Necessity Is The Mother Of Legislation: Here Comes The Fiscal Cliff

They say necessity breeds invention, which is understandable because you might not be inclined to invent something you don’t need.

But on Capitol Hill, necessity breeds legislation, and that’s unfortunate because legislating is Congress’s job. So, when they’re not doing it, they’re derelict, pretty much by definition.

Of course, if America didn’t need any legislation — colloquially, if there was nothing that needed fixing — we wouldn’t want government passing laws, spending, and tinkering just for the sake of it. That’s every libertarian’s nightmare. But clearly, there are all manner of problems that need to be addressed at the national level from infrastructure to all sorts of reforms, and this was true prior to the pandemic.

I suppose gridlock was destined to become a defining feature of the American system given checks and balances and overlapping claims to authority between the branches. But, if you notice, there’s always a sense that a tall mountain has been climbed every, single time something finally gets done.

Even the most mundane bills are celebrated by their sponsors as Herculean feats of ambition if they somehow manage to successfully navigate a labyrinthine process that no average American understands.

Given this, it’s little wonder that voters haven’t had much confidence in Congress in decades.

In this context, it’s a bit surprising that so many people seem to be convinced that the next virus relief package is a foregone conclusion.

It’s true that lawmakers moved with what counts as lightning speed earlier this year to pass multi-trillion-dollar legislation to rush aid to Americans as the country’s economy shut down, but that was an extreme case of necessity breeding legislation.

What some on the Hill might not fully appreciate is that for many of their constituents, the situation is no less urgent now. In fact, it’s safe to say it’s more urgent now than it was in March and April for millions of Americans, because generally speaking, the longer one persists in a state of precarity, the closer one gets to economic oblivion.

And so, Congress will attempt to squeeze in a new bill between vacations over the next two weeks. As a reminder, House Democrats passed a $3.5 trillion bill weeks ago, and the Trump administration has effectively green-lighted anything in the neighborhood of $1 trillion. Once again, the fate of the nation is in Mitch McConnell’s hands.

I doubt I need to reiterate this, but Congress needs to extend extra federal unemployment benefits. There’s plenty of evidence (anecdotal, quantitative, and somewhere in-between) to suggest that labor market strength seen in the last two jobs reports is set to dissipate or disappear, and some argue the official unemployment rate is even more nonsensical than usual.

The figure (below) underscores the point. If Americans lose the extra payments, it could represent a real problem for household finances.

I’m not one for doomsaying and there are obviously two components to that chart (i.e., incomes could rise), but you’d be forgiven for asking what happens to personal consumption in a scenario where the $600/week boost to state jobless benefits is yanked away just as the labor market rebound runs out of steam.

Jobless claims, you’re reminded, fell by the least since March last week. We are now officially stuck in neutral.

You can absolutely expect these discussions to go down to the proverbial wire, as some Senate GOP’ers look to limit spending by resorting to claims that extra federal support for the unemployed is disincentivizing the jobless.

Most analysts are sure something will get done. “Given that this recession is nobody’s fault, policy makers have been quick to enact sizable fiscal easing and we expect additional fiscal stimulus of $1 trillion in the US”, Morgan Stanley said last week, adding that,

We believe that risks are skewed to our bull case scenario of $1.6-2.4T. An additional US$1T package would bring the fiscal deficit to 24.6% of GDP while an additional US$1.5T would lift the deficit to 27.1%, its highest since 1943. Recent events have led to an alignment of Republicans and Democrats on the need for further fiscal stimulus.Lawmakers now appear to agree on the need for state and local government aid ($150-500bn in our base case),an extension of the PPP program (around $325bn, possibly including the $120bn remaining in already appropriated butunused funding from CARES I),and support to hospitals and health systems ($75bn).

Obviously, the deficit is of little concern right now, but some lawmakers will pretend it matters.

Morgan Stanley’s Chetan Ahya concedes that “the shape of additional direct support to households and workers remains unclear”, with the $600/week unemployment boost being particularly contentious.

“A number of alternative options are on the table including one-step or gradual decrease in the amount of the supplemental benefit in line with unemployment rates, replacement with ‘back-to-work’ bonuses to returning workers, or discontinuation in favor of another round of broad-based stimulus checks”, Ahya writes, before noting that “the latter two options are particularly attractive to GOP lawmakers worried about giving workers an incentive to stay on unemployment”.

Speaking of incentives, and coming full circle to the notion that necessity is the mother of invention, Republican lawmakers do have a powerful incentive to avoid irritating the beleaguered masses — namely, the election.