More Economic Stimulus Coming?

October 12th, 2020

The stimulus drama in Washington continues to dominate the financial news cycle as we wonder will they/won’t they (or perhaps more realistically, when will they, and how much). Given where we stand with COVID and the economy, it seems fairly likely that at least some form of additional stimulus will happen at some point. But a lot of questions remain.

Where it stands now

Two weeks ago, the Democrat-led House of Representatives passed a $2.2 trillion plan, which, as expected, met opposition from Republican leaders and the Trump Administration. Yet on Friday, the White House upped it’s previous $1.6 trillion counter offer to a $1.8 trillion proposal. And Treasury Secretary Mnuchin and House Speaker Nancy Pelosi plan to meet again this Friday to try to find some common ground.

Of course all of this would still need approval from the Republican-led Senate, and Senate Majority Leader Mitch McConnell said Friday that a new round of stimulus is “unlikely in the next three weeks” (ie, before the election). Needless to say, there are a LOT of moving pieces here.

So why can’t the politicians agree?

Short answer, because they’re politicians. Longer answer, it’s complicated.

It may seem like the White House and Senate Republicans are just being stubborn in holding back more stimulus that our country sorely needs.

But decisions like this are complex, and coming to agreement on spending $2 trillion isn’t easy. Especially when there’s an election just weeks away.

On the one hand, the economy has taken a MASSIVE hit.

We lost roughly $2 trillion of GDP in the second quarter alone (April through June). We’ve almost certainly lost more since, and the economy will likely be impaired, at least to some extent, for the foreseeable future. For some context on that $2 trillion, total US GDP for 2019 was just shy of $21.5 trillion. So losing $2 trillion in three months is scary. Really scary.

And many are fearful that such a hit to our economy can trigger a downward spiral that may lead to another Great Depression. When the economy struggles, people lose their jobs, so spending falls, which hurts businesses, which results in more lost jobs, and even less spending, etc. Not surprisingly, unemployment spiked after COVID hit. And while it has steadily fallen over the last few months, we aren’t out of the woods yet.

So the hope is that if the government can pump enough money into the economy now, it may prevent this spiral from taking hold.

But on the other hand, the government has already implemented a $2 trillion economic stimulus/recover plan, along with several smaller relief acts.

And the Federal Reserve, which controls the money supply, has dropped interest rates to nearly zero, where it plans to hold them, in hopes of stimulating the economy further.

So a lot of money has already entered the system. Yes, we’ll need more if we want to fully offset the impact of COVID, but how much more? And when?

And we also need to remember that stimulus money doesn’t come from the sky. Whatever we spend now, we’re borrowing from the future, and we’ll need to pay it off eventually (at least in theory). Our national debt currently stands at $27 trillion, more than our entire 2019 GDP. So any new stimulus will add to our already growing debt. Not to mention, Congress will need to decide what exactly to spend the money on, no small task in and of itself.

Long story short, the challenge is real. And coming to agreement isn’t easy.

Politics as usual?

And of course, general politics come into play too.

Various competing interests fight it out in Washington even in the best of times. Add in a global pandemic, a struggling economy, and a hotly contested presidential election, and you have a perfect storm for disagreement, posturing, and general animosity.

So all in all, it’s not too surprising that a deal has yet to be reached.

And yes, more stimulus is probably coming at some point. But the devil will be in the details.