The Finance 202: Congressional Republicans resisting more coronavirus relief draw opposition from Fed, economists


with Brent D. Griffiths

Congressional Republicans citing ballooning deficits as a reason to object to new emergency relief spending are drawing out some powerful detractors.

Federal Reserve Chair Jerome H. Powell and a host of conservative economists have taken the unusual step of urging Congress to do more now to help stabilize an economy rocked by the coronavirus pandemic and worry about deficits later. 

There are no flashing warning signals from the economy itself — either in the bond market or from broader measures of inflation and interest rates — that the federal government has run out of room to borrow. And while polls show a plurality of Americans are wary of the deficit, a strong majority supports the federal government going big in its economic rescue efforts.

Meanwhile, state and local governments are clamoring for more help from Washington, as the April jobs report shows the extent of the damage the pandemic shutdowns have already wrought. 

The dynamic threatens to thrust congressional Republicans onto the defensive as Democrats prepare to roll out another package of relief measures.

Senate Republicans say they want to “pause” after approving about $3 trillion in coronavirus relief.  

House Democrats are still working out what to include in their next package, but it is expected to carry a multi-trillion-dollar price tag. 

Debuting it will put the ball in the Senate GOP’s court, where leaders have been telegraphing they feel no pressure to return it. “I don’t think we have yet felt the urgency of acting immediately,” Senate Majority Leader Mitch McConnell (R-Ky.) told reporters Monday. “That time could develop, but I don’t think it has yet.” 

McConnell said he is in “constant communication” with the White House, and “if we decide to go forward, we’ll go forward together.” And other top Republicans in the chamber are echoing his language. Sen. Lamar Alexander (R-Tenn.) on Sunday said Congress can’t “appropriate much more money” to offset the economic damage of the pandemic shutdowns. Senate Republicans don’t expect action on another installment of federal aid until June, if at all.

But Powell is urging action.

The Fed chair, whose approval ratings have spiked as the central bank has launched unprecedented interventions to stabilize financial markets and the broader economy, is pressing lawmakers to spend more.

“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Powell said at a news conference late last month. The comment put Powell in unusual territory in two regards: Typically, he advocates in broad strokes for deficit reduction, while also working to avoid giving lawmakers direct advice on fiscal policy. 

House Speaker Nancy Pelosi (D-Calif.) invoked Powell in a Sunday letter to House Democrats. “The Chair of the Federal Reserve Bank has told us to ‘Think Big’ because interest rates are so low,” she wrote. 

She pressed her call for colleagues to “go big” on a Monday conference call, per Lisa Mascaro of the Associated Press, then took it to the airwaves. “Let’s get on with it,” she said on MSNBC. ”We have a big need.”

Powell isn’t just providing lip service. “The Fed is putting its money where its mouth is, essentially ensuring that the Treasury can borrow at record-low interest rates for the indefinite future,” the New York Times’s Neil Irwin has noted. “Those rates, in turn, should make it manageable for the government to finance a large national debt.”

That’s because “what really matters for the sustainability of public finances is not the size of the debt, but the ratio of debt service costs to the overall economy. [Powell] is effectively pledging to keep the numerator low (through low interest rates), while asking Congress to do what it can to keep the denominator high (by preventing a sustained economic collapse).”

Powell will have a chance to reemphasize the message Wednesday morning when he speaks and then answers questions at a virtual event hosted by the Peterson Institute for International Economics. It comes as the Fed today launches its backstop for companies by beginning to buy corporate debt. 

Some conservative economists are also suspending their calls to rein in federal outlays.

“I’ve been a deficit hawk economist for 20 years. As soon as the economy recovers, we are going to need significant deficit reforms,” Brian Riedl, a senior fellow at the Manhattan Institute who has advised top Senate Republicans, recently told Seung Min Kim. “But again, you can’t begin to solve the debt crisis until they have solved the economic crisis, and that will take spending money in the short term.”

