Will Trump Let Republicans Jeopardize His Reelection By Refusing More Virus Relief?

The White House supports more virus relief for the economy, which isn’t surprising. It’s an election year, and Donald Trump (the self-declared “King of Debt”) has no qualms about borrowing to fund projects that are beneficial to him personally even if he has no plans to pay the money back. One assumes that goes double when he’s not the one ultimately on the hook for repayment.

But the GOP is reticent, at best. At worst, Republicans are turning outright hostile towards more stimulus. And all based on a single jobs report, apparently.

One key issue are additional unemployment benefits. “The payments of $600 a week, currently due to expire July 31, will be discussed at a hearing of the Senate Finance Committee on Tuesday”, Bloomberg notes, adding that “Republicans have argued that the need to juice the economy is receding, after 2.5 million jobs were created in May and the unemployment rate declined when it was expected to jump”.

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“[The jobs report] underscores why Congress should take a thoughtful approach and not rush to pass expensive legislation paid for with more debt”, a spokesman for Chuck Grassley remarked.

This is clearly misguided. The US lost 22 million jobs over the March and April reports. The labor market added 2.5 million (~11%) of them back in May. The figure (below) shows the reality.

June payrolls with thus play a crucial role in shaping the future of the stimulus debate.

Some Republicans on the Hill argue that extra unemployment benefits disincentivize workers. Back in April, Goldman combined state unemployment benefits and additional funds from the federal government on the way to noting that “for two groups facing high layoff rates in this recession–sales workers in the retail trade sector and services workers in the leisure and hospitality sector–benefits substantially exceed normal wages”. The visual shows the breakdown.

(Goldman)

The bank reckoned that “on average, laid-off workers are entitled to unemployment benefits worth about 106% of their former wages”. Not only that, around three-quarters of those laid-off workers “receive benefits that exceed their former wage”, on Goldman’s estimates. (More here)

Of course, there’s more to it than that. Pointing to topped-up monetary assistance for the newly jobless doesn’t tell the whole story. The financial precarity that goes along with losing one’s wage is only part of the suffering. The loss of dignity and sense of self-worth is devastating, especially for a given household’s primary breadwinner. And then there are lost benefits for some workers.

The point of bringing that up again is to say that lawmakers who argued in April and May that extra assistance was encouraging workers to remain jobless are now arguing that the return of workers suggests the extension of benefits to those who are still without work isn’t necessary.

Clearly, that is duplicitous. 2.5 million people (many of whom presumably could have chosen to remain unemployed) went back to work in May, so the extra benefits were not, in fact, a disincentive. A quick look at the breakdown of the May report shows massive gains in the two categories of workers who, on Goldman’s estimates, were making more to stay home.

This debate matters, folks. “If [Congress] delivers in July, you get one outcome. If they don’t, liquidity falls off a cliff and you get another outcome”, Stan Druckenmiller said Monday.

JPMorgan’s Michael Feroli recently warned that the expiration of these benefits, along with the deferred tax date in July, act as fiscal cliffs. “These factors could add turmoil to the economy at a time when we think activity will be starting to pick up due to the easing of social distancing restrictions”, JPMorgan’s economists wrote last month, adding that although “partisanship appears to be back in style in Washington, we think policymakers will eventually agree to some form of added stimulus ahead of these summer ‘deadlines’”.

There will be no agreement on another broad stimulus package before the end of July. Mitch McConnell made that much clear.

As I’ve been keen to point out, the protests across the country aren’t just about racial injustice. They are about inequality of all sorts. Lawmakers risk exacerbating that if they decide that one (or two) jobs reports and a surge in stocks are enough “evidence” to deny additional virus relief to Americans who need it. It’s not exactly like the majority of Americans are suddenly wealthy because the S&P has recouped its 2020 losses.

“The delicate balance going forward will be defined by household income recovery as the economy returns to work against the pace of social transfers decreasing”, BNY Mellon’s Daniel Tenengauzer said, in a Tuesday note. “The probability of a problem emerging is high because several social transfers expire in the coming weeks while progress on the next fiscal package remains elusive”.

One thing that must be emphasized is that existing legislation is not properly “stimulus”. Until recently, there was nothing to “stimulate” as the economy was shuttered. The trillions in aid earmarked for individuals, families and businesses was designed to bridge the gap between the time incomes and cash flows ceased, to when they flowed anew.

Having provided the oxygen to keep the patient alive during what JPMorgan has called “an induced economic coma”, it’s now generally seen as advisable to pass a new package of measures aimed at delivering an adrenaline shock now that the patient is awake.

I discussed this at length late last week (here), warning that while fiscal hawks have been mostly quiet in recognition of the existential crisis facing the economy, you can expect the squawking to start up again soon. Well, that squawking has begun thanks to the jobs report.

There are no atheists in foxholes, as they say, so it wasn’t surprising that the GOP (prodded relentlessly by Steve Mnuchin) got behind the CARES Act. But each upside data surprise gives Republicans an excuse to argue against more spending.

A “phase four” package is generally seen ballooning the deficit to 20% of GDP (or more), and that’s just too much for would-be disciplinarians to stomach.

The saving grace for struggling Americans may (ironically) end up being Donald Trump, who, in addition to not really caring about the deficit or debt, knows how crucial it is to pacify an irritated electorate before November.

It’s possible (indeed, it seems likely) that Trump will simply instruct McConnell to get something done, even if the rumored $1 trillion GOP package ends up falling woefully short of the Democrats’ ambitious HEROES legislation. (Remember, Trump is more popular in Kentucky than McConnell.)

The bottom line is that GOP reluctance aside, it is difficult to imagine a scenario where Trump subjugates his reelection bid to concerns about the deficit and fiscal discipline. That would be wholly out of character.

As BNY Mellon’s Tenengauzer emphasized on Tuesday, “social unrest [in America] has had a meaningful income inequality component, despite an unprecedented cushion provided to household income”.

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