Washington Weekly: Stimulus 3.5 Done

Both the House and Senate passed the "stimulus 3.5" bill (see below).

Both chambers will be out of session and are expected to return on May 4.

Stimulus 3.5 Done. 

Both the House and Senate this week easily passed stimulus 3.5. It is the fourth stimulus bill over the past 49 days to address the health and economic effects of the coronavirus (COVID-19). The $484 billion bill primarily replenishes the Paycheck Protection Program (PPP), a fund created in the last stimulus bill to expand lending to small businesses, with an additional $310 billion of funds. It also contains funds for hospitals and COVID-19 testing. A summary of the bill can be found here. It is likely that the new PPP funds will be exhausted in the next few days given the current backlog of pending requests from eligible small businesses. If so, Congress will be under pressure to extend the program once again as early as next week. This will force a repeat of negotiations from the past week where the two parties fought over the composition of the bill and delayed the loan assistance to small businesses for nearly a week.

State and Local Government Funding Dilemma.

The level of emergency funding support for state and local governments (SLGs) is an ongoing point of disagreement between the two parties. Stimulus 3 provided SLGs with $150 billion of funds. SLGs also benefitted from funding in the first three stimulus bills relating to public transit, disaster relief, education, and an increase to Medicaid. Moreover, a new Federal Reserve lending facility – also created in stimulus 3 – is expected to buy up to $500 billion in debt from SLGs. There is no question that SLGs are in financial pain as tax revenues have dried up and local services have increased, but some lawmakers are increasingly leery of additional funding. Senate Majority Leader Mitch McConnell (R-KY) talked this week about the feasibility of some states declaring bankruptcy, which we interpreted as a signal that future SGL funding has limits. A compromise could be less SLG funding than what Democrats have requested and strict boundaries around what the extra money can be used for. Republicans don't want stimulus funds used to pay for financial problems (such as underfunded pensions) that existed before COVID-19. Friction over SLG funding will be the primary sticking point in negotiations on future stimulus bills.

The Next Stimulus Bill.

There are two possible scenarios for the next stimulus bill. First, if the PPP runs out of money in the next week, the next bill could come very soon, perhaps in the next two weeks. The bill would likely be on the limited scale of stimulus 3.5 and focus on additional PPP funding. Second, if the PPP funding can last through early May, the next bill could be more comprehensive and emerge next month with final action more likely in June. What is included in this bill will depend on what the economy looks like in a month. The worse it looks, the bigger a stimulus bill will be; the better the economy looks, the smaller the bill will be. President Trump and lawmakers from both parties profess to have big plans for the next stimulus bill and have proposed infrastructure, tax breaks, payroll tax forgiveness, and other big-ticket items for inclusion. While we project another stimulus bill, it is premature to assume this bill will be comprehensive enough to include the big-ticket items mentioned above. The need for it may not seem as urgent a month from now than it does today.

Fed Facilities.

In addition to the PPP, Congress (in stimulus 3) provided $500 billion to the Treasury to extend support to businesses and municipalities. Some of that money (up to $46 billion) is being used by the Treasury to provide loans to targeted industries like the airlines. However, the lion’s share ($454 billion) will be used by the Treasury to backstop an array of emergency facilities by the Federal Reserve that will total several trillions of dollars of financial firepower. Beyond dusting off its playbook from the last financial crisis, the Fed has used the Treasury funds to launch unprecedented programs to provide liquidity to the corporate and municipal bond markets and a new Main Street Lending facility for small and mid-sized businesses. Even with these new measures, the Treasury and Fed still have plenty of dry powder (close to $300 billion of the aforementioned $454 billion of funds from Congress) to launch new facilities or expand existing ones. Congress has not been shy in weighing in with views on how unused funds should be deployed and on how existing programs could be expanded as well as on the need for transparency on who gets support. Notably, there have been calls from Congress for the Fed to expand its facility for the municipal market. Congress also has urged the Fed to help mortgage servicers, which face a liquidity squeeze as homeowners seek forbearance on their mortgage payments, though the servicers already have received some relief this week from the government-backed mortgage giants Fannie Mae and Freddie Mac. The Fed will continue to move beyond its comfort zone in responding to this crisis, but it will do so carefully and cautiously given the inevitable Congressional and public scrutiny.

