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Trump faces the risk of a coronavirus cliff


Republicans are trying to pull off a high-wire act over the next three months: Reopen the economy enough to get most jobless Americans back to work and off the public dole, while resisting another giant stimulus package.

If they fail, they’ll face a coronavirus cliff — an even deeper collapse in spending and sky-high unemployment in the months before Election Day. That could both damage President Donald Trump’s reelection prospects and put the party’s Senate majority at serious risk.

Senate Majority Leader Mitch McConnell, who has suggested that states be allowed to seek bankruptcy protection and questioned the need for a big new stimulus, said Monday that the Senate would return next Monday along with the House. He indicated he would consider additional coronavirus relief funding, but that any aid to states would continue to come with strings attached. And he told POLITICO last week that he was leery of adding much more to the deficit, joining other conservatives who are growing concerned about the GOP record of racking up a mountain of debt after railing against it for a decade before Trump.

Republicans are currently betting that efforts to reopen states will be successful and the nearly $ 3 trillion already allocated by lawmakers — the largest federal rescue in American history — will be at least close to enough to start bringing the unemployment rate down and sending economic growth back up.

But it remains far from clear that it will be anywhere near enough to restore the tens of millions of jobs lost in recent weeks. A provision of the enhanced unemployment benefits enacted under the CARES Act added $ 600 per week to jobless benefits offered by states — but only through July 31.

And risks remain high that quick reopenings could lead to fresh virus breakouts, shutting down the economy again.

If that happens and the rescue programs aren’t expanded for individuals, businesses and state and local governments, the political toll could be enormous.

“Trump in 2016 won quite a few voters who traditionally back Democrats, the so-called ‘forgotten voters’ in places like Pennsylvania, Ohio and Michigan,” said Michael Weber, a University of Chicago economist. “So it’s very risky to think about austerity right now because it would hit many Trump voters the hardest. Trump realizes his reelection depends on the economy and that’s why he is pushing to reopen states, even though that creates a very big risk of a second wave of the virus.”

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There are complex political calculations in play over a potential successor to the $ 2.3 trillion CARES Act. Some close McConnell observers say despite recent remarks urging states to consider bankruptcy and warning of any more big spending, the Kentucky Republican knows another significant injection of federal funds will be required to boost the economy heading toward Election Day. Blocking one could wreck the prospects for numerous GOP candidates in November.

These people say McConnell is simply trying to start negotiations on a footing more friendly to the Senate GOP caucus while holding off other recent Democratic demands on mandating states to allow mail-in voting, clean energy, food stamp benefits and other wish list items. They say there will likely be another coronavirus relief bill, but that it will be significantly smaller than the CARES Act and only passed with both chambers in session in Washington.

McConnell on Monday acknowledged the need for at least some added funding. But he suggested it would have to be coupled with more liability protection for corporate America and would not amount to bailouts for states. “I’m open to additional assistance. It’s not just going to be a check, though, you get my point?” McConnell said in an interview. “We’re not writing a check to send down to states to allow them to, in effect, finance mistakes they’ve made unrelated to the coronavirus.”

But others warn that McConnell’s stance and general Republican pressure not to add much more to federal deficits could wind up delaying or even killing another big stimulus package, an outcome that could curtail any chance for a fast recovery and slam marginal Trump voters in critical swing states.

It could also give Democrats an even better shot at flipping the three or four seats they will need to control the Senate. They would need three if Joe Biden wins the White House and his vice president controls the deciding vote in a 50-50 Senate.

The question of additional assistance on top of the roughly $ 3 trillion already allocated — on top of trillions in additional support from the Federal Reserve — comes as grim economic data continues to pile up.

The first read on economic growth in the first quarter of the year, due out Wednesday morning, is expected to show an annualized decline of around 4 percent. The second quarter, which covers most of the Covid-19 shock thus far, will be far worse with estimates ranging up to an annualized decline of 30 to 40 percent.

Already, over 26 million Americans have filed for first-time unemployment benefits during the crisis, suggesting a jobless rate of up to 20 percent, nearing the Great Depression high of 24.9 percent. The number is expected to leap over 30 million new jobless claims when fresh numbers come out on Thursday.

