Every day for the past 27 days, the United States has reported over 100,000 new cases of COVID-19. More Americans were hospitalized with COVID last night than ever before. Epidemiologists are warning that the nation is on pace to see 4,000 COVID deaths a day by year’s end. The combination of such mass death and falling temperatures will likely trigger a spike in small-business bankruptcies (which have already reached catastrophic levels), a surge in weekly job losses (already at 778,000 and rising), and more widespread poverty (which was already at 11.3 percent back in October, when public-health conditions were less dire than they are now).
As this catastrophe was unfolding, Congress staged perfunctory hearings for a sure-to-be confirmed Supreme Court nominee, debated years-old New York Times Magazine articles, and took multiple vacations. On Monday, our federal legislators returned from their weeklong Thanksgiving recess — and, in an odd turn of events, proposed actually doing something about the social crisis devastating their constituents.
Specifically, with talks between each party’s leadership stalled, a bipartisan group of senators got together and brokered a $908 billion compromise relief package. That’s $408 billion more than Mitch McConnell had been proposing but roughly half of what Steve Mnuchin reportedly offered Nancy Pelosi before Election Day. A document obtained by the Washington Post’s Jeff Stein itemizes the plan’s key provisions (which remain in a state of flux):
Notably absent from the list is another round of $1,200 stimulus checks.
Critically, according to Mitt Romney — one of the senators who brokered the agreement — $560 billion of the package’s total appropriation just relocates funds already approved under the CARES Act and thus only increases the deficit by $348 billion. But this statement is fallacious. The only place one could find such a large pot of unspent CARES Act money would be in the Federal Reserve’s $454 billion loan backstop. That massive sum of money is not directly circulating in the economy and is unlikely to ever be much diminished. The $454 billion backstop enables the Fed to lend out up to ten times that sum, as a ten-to-one ratio between the money you’ve loaned out and the amount of capital you’ve got on hand is normative in private banking. But the Fed is not a private bank and cannot run out of dollars; the loan backstop exists less to capitalize loans in any material sense than to embody Congress’s blessing of the Fed’s aggressive lending programs, thereby reassuring the central bank that its interventions will not invite a congressional backlash that might threaten its coveted independence. Regardless, all of the loans the Fed makes under its lending programs require borrowers to pay back with interest. Which is to say, barring some extraordinary (and exceedingly unlikely) misallocation of credit by the central bank, the program will generate income for the federal government, not deplete its revenues. And the $454 billion pot of capital will remain in the government’s hands.
Thus, by moving $454 billion from the Fed’s vault to small businesses, the unemployed, and other constituencies, you effectively increase federal spending by that sum, even if that dollar amount was previously authorized by the CARES Act for the purpose of backstopping Fed loans. But if Republicans have convinced themselves that they can spend $454 billion through this reallocation without increasing the federal deficit, it may be best not to burst their bubble.
The cost of the reallocation, in real terms, is that it may limit the incoming Biden administration’s discretion to revamp the Fed’s lending programs. Put concretely: If the Fed’s lending facilities retain their congressional blessing, a Treasury Secretary Yellen would be better able to push the central bank to lend to states and municipalities at extremely lenient terms. As is, the Fed’s lending programs offer credit to these entities on less favorable terms than private investors do.
It is not clear where the rest of the reallocated funds are coming from. Though the safest bet is that Romney is referring to unspent funding for the Paycheck Protection Program.
Critically, in addition to its relief provisions, the compromise bill would also enact an as-yet-undefined version of the liability shield for businesses that McConnell has long sought. Such a policy would insulate firms from the threat of liability lawsuits related to COVID-19. This has long been a deal-breaker for Democrats. At present, the idea seems to be to make this shield temporary and/or give states more latitude to enact their own shields.
