Non-negotiable Demands as Stimulus Debate Begins

by Greg Valliere, AGF Management Ltd.

CONGRESS RETURNS NEXT WEEK, resigned to a bruising debate over what will be included in the next stimulus bill. We continue to believe that the measure will cost about $1.5 trillion, but the devil is in the details.

REPUBLICANS ARE LUKEWARM about still another massive package, but they acknowledge that failure to pass a bill would further diminish their shaky election prospects. So the debate is about to begin — starting on Sunday’s talk shows, followed by horse trading for the rest of this month.

THE DELIBERATIONS COULD EXTEND beyond the July 31 expiration date for $600 weekly unemployment benefits. Nancy Pelosi has said that the House could stay in session well into August, until a bill is passed, but there’s this problem —

EVERY MAJOR PLAYER HAS AT LEAST ONE NON-NEGOTIABLE DEMAND: In order to patch together a bill, everyone will have to get their must-pass provisions. Here’s our take:

DONALD TRUMP INSISTS ON A PAYROLL TAX CUT: The president doubled down yesterday; he apparently will not sign a bill that doesn’t include a payroll tax reduction.

MITCH McCONNELL INSISTS ON LIABILITY REFORM: The Senate majority leader won’t agree to a bill without protecting companies from lawsuits. The broad outline of his plan is in this morning’s Wall Street Journal.

THE DEMOCRATS INSIST ON AID TO STATE AND LOCAL GOVERNMENTS: Pelosi wants at least $500 billion for reeling state and local governments, which are laying off workers as revenues shrink and outlays rise.

EVERYONE INSISTS ON AID TO SCHOOLS: The new element of this narrative is the need for at least $100 billion for K thru 12, and for colleges. There’s no question this will be included in a final bill.

IN ADDITION TO THESE NON-NEGOTIABLE DEMANDS, there’s strong support for sending out more stimulus checks (Treasury Secretary Steven Mnuchin favors this), and there’s an acknowledgement that either unemployment benefits will have to continue, at a lower rate, or a bonus will be necessary to lure people back to work.

BOTTOM LINE: Washington is shell-shocked by the rise of infections, hospitalizations and deaths. The economic data has been surprisingly good, but that may fade as this new Covid-19 surge persists. So Congress has no choice — more stimulus is coming, despite a budget deficit that may exceed $4 trillion this year.

WHAT IF THERE’S NO BILL? It’s possible that this upcoming measure could sink from its own weight, and it’s possible that negotiations could drag well into August. Gridlock would be a major negative for both parties and the financial markets — which is why odds still favor passage of a very expensive bill.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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This post was first published at the AGF Perspectives Blog.