few Republicans to date, to be the largest component of stimulus 3, somewhere in the neighborhood of $500 billion. Lawmakers will set broad eligibility requirements that will be based on income level and family size. If you aren't wealthy by federal government standards, you'll likely be getting a portion of this cash in the next ten weeks.
- Airlines industry will get significant relief. The bill will provide the airlines industry (both passenger and cargo) with the ability to borrow funds from the federal government at a reduced interest rate (or possibly interest-free in some situations). To access this financing, airlines likely will need to commit to restoring much of their service and keeping employees on the job.
- Other targeted industry relief. Other sectors, most notably the hospitality and health care industries, will also receive lending and loan guarantee assistance but likely on a smaller scale than the airlines. Hospitals and the broader health care sector will also be given funds to purchase emergency equipment and expand certain facilities and research that are relevant to COVID-19.
- Other loans and loan guarantees for small and medium-sized businesses. The bill will likely provide a federal guarantee to private lending to smaller businesses, with a likely threshold of those with 500 employees or less. This will be separate from the more targeted relief for specific sectors that is outlined above. The loans will cover the businesses' payroll costs over at least an eight-week period from when the loan is extended. The portions of the loans used to retain and pay employees throughout the crisis will very likely be forgiven.
- Building off the first two stimulus bills that have already passed, various social service and health programs will be expanded to pay for crisis-related needs. Public schools, child care programs, public housing, home-based health care, other health facilities, public transportation, state and local governments, and student loan users, among others, will very likely get some degree of funding assistance. Unemployment insurance terms will also be adjusted and made more flexible to deal with anticipated lay-offs throughout the crisis.
- Tax measures. Today, the IRS announced it will push back the tax filing deadline by three months. A final bill will likely allow penalty free withdrawals from retirement accounts in certain circumstances and provide targeted tax relief for impacted companies, among several other provisions. This is a very fluid part of the bill, and a final bill may include various other tax provisions, though stimulus 3 will clearly be much more of a spending bill than a tax bill.
- Money Market Fund Guarantee. Lawmakers also will likely create a temporary backstop guarantee for money market funds (MMFs), which are funds that invest in liquid, short-term paper. The failure of a major MMF was an amplifier of the financial crisis in 2008 and prompted the Treasury to set up a guarantee at that time. Even with recent Fed actions this week to help facilitate liquidity for MMFs, a more comprehensive MMF backstop still may be necessary and is a good candidate for inclusion in a final bill.
When will this bill pass? It is likely to pass in the Senate next week, or at the latest, the following week. The Senate has committed to stay in Washington until this bill is passed, which underscores its urgency in passing the bill. House action will follow Senate action. Realistically, a Senate bill will only move forward if it has the support of a majority from both parties and President Trump. If it meets this test, passage of the bill in the House should occur soon after it passes the Senate. It is difficult for any lawmaker – regardless of party – to make partisan demands in a time like this.
Next steps? Work in the Senate on a stimulus 3 bill will dominate Washington over the next week or two. As the bill is written, there will be rumors and speculation about what provisions it may include. In the executive branch, Vice President Mike Pence will continue to assemble his team of health experts on a daily basis to update the public on relevant developments. Also, talk of a "stimulus 4" bill will accelerate once stimulus 3 becomes law, though this will depend on the evolving economic circumstances.
The Fed has not been sleeping. The Fed has announced a series of targeted actions over the last couple of weeks to ensure the functioning of markets through increased liquidity and purchases of securities. There is more it can and will do. It may be called upon to use its emergency authority to support other markets, like municipal bonds and corporate bonds; indeed, giving the Fed more statutory authority and direction in this regard may become a consideration in the current or a future iteration of stimulus.
Enough of COVID-19. How about the election? Former Vice President Joe Biden has all but clinched the Democratic nomination with lopsided wins in the three states that held primaries (Arizona, Florida and Illinois) this week. We will hear and read about the election less over the next few weeks as the candidates continue to be sidelined from public campaign events, especially since previously scheduled primaries over the next few weeks have been postponed. The candidates will go to great lengths to deploy digital communications to find ways to connect with voters while still practicing "social distancing" during the crisis (will we see the return of the fireside chat?). There will be increased speculation over whether it will be possible to hold the two party conventions this summer. The conventions cannot simply be cancelled since their purpose is to officially nominate the parties' candidates for the November 3 election. We believe there is a good chance they will be converted into online exercises that ratify the official candidate nominations.
Trump vs. Biden in a COVID-19 environment. The COVID-19 crisis comes at an ideal time to benefit Biden and to hurt Trump. Trump's rationale for re-election is a strong economy, as evidenced by low unemployment and a healthy stock market. That narrative is weakened as the crisis intensifies. Biden's surge has occurred at a time when public focus on the presidential election is fading, which suits him perfectly. The more he is off the campaign trail, the fewer opportunities he has to commit verbal gaffes. Depending on when the crisis eases and how long it takes for the economy to recover, the election story may be about voters' perception of Trump's performance during the crisis – something that no one could have predicted just four weeks ago.