US stimulus deal brings relief but no cure for economic pain
The $900bn fiscal stimulus agreement reached on Sunday will deliver a much-needed jolt to the US recovery after months of uncertainty, twists and tensions on Capitol Hill.
But the deal is no panacea for the world’s largest economy: it has come too late to avoid a big slowdown in the labour market and a reduction in consumer spending — and may be insufficient to address longer-term damage from the pandemic.
The pact agreed by congressional Democrats and Republicans — with the blessing of both outgoing president Donald Trump and president-elect Joe Biden — was greeted with widespread relief by economists who had been lamenting the stand-off in Washington for months.
“This support is unequivocally beneficial”, Mary Daly, the president of the Federal Reserve Bank of San Francisco, told CBS on Sunday, reflecting the satisfaction at the US central bank, which had been relentlessly making the case for more fiscal support.
Assuming it is approved by Congress, which could happen as early as Monday, the deal will give $325bn in funds for small businesses, $120bn for federal jobless benefits lasting 11 weeks, and, for a cost of $166bn, direct payments of $600 to individuals earning $75,000 or less. It will also offer $25bn for rental assistance and a new round of aid to troubled sectors, including airlines and transit agencies. All this will help the economy weather the winter surge in coronavirus cases and new restrictions on activity.
But with the US economy still operating well below capacity and facing a long exit from the crisis, economists said that it was not the definitive solution, and more help might still be needed down the road.
One big gap in the package was that it failed to include direct assistance to cash-strapped state and local governments, a central Democratic demand that was long resisted by Republicans and whose absence could lead to additional public sector lay-offs.
“The US needs an economic lifeline lasting around 9 months to get comfortably to wide vaccine distribution. This is more like 2-3 months of lifeline,” said Ernie Tedeschi, an economist at Evercore ISI in Washington and a former Treasury official under Barack Obama. “And even over that time it still leaves a good deal of risk on the table particularly around state and local government cuts. But it’s far, far superior to $0,” he said.
In historical terms, the agreement is not small: its pricetag makes it the second-largest economic relief package in US history after the $2.2tn stimulus agreed in March, and it exceeds the $787bn fiscal stimulus enacted by Barack Obama in early 2009 during the financial crisis. Democrats had been pushing for a far bigger package, to no avail, for most of the year.
In May, they passed legislation involving $3.4tn in additional government help, then tried again in September with a smaller package worth $2.2tn. In both cases, Republicans and the White House dismissed the bills as excessive.
Right before the November election, Mr Trump offered a package worth $1.8tn, but that was rejected as insufficient by the Democrats, extending the stalemate until December, and ending any hopes of a very large agreement. The disagreements and missed opportunities along the way were for many weeks papered over by the fact that the US recovery was beating expectations in terms of the drop in the jobless rate and consumer resilience. But since November the fallout from the lack of stimulus has been concerning, highlighting the cost of the delay.
“If I walk around my neighbourhood in NYC . . . the economic wreckage from Covid is obvious: in a 10 block sq there are literally dozens of shops and restaurants gone forever. Not one of them will be helped by this Covid bill,” Tony Fratto, the founder of Hamilton Place Strategies and a former senior Treasury official under George W Bush, wrote on Twitter on Sunday as the deal came together.
Although some lawmakers from opposite sides of the political spectrum, such as Bernie Sanders of Vermont on the left and Josh Hawley of Missouri on the right, had called for bigger direct payments, some economists said that even the $600 cheques that were approved were not the best use of government funds at this stage. “A substantial part of the money will be saved. It will contribute nothing either to immediate GDP growth or support of businesses under pressure from Covid restrictions,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note on Sunday.
The agreement will remove some pressure from Mr Biden to immediately pass emergency stimulus once he takes office in January. But it sets the stage for a tough political fight in 2021 over the incoming president’s broader economic agenda in dealing with the pandemic.
This includes pumping trillions more in government money into the economy through spending on infrastructure, green energy, education and healthcare — partially funded by higher taxes on companies and wealthy individuals.
While Mr Biden has said any stimulus deal this month should only be the beginning of a large economic relief effort, Republicans are likely to view this deal as the end of it, and resist any additional legislation.
In the final stretch of the stimulus talks, Republicans tried to curb the Federal Reserve’s ability to respond to bond market turmoil with emergency lending facilities. While they backed down after fierce Democratic opposition, their effort was a warning sign that Mr Biden may struggle to garner political support for joint action with the Fed if there was another severe dip.
Despite the shortcomings, the deal will at least prevent many households and businesses from running out of money entirely in the coming weeks, staving off fears of widespread hunger and evictions during the holidays.
“The good news is, Congress is not going to be the Grinch,” said Mark Warner, the Virginia Democrat, told ABC on Sunday.