This week and the following ones will be important in deciding where the US economy will be heading, which most likely will affect the global economy as well. The Covid-19 crisis continuing, destroying businesses, individual welfare, and economies in general. Economy is complicated system that does require intervention when things go wrong, and in this case out of control. This week the US Congress is returning to work after a recess. First agenda on the table is to tackle a second stimulus plan to mitigate the pain caused by Covid-19 crisis and stimulate the economy.
Back in March US Congress passed the first stimulus package named Cares Act to address the economic issues caused by Covid-19 situation. Among solutions were direct stimulus checks to adults who make 75k or less in the amount of $1200 and $500 for their kids (each), boost to unemployment recipients of $600 a week regardless their pay brackets in addition to their unemployment benefits given by state, payroll protections, small business assistance grants and loans, etc.
Before Congress went on recess in early July, I believe in June House Chamber of the Congress controlled by Democrats passed Heroes Act that would give second round stimulus checks to all adults and children in the amount of $1200, extend unemployment boost of $600 till the end of the year, provide assistance to state and local governments, give pay boost to essential workers, etc. However, since then nothing has been done, and the Act was completely ignored by the Republicans controlled Senate.
So, in this political game there are three main players, the Democrats that are pretty much united as what they want to do, the Republican also united in addressing these issues, and the President of the United States. Democrats passed their bill and sent it to Senate. Since then ball has been in the Senate Republicans or the Senate majority leader, Mitch McConnell's hands to act.
Now, the next following weeks will be negotiations between Democrats and Republican and the White House as what the next action of the US government should be to address the economic crisis caused by Covid-19. Before going into the details of what each party wants let me address few disappointments against our political leaders.
First, these important negotiations will actually not tackle the problem we have had since the emergence of the Covid-19. It will not solve the problem, it will not unite the country in how to address the problem, it will not address the cures or vaccines. It is merely a political game to mitigate the pain.
Second, our elected officials will be negotiating on spending trillions of dollars that we don't have. US debt has been ridiculously high that they probably can only cover the interest on the debt on yearly basis at this time. It is also interesting how confident they will be able to write off these spending without having them in the treasury, but relying on the Federal Reserve to issue more debt. It is also important to mention that multiple Fed officials have stated publicly that stimulus package is absolutely necessary to keep the economy afloat.
Third, just like college students who procrastinate to prepare for midterms or exams until the very last day, the US Congress has demonstrated the similar behavior over and over. These problems could have been tackled long before. But they intentionally choose to wait until the very last moment. What I mean with the very last moment is that unemployment boost of $600 will expire in the end of this month. Whether it should be extended, cut down, or discontinued has not been addressed by Congress yet. It is one of the items they should be considering and negotiating about. The sad part it they have to wait until the very last moment, take their long recess time, etc before showing up to address the important issues that they are elected to do.
The US Economy is one of the largest economies in the world if not the largest. We live in an interconnected world where economies are interconnected with each other. We saw back in 2008-2009 global economic crisis how housing crisis caused massive chaos and economic crisis globally. The US Economy has already been hit hard by Covid-19 and directly impacted the massive losses in the service, hospitality, tourism industries. When any major industries are hit that causes a ripple effect into other industries as well.
We don't see the crisis being displayed in the stock markets yet, due to the heavy Fed involvement in the Repo markets and pumping in hundreds of billions of dollars. These actions by Fed had actually been detected even before the Covid-19 crisis, and many economist were predicting some sort of economic recession or crisis already. But throughout the Covid-19 crisis Fed was able to keep markets stable.
Now, the US Congress will be negotiating how to handle the potential economic issues with another stimulus package. Democrats asking a lot more borrowing and covering wide range of issues in their Heroes Act. Here are some of the things Republicans and Mitch McConnell are countering with: no money for state and local government, decreasing the income threshold for direct stimulus checks to individuals from 75K income to about 40K income, decreasing the unemployment boost from $600 to something ranging between $200-$450, adding liability protection to businesses for Covid-19 related legal actions, etc.
What the White House and the President Trump wants in this bill is a payroll tax cut and also liabilities protections. The White House seems to be in favor of another round of stimulus checks to people, however not much boost to unemployment beneficiaries as it may cause disincentive to return to work. What payroll tax cut does is it removes that tax from individuals so they can take home more cash. But what it also does is it defunds social security and medicaid for seniors. In surface it may seem like no additional money needs to be borrowed to cover this, it in essence weakens the already problematic social security fund and medicaid.
When it comes to unemployment boost, it seems White House or more specifically Treasury Secretary would prefer to make sure recipients do not get more than what they would have received if they were still employed. Basically capped at 100% of their wage. Important to note is that normally state unemployment benefits cover about 40% of recipients' normal wages.
It is hard to predict at what conclusion these negotiations will end, or when they will end. Congress will be going on recess again in August. If they don't resolve this matter, it may be postponed to September. People will be losing their unemployment boosts starting August. We don't know what kind of consequences it may present to the economy.
One of the main concerns is that if millions of unemployed do not get extension to the federal boost, they may face difficulties paying the rents and mortgages, which may result in large numbers of evictions and mortgage defaults. Last time major economic crisis hit it started int he housing market collapse and continued with dominos effect to the rest of the market.
We are not sure how this crisis will play out if people are put in the situation that they are no longer able to cover basic expense like mortgage and rents. If housing market were to collapse, we can be sure based on past experience that rest of the market will follow. Hopefully, elected leaders for once will use their intelligence and prevent any potential major economic crisis.
Of course this year being an election year for the US President, these negotiations will be politicized and focused on more in gaining political points rather than coming up with real solutions. Hopefully more intelligent minds will prevail and this won't lead us to another recession.