Similarly, Douglas Holtz-Eakin, a Republican former head of the Congressional Budget Office, told Politico’s Victoria Guida and Marianne Levine, “I’m a fiscal hawk from way back, and all of my heebie-jeebies are going off when I see these numbers. But then I look at the scale of the problem, and I think, yeah, that’s that. Gotta do it.”

And Michael Strain, of the right-leaning American Enterprise Institute, says he expects to see more deficit-financed backstopping of the economy. “It’s reasonably likely that the economy is going to need significant government support for many, many months,” he told Rachel Siegel last week. “That is going to have to change as the public health situation changes and evolves.”

There’s no indication yet the federal government has exhausted its ability to borrow.

Borrowing this year is set to top $4.5 trillion, quadrupling the annual deficit and pushing it to its highest level relative to the size of the economy since World War II. “That would push the national debt to 101% of GDP, also the highest since the end of World War II,” the Wall Street Journal’s Kate Davidson notes.

Yet as the Treasury issues a flood of new U.S. debt to finance all the spending, bond traders are showing an undiminished appetite to snap it up. The yield on the 10-year Treasury bond remains near record lows, hovering near 0.7 percent this morning. And there’s little sign so far that the Fed’s bond buying is goosing inflation, which has held stubbornly steady below the central bank’s 2 percent target.

Treasury Secretary Steven Mnuchin highlighted the favorable conditions in a Monday appearance on CNBC. “One of the reasons I do feel comfortable with us spending all this money is because interest rates are very low. And we’re taking advantage of long-term rates,” he said. 

Lou Crandall, chief economist for Wrightson ICAP, tells me policymakers “need to be mindful” of the growing debt pile and “make sure the investments we’re making are worthwhile.” He also acknowledges there is little evidence yet the extra borrowing is creating strains. “But it’s one of those issues where you will only learn the hard way if you get to the point where you’re overburdening the system with federal debt.”

Polls show Americans are wary of too much spending but still support a big federal intervention.

Just under half of voters expressed concern about the deficit in a recent Wall Street Journal-NBC News poll, while 40 percent said they were more worried the federal government would spend too little, extending the economic downturn. But “about six in 10 voters in the survey approved of the federal government taking an expanded role in the economy, which has included providing trillions of dollars in stimulus,” WSJ’s Catherine Lucey noted.

That finding aligns with sentiment Gallup noticed before the pandemic: Growing popular support for activist government. “Since 2010, the percentage of Americans saying government should do more to solve the country’s problems has increased 11 percentage points, to 47%,” Gallup found, “and the percentage wanting government to take active steps to improve people’s lives is up eight points, to 42%.”

The reopening debate

Americans give governors high marks, but lower praise for those pushing hasty reopening.

That is the major finding in a new poll this morning: “Governors collectively have been winning widespread praise from the public for their handling of the coronavirus outbreak, often with the kind of bipartisan approval that has eluded [Trump]. But a large-scale Washington Post-Ipsos poll finds that some Republican governors who have embraced reopening their states are struggling to achieve that consensus,” Scott Clement and Dan Balz report.

“The survey of more than 8,000 adults reveals a wide range in the assessments of Republican governors, but not for their Democratic counterparts. The disparities appear to be linked not solely to partisanship, but also to the differing paths the governors have adopted as they seek to balance efforts to contain the spread of the virus while trying to limit the damage to their economies.”

Other key findings:

The contrast is widest in two states won by Trump in 2016: In Ohio, 86 percent of adults say they approve of the way Gov. Mike DeWine (R), who moved aggressively to close down his state and has been cautious about lifting the restrictions, has dealt with the crisis. In Georgia, 39 percent of adults approve of the performance of Gov. Brian Kemp (R), who moved less swiftly than some other governors to mitigate the spread and has been in the forefront of reopening the economy there.”

American’s still want to take it slow: “Across 12 states with sample sizes large enough to break down results, from Pennsylvania to Texas to California, at least 7 in 10 say they prefer focusing on slowing the virus’s spread rather than beginning to reopen businesses.”

