US Fiscal: A Deal in the Crosshairs

Published on October 5, 2020

Pressure on the White House and Congress to pass a Phase IV fiscal stimulus deal has risen sharply over the last two weeks as economic data and a renewed series of layoff announcements start to show evidence of the deceleration in the post-COVID shutdown rebound that economists and most Federal Reserve officials have been warning about.

But as recently as four days ago, Republican Congressmen believed, with little equivocation, that Speaker of the House Nancy Pelosi had little intention of striking a deal with President Donald Trump before the November 3 presidential elections, if at all. Whether true or not, the dramatic news of President Trump’s positive diagnosis for COVID and hospitalization has upended that thinking, and those four days now seem a lifetime ago.

** News reports this morning stress five major areas of disagreement that Speaker Pelosi has identified between the Democratic and White House positions, and the two sides have drawn a red line respectively below and above their $2.2 trillion and $1.6 trillion proposals. But we believe the price tag can and will essentially be split again down the middle and assign a 60-70% chance that the contours of a fourth fiscal stimulus bill will come into focus this week, leaving discussions open for a final deal. We suspect, however, that negotiations may drag on and a final agreement might not be struck until after the November 3 presidential elections.

** If momentum carries that timeline forward, a real possibility, that would be a positive surprise. But even those GOP Congressmen grumbling to us last Thursday about Pelosi’s decision the week before to kill a discharge petition that would have put an extension of the Paycheck Protection Program to a floor vote admit that “everyone on the Hill has long known” what a deal would essentially look like. That deal, it is clear to even those staunch Republicans, would carry with it a final price tag of $1.7-1.8, if not close to $2.0 trillion, if it is to be struck at all.

** Perhaps more fundamental politically than an agreement over the price tag, the gordian knot that will need to be cut is a final trade-off in some additional state and local spending from the Republicans. We expect that will entail splitting the difference over state and local funding between the two sides at around $200 billion — Republicans will insist there is some demonstration of COVID-related need offered to assert they are not bailing out “profligate states,” and that will be accompanied with provisions that have been floated in discussions for a “step-up” if more is needed to allow Democrats a claim to a potentially larger number.

** In exchange there will need to be a compromise from Democrats over some liability protection against COVID lawsuits as pushed by Senate Majority Leader McConnell. We believe that compromise is not only possible, but very likely. And while we would not downplay the level of resistance from many GOP senators to another enormous fiscal package, a win on liability would give cover to McConnell to press, with pressure and the blessings of a White House eager for a deal, his caucus to vote for a deal.

** Furthermore, we expect the full $600/week extension of supplemental unemployment insurance that is in the current Democratic proposal will be readily traded for something lower — we believe the negotiators are eyeing $400/week. That would be a tad above the stand-alone, $300/week federal portion in President Trump’s executive order – a political “win” for the House — but a step down nevertheless from $600 to address GOP concerns that the current terms are too costly, and serve as a disincentive to getting people back to work. Testing and tracing, and childcare tax credits, two of the other five areas of disagreement listed by Pelosi, are minor issues in comparison to the two above, while the fifth, “other appropriations,” is a catch-all negotiating option on the talks more broadly.

** Complicating the timeline now is a new wrinkle in the logistical challenges of getting three senators that have been quarantined for COVID to the chamber to vote, as the Senate has no provision for remote legislature. But our understanding is that the Republican leadership is considering the possibility of setting the Senate gallery up as a safe area for those quarantined senators from which to cast their votes.

** More fundamental will be the tension with Democrats over the GOP drive to push the confirmation of Judge Amy Coney Barrett to the Supreme Court through the Senate before the November 3 elections. And even as Treasury Secretary Mnuchin and Speaker of the House Nancy Pelosi continue to negotiate and narrow the gap between the two sides, and pressure from members in swing states mounts to strike a deal, the specter of electoral politics hangs heavy over the talks with less than a month left to the November 3 presidential elections.

For those reasons it appears to us more likely than not a final deal may not pass until in the lame duck session of Congress after November 3. It may well come sooner – but if it does that would be a pleasant upside surprise.

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