It looks like there won’t be any agreement on a new stimulus package any time soon. Senate Majority Leader Mitch McConnell, R-KY, announced on Aug. 13 that the Senate is recessing until after Labor Day. Even if the House cuts short its recess on Aug. 22 to vote on legislation to prohibit changes at the U.S. Postal Service, it’s not clear whether the Senate will return as well – or whether either chamber will take any action related to economic stimulus.
This could have dire consequences for the economy and the markets. The improving, though still floundering, economy will likely reverse course as tens of millions of Americans lose benefits and struggling companies are no longer able to obtain the Paycheck Protection Program loans.
The impasse on fiscal stimulus will likely harm residential and commercial real estate markets. Eviction moratoriums and stimulus in the form of unemployment insurance and/or direct payments have boosted collections in the residential and multifamily sectors. Consumer spending, which accounts for about 68% of GDP, will be further curtailed, adding another blow to the retail sector. The outlook for the office sector, which was already uncertain given the increase in remote work, will likely face further challenges from a lapse in stimulus as small businesses face financial trouble. Even the industrial sector, which is performing relatively well, has the potential to be hit if small-business tenants are forced to close their doors.
McConnell made his announcement after weeks of squabbling – and 2½ months after the Democratic-controlled House passed a $3.5 trillion stimulus package dubbed the HEROES Act. On Aug. 8, President Trump took unilateral action that he said would spur an economic recovery, but it’s not clear how effective his actions will be – or even if all of them are constitutional.
The HEROES Act included extending until Jan. 31, 2021, the $600-a-week federal unemployment insurance (UI), which expired July 31, along with an eviction moratorium for most tenants and homeowners, money for coronavirus testing and aid for states and municipalities, schools and businesses, along with a second round of direct payments of $1,200 to most adults. The Republican leadership wanted to limit spending to $1 trillion. While it would have included the $1,200 stimulus checks, it provided no direct aid to states and municipalities.
In the wake of the president’s actions, most expected that negotiations would resume in hopes that they would lead to both houses of Congress passing some formal legislation for the president to sign. Instead, there was little progress before McConnell made his announcement.
On Aug. 12, House Speaker Nancy Pelosi, D-CA, and Senate Minority Leader Chuck Schumer, D-NY, rejected a request to resume negotiations. They told Treasury Secretary Steven Mnuchin that they wouldn’t return to the bargaining table unless Republicans agree to at least $2 trillion in spending.
Complicating matters was that the president on Aug. 13 said he opposed any agreement that included extra spending to make it easier to vote by mail. The HEROES Act included $25 billion in aid for the cash-strapped U.S. Postal Service and an additional $3.6 billion specifically to help the USPS handle an expected surge in mail-in voting during the pandemic. The president has repeatedly claimed without proof that extensive mail-in voting would lead to voter fraud and unfairly help Democratic candidates.
All of these negotiations and debates have been against the backdrop of the continuing COVID-19 pandemic, in which the death toll has been rising again nationally in recent weeks with several deadly hot spots, and the related hardship still being faced by millions after the economy was essentially shut down. The U.S. GDP in 2Q 2020 fell at a catastrophic annual rate 32.9% (first estimate). The national unemployment rate soared as high as 14.7% in April. It has since dropped to 10.2% in July, but that remained higher than at any time during the GFC. For the week ending Aug. 7, the number of unemployment claims finally fell below 1 million for the first time since March, but that is still significantly higher than the peak of about 675,000 during the GFC – and many analysts worry that the economy will slide back down again without further government action.
When President Trump stepped into the breach by signing one executive order and three memorandums, this led to two key questions:
- Will his action achieve the goal of preventing additional economic pain?
- Are his actions even constitutional?
Trump took executive action to enact:
- A federal eviction ban;
- A payroll tax suspension;
- Relief for student borrowers;
- A new weekly supplement for the unemployed.
The president’s eviction ban does not revive the since-expired moratorium that was passed in March as part of a $2.2 trillion stimulus package. Instead, it said that federal policy was to minimize evictions during the pandemic and that officials should identify statutory ways to help homeowners and renters. It’s not clear yet how many evictions this will prevent or delay, but many states and municipalities have enacted their own eviction suspensions of varying length and with varying provisions of how soon the money will have to be paid back.
The suspension of the payroll tax for Social Security paid by individuals is retroactive to Aug. 1 through the end of 2020. Individuals slated to earn $104,000 a year or less would qualify. The president doesn’t have the authority under the Constitution to unilaterally cut taxes, so his order functions as another moratorium. Unless Congress passes a bill that he signs into law to eliminate the tax either for the rest of the year or for a longer period, taxpayers would presumably have to pay it back when they file their 2020 federal taxes next year. The president said, however, he will work to “terminate” this year’s deferral if he’s re-elected.
Although Trump has been pushing to cut or eliminate the payroll tax as part of a stimulus plan since the pandemic began, it has received little support – even from Republican lawmakers – because it wouldn’t provide any money for people already out of work. And since that tax money is earmarked for Social Security payments, many worry that it will gut the Social Security trust fund, which already is projected to run out of money by 2034, even though the lost money could come from the government’s general fund. In addition, assuming that the payroll tax is reinstated at some point, that will, in effect, at that time be felt as a tax increase.
The third executive action extends relief for student borrowers by waiving interest and deferring principal repayment on student loans.
Perhaps the most controversial action is Trump’s plan to replace the original $600 a week in enhanced unemployment insurance (UI) benefits with $300 a week from a $44 billion fund set aside for disaster aid. Originally, states would have had to spend an extra $100 a week for each unemployed individual for them to qualify for the federal money, and it was touted as a benefit of $400 a week. After many states objected, the U.S. Department of Labor released guidelines that effectively removed this requirement.
It’s hard to predict how long it will take for the new UI money to start flowing to unemployed workers and how long that money will last if it’s not replaced with new legislation.
In the short term, while unemployed individuals will receive half as much in federal unemployment money, nobody will receive $1,200 stimulus checks, and states and municipalities will continue to grapple with rising costs and declining revenue. Many state and local governments, which aren’t allowed to run yearly deficits, will be forced to lay off workers, raise taxes or both – creating a further drag on the nation’s economy. In perhaps the most extreme example, New York City Mayor Bill de Blasio said the nation’s largest city plans to lay off 22,000 public workers on Oct. 1 unless another source of money materializes.