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These numbers help explain why Trump — who regularly boasts about how great the economy was before the virus hit — wants states to start opening up as soon as they possibly can.

The president on Monday evening said he did not know how bad the economy might tank in the second quarter, but that “the third and the fourth quarter in particular are going to be I think spectacular.” He added that it would be a “tremendous comeback.”

But he is not in charge of the reopening process, which is likely to unfold quite slowly until the U.S. has far more effective virus testing and tracking capabilities. New outbreaks of the virus caused by rapid reopenings could also force fresh lockdowns and further damage the economy.

And plenty of gaps could open up by summer if the GOP sticks to its current approach.

The Paycheck Protection Program, intended to help small businesses stay afloat, has been beset by problems from the start and already ran out of money once. It may do so again this week.

Economists suggest there is only a limited chance that most who lost jobs during the initial wave of the crisis — largely lower-paid service industry workers — will be reemployed by the summer. The jobless rate is likely to remain well into the double digits into the fall.

If the added benefits are not extended and more money is not pushed into the small business program, dreams that the economy could snap back to rapid growth heading into the November elections could be vaporized.

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“There is a time and place to have these discussions about spending and debt, but now is certainly not the time,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “I do think Republicans will have to relent here because the number of unemployed we are seeing is just horrendous. A lot of businesses have already gone under and more will follow.”

Farooqi added that “the unemployment rate is going to stay high through the end of the year. We will need extended help and it’s inappropriate to be having these discussions and saying things like states should be allowed to go bankrupt.”

McConnell brought up the state bankruptcy possibility last week on conservative commentator Hugh Hewitt’s radio show. “I would certainly be in favor of allowing states to use the bankruptcy route,” he said. “My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of.”

The comments drew howls of rebuke from Democratic governors like New York’s Andrew Cuomo, who noted that his state pays far more into federal coffers each year than it takes out. Some Republicans, including Maryland governor Larry Hogan, also slammed McConnell’s remarks.

In an interview last week with POLITICO, McConnell also staked out a hardline position on another stimulus package. He expressed little appetite for adding much more to a federal deficit that the Congressional Budget Office now says could nearly quadruple this year to nearly $ 4 trillion. And he is leery of the federal government bailing out state pension funds. Any further aid to states is likely to feature the same restrictions included in the CARES Act that the money only go to offset losses directly attributable to the virus.

“You’ve seen the talk from both sides about acting, but my goal from the beginning of this, given the extraordinary numbers that we’re racking up to the national debt, is that we need to be as cautious as we can be,” McConnell told POLITICO last week. “We need to see how things are working, see what needs to be corrected, and I do think that the next time we pass a coronavirus rescue bill, we need to have everyone here and everyone engaged.”

Trump weighed in on the aid to states argument on Twitter Monday, basically echoing McConnell’s approach. “Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help?” Trump wrote.

Many economists, meanwhile, argue that it is not yet time to be “cautious” when considering further economic assistance for individuals, small businesses and cash-strapped state and local governments that have seen tax receipts crash. State and local governments employ around 13 percent of the American workforce. And huge layoffs in the sector helped worsen the 2008-09 recession and slowed the recovery, according to some analysts.

There may not be enough time to see if current federal assistance is working — as McConnell wants to do — before Congress needs to act again. It takes significant time for fiscal stimulus, including direct payments to individuals and businesses, to show up in economic data.

While the deficit is breaching historic levels, interest rates remain close to zero, meaning the cost of borrowing is historically low. And the old economic consensus that debt begins to get dangerous when it outstrips the overall size of a country’s economy, as is likely to happen to the U.S. this year, no longer really holds, especially for such a large nation that controls the most widely used currency in the world.

“In the next year or two, the more they do in terms of fiscal stimulus, the quicker the economy will recover. This is a very big whole the economy has to dig out of,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities. “There is going to have to be more aid for states.”

“One caveat to all this would be if markets get spooked by deficits and interest rates rise,” he said. “But we just aren’t seeing any of that at this point. I’m not saying something like that couldn’t happen in 10 years’ time, but right now, it’s pretty clear the U.S. needs more fiscal help.”

Burgess Everett contributed to this report.

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