Business Interruption Insurance.

A fight continues to brew in Washington between restaurants (and other businesses) and the property/casualty insurance industry over whether business interruption insurance policies cover costs related to COVID-19. In response to some businesses’ concerns, a bill in the House recently was introduced that would require pandemics to be covered by these insurance policies. The insurance industry has argued that this would result in a retroactive change in insurance contracts that could threaten the industry’s solvency. The insurance industry’s concerns have been echoed in letters by Republican lawmakers to President Trump who has expressed some sympathy for the views of the broader business community. However, given the competing equities, the administration has been reluctant to take a more formal stance on this issue, which is more likely to be resolved by court decisions than by policy action. The policy debate instead may shift more toward what prospective measures are needed, in particular whether there should be a federal reinsurance backstop for pandemics as there is for acts of terrorism. While this issue of a federal backstop is likely to be a topic of growing debate in Congress, it is less likely to be ripe for the next major stimulus effort.

US-China Relationship. 

New tensions seem to be added to this bilateral relationship with every weekly publication we write. The latest is the allegation that COVID-19 originated in a Chinese lab in Wuhan, rather than a street market, and that the Chinese government did not disclose that development to other countries while permitting international travel to and from Wuhan. This allegation will be subject to multiple investigations by Congress (once it reconvenes) and by various international organizations. President Trump will use the issue to further challenge China and to criticize former Vice President Biden for his record on China (particularly his support of increased trade ties with China) during his 44 years in Washington. Whether concerns from US citizens relate to trade, national security, COVID-19, human rights or others, they are strong and bipartisan – which means they will have staying power on the policy agenda regardless of whether Trump or Biden wins in November.

Oil Woes.

Oil-state lawmakers have advocated for some form of relief for the oil industry in a future stimulus bill. Don't count on it. Due to the objections of House Democrats, a provision requiring the federal Strategic Petroleum Reserve (SPR) to fill its reserves through the purchase of $3 billion of excess oil was dropped from an earlier stimulus bill. Democrats aren't likely to be receptive to any provision to assist the fossil fuel industry as part of stimulus legislation. President Trump is considering whether to provide temporary regulatory or royalty payment relief and to permit the industry to further lease space in the SPR to temporarily hold excess inventory, but the oil industry will have to weather this storm by itself in the absence of a clear consensus in Congress.

Medicare and Social Security.

The Medicare and Social Security Trustees issued their annual report this week on the financial health of the two programs. According to this report, Medicare will be insolvent in 2026 and Social Security In 2035. However, the data in the report was gathered pre-COVID-19. As such, it does not take into account the large declines in payroll tax revenue that has occurred due to millions of Americans losing their jobs. Next year's report will be more revealing and will move up the dates of financial stress facing both systems. This report, which would have set off louder alarm bells this week if the COVID-19 crisis was not all-consuming, adds another significant funding and political challenge for Congress to act on in the next few years. 

Can Congress Work From Home?

Like many Americans, lawmakers were sent home to work on March 14 due to the COVID-19 crisis. Neither the House nor the Senate has a system of voting remotely, and their current isolation (hailed by many people) has made it very difficult to vote on emergency bills (such as the stimulus bill approved this week) without returning to the nation's capital. In recent weeks, there has been a push from some lawmakers to implement a system of remote voting in order to avoid this travel back to Washington when necessary. However, remote voting has proven contentious and is unlikely to be adopted at the current time due to resistance from leadership in both parties. A bipartisan task force has been launched instead to make recommendations on how such a system could work effectively. While many workers in the US have successfully transitioned to working from home, it does not appear that Congress will be joining them any time soon.