  • But there’s a big partisan split: “More than 9 in 10 (92 percent) Democrats and Democratic-leaning independents say they favor closures to deal with the virus, while Republicans and Republican-leaning independents are split almost evenly, with 49 percent saying closures should be the top priority and 50 percent saying businesses should be opened up again.”

Coronavirus fallout

In the U.S.:
  • At least 1,341,000 cases have been reported; 80,060 people have died. 
  • Economists now expect a swoosh-shaped recovery: “Named after the Nike logo, it predicts a large drop followed by a painfully slow recovery, with many Western economies, including the U.S. and Europe, not back to 2019 levels of output until late next year—or beyond,” the WSJ’s Paul Hannon and Saabira Chaudhuri report. “The sobering new view reflects the depth of the contraction now being recorded for the spring, as well as more evidence that soaring joblessness and months or years of social distancing—particularly in the West—will depress economic activity well into next year.”
  • Fed’s Evan says growth may return in second half of the year: Chicago Federal Reserve leader Charles Evans said “the most probable outlook still holds for a modest economic recovery in the latter half of the year …” the WSJ’s Michael S. Derby reports.
  • White House requires masks, except for Trump: “A memo Monday instructed most White House officials to wear masks or face coverings in the West Wing, as well as avoid ‘unnecessary visits’ there — directives to prevent the novel coronavirus from spreading further inside the presidential compound,” Ashley Parker, Josh Dawsey and Philip Rucker report. “The request does not apply to staff members seated at their desks if they are ‘appropriately socially distanced,’ and Trump is not expected to wear a mask in the White House, aides said.”
Elon Musk escalates fight with local health officials, reopens California factory.

Telsa’s CEO mentioned he might be arrested for defying local orders: “It is one of the most prominent examples of a powerful public figure defying local health orders amid the coronavirus response,” Faiz Siddiqui reports from San Francisco.

“Tesla on Saturday filed suit against Alameda County, where its Fremont, Calif. factory is located, seeking an injunction against orders it stay closed. The suit alleged violations of the due process and equal protection clauses of the 14th Amendment … Musk has repeatedly downplayed the seriousness of the coronavirus, at one point calling the panic ‘dumb.'”

Musk tweeted:

More from the corporate front: 
  • Biggest mall owner plans to have 50 percent of centers reopened this week: Simon Property Group “made the announcement as it reported quarterly earnings, where Simon’s quarterly profits fell 20.2 percent during the first quarter ended March 31,” CNBC’s Lauren Thomas reports. “Simon owns roughly 200 malls and outlet centers in the U.S., including Copley Place in Boston and Northgate Mall in Seattle.”
  • Stage Stores files for bankruptcy: “The Houston-based company said it is searching for a buyer and plans to reopen and liquidate its stores beginning Friday. The retailer has 738 stores across half a dozen brands, including the off-price chain Gordmans and the Peebles and Stage department stores, in small towns and rural areas in 42 states,” Abha Bhattarai reports.
  • Neiman will burn hundreds of millions in bankruptcy: “At a hearing Friday in the U.S. Bankruptcy Court in Houston, Neiman adviser Tyler Cowan said the overall cash burn is forecast to reach $370 million by the end of July,” the WSJ’s Soma Biswas reports. All of this will come before Neiman Marcus can reopen any of its stores.
  • Under Armour forecasts grim Q2: “The Baltimore-based company also reported bigger-than-expected loss for the first quarter and revenue that missed Wall Street estimates. About 80 percent of Under Armour’s business around the world remained closed since April, Chief Financial Officer David Bergman said, even as most of its own stores and wholesale operations in Asia have already reopened,” Reuters’s Nivedita Balu reports.
Around the world:
  • Japanese pan government’s response: “The Japanese public are deeply unhappy with their government’s handling of the epidemic, much more so than people in the United States and Britain where the death toll from covid-19 is much higher, a new survey shows,” Simon Denyer reports from Tokyo.
  • UK gives green light for Premier League to return: “The the world’s richest confederation of soccer teams, may resume its season June 1 amid heavy restrictions,” Matt Bonesteel reports. “’Cultural and sporting events to take place behind closed doors for broadcast, while avoiding the risk of large-scale social contact,’ will be allowed, the government announced in its plan to ease lockdown restrictions. Fans will not be allowed back into stadiums until ‘significantly later,’ the document said.”