All and all, this is a pretty suboptimal piece of legislation. But it is also a bill that would immeasurably improve millions of Americans’ lives. An extra $1,200 a month from the federal government would help a great many unemployed Americans plug the holes in their household budgets; $25 billion in housing assistance will keep many families in their homes. The $16 billion for vaccine development, testing, and tracing is essential for reducing the overall death toll of the raging pandemic. On just about every item, the appropriation is inadequate to the level of need. Democrats should certainly push for better terms (extending the enhanced unemployment benefits beyond four months, or tying them to some objective measure of labor-market conditions such as the unemployment rate, seems like an especially worthwhile place to push).
But it’s not clear to me how Democrats end up with a much better deal than this. If they do not sweep the Georgia Senate election runoffs in January, then Mitch McConnell will still control the Senate when Biden takes office, while Nancy Pelosi will preside over a much slimmer House majority than she does now. I see little basis for believing that Democrats will be able to get better terms from this new Congress than they have from the current one.
More important, America’s most vulnerable cannot wait two months for aid. And from a macroeconomic perspective, an ounce of recession prevention is worth a pound of cure. If America enters a recessionary spiral — with job losses leading to lower consumer spending, leading to more job losses — the fiscal cost of helping every constituency that Democrats wish to aid will rise substantially. For this reason, a $900 billion stimulus deal today would be preferable to a $1 trillion one two months from now.
Meanwhile, if Democrats do sweep the Georgia runoffs and secure Senate control, they will be free to pass a new stimulus, building on what was passed during the lame-duck session. And that stimulus will get the nation closer to full employment if December and January’s job losses are tempered by a $908 billion aid package.
The chief downsides of accepting some version of the bipartisan plan are that it could limit the Federal Reserve’s policy discretion under a Biden administration, that it would require accepting a liability shield of some kind, and that it could theoretically boost the Republican Senate incumbents in Georgia’s special elections next month.
I would like to have more clarity on the concrete implications of drawing down the Fed’s backstop funds than I do at present. Currently, Treasury Secretary Steve Mnuchin is trying to revoke this funding from the Federal Reserve unilaterally, irrespective of whether a new COVID bill passes. But many experts believe that the next Treasury secretary will have the authority to fully restore the Fed’s backstop funds, unless they are reallocated by Congress for another purpose.
The consequences of the pending liability shield are similarly opaque. The notion that the bill’s passage could give the GOP an advantage in Georgia’s special election is plausible but too speculative to justify the withholding of desperately needed fiscal support.
Unless reallocating the Fed’s $454 billion backstop would fully exhaust the funds available to support its lending (which I don’t believe is the case), the benefits of taking this deal would likely outweigh the costs from the standpoint of both the Democratic Party and the American public writ large.
But it may not make sense from the standpoint of maniacally anti-spending Senate conservatives. And that could prevent Mitch McConnell from allowing a vote on the bill. Late Tuesday, the Senate majority leader released his own stimulus proposal, one reportedly formulated after a discussion with White House chief of staff Mark Meadows about what forms of relief President Trump was prepared to support. The proposal includes $0 in enhanced unemployment benefits, $0 in fiscal relief for state and city governments, $0 in funding for transit systems, a liability shield for businesses, and a provision that would prevent a Biden administration from unilaterally restoring the Fed’s lending programs. It also features $332.7 billion in small-business aid, $16 billion for testing and contact tracing, $31 billion for vaccine development and distribution, and $105 billion for schools, among other things.
The proposal crosses so many of the Democratic Party’s red lines it’s tempting to interpret it as a declaration of McConnell’s lack of interest in reaching a deal of any kind. But it is also possible that a couple of the outline’s poison pills are there primarily to give McConnell something to concede (while still playing hardball on every major item). If this is an earnest document, it’s possible that McConnell’s gambit is to attach his proposal to the spending bill that must be passed by December 11 to avoid a government shutdown — and then dare Democrats to vote against keeping the government open, delivering aid to small businesses, and funding vaccine distribution. That would be a risky bet for the U.S. economy. But McConnell may see his gamble as a win-win proposition: Either Democrats fold or Joe Biden spends his honeymoon struggling to clean up the mess that Mitch and Donald left him.