When superpowers collide

China wants to reopen Phase 1 trade deal, but Trump says no.

Advisers in Beijing want a better deal: “Hawkish voices have emerged in China seeking a reevaluation of its Phase 1 trade deal with the United States, with some advisers urging fresh talks, a state-controlled tabloid said, citing sources close to the Chinese government,” Reuters’s Ryan Woo reports.

“Malicious attacks by the United States have ignited a ‘tsunami of anger’ among Chinese trade insiders, the Global Times said. It added that China had made compromises for the Phase 1 pact to press ahead. ‘It’s in fact in China’s interests to terminate the current Phase 1 deal,’ a trade adviser to the Chinese government told the Global Times, pointing to the weakening U.S. economy and the upcoming U.S. presidential elections.”

Chinese investment in U.S. drops to lowest since the recession: Chinese investment in the United States dropped to $5 billion in 2019, a slight decrease from a year earlier and the lowest level since the global financial crisis a decade ago, according to a new analysis by the U.S.-China Investment Project,” Reuters’s Ted Hesson reports. 

“The analysis attributed the investment slowdown to Chinese restrictions on outbound capital, more regulatory oversight in the United States, slower Chinese economic growth, and rising tensions between the two nations.”

Trump administration plans to alert Chinese hackers are targeting vaccine research: “The warning from the FBI and Department of Homeland Security will also specify the threat as coming from ‘non-traditional actors’ such as Chinese students and researchers in the United States, said one official who, like others interviewed, spoke on the condition of anonymity because of the issue’s sensitivity,” Ellen Nakashima reports.

“There is no indication that any attempt thus far has been successful, said a second official. The expected warning should be out within a week or so. Asked about the warning, which was first reported by the New York Times, Zhao Lijian, the spokesman for the Chinese Foreign Ministry, said, ‘We firmly oppose and fight all kinds of cyber attacks conducted by hackers. We are leading the world in covid-19 treatment and vaccine research. It is immoral to target China with rumors and slanders in the absence of any evidence.’ ”

Trump tracker

Supreme Court set to hear cases on Trump’s finances and tax returns.

Trump has long seen the high court as his fail safe: “The court will spend hours in teleconferenced hearings — with the world listening in — on three cases with potential landmark constitutional consequences. All concern Trump’s long-running legal fight to shield years of income tax returns from public view and keep his private financial records from the hands of Democratic-led House committees and a New York district attorney,” Robert Barnes and Ann E. Marimow report. “The court’s conclusion this summer will carry major implications for the limits of presidential power and accountability, and could affect the fall election.”

  • Trump has lost in lower courts: “The president is aggressively arguing that subpoenas to banks and an accounting firm for years of financial records from him, his company and his family are unprecedented attacks on the presidency itself.”
  • Previous presidents have lost on similar grounds: “Richard M. Nixon and Bill Clinton have made similar arguments about the deference owed the occupant of the White House and come away empty-handed. Both resulted in rulings against the chief executives, and the presidents’ own nominees joined in the unanimity.”

Pocket change

Facebook fights back in Washington.

As lawmakers demand more regulation, the social network prepares to poke back: “Facebook is working behind the scenes to help launch a new political advocacy group that would combat U.S. lawmakers and regulators trying to rein in the tech industry, escalating Silicon Valley’s war with Washington at a moment when government officials are threatening to break up large companies,” Tony Romm reports.

“The organization is called American Edge, and it aims through a barrage of advertising and other political spending to convince policymakers that Silicon Valley is essential to the U.S. economy and the future of free speech… Facebook is viewed as a critical member in helping to launch American Edge, the sources said, though some cautioned it is not the only one. On the group’s board are a former Republican governor, federal regulator and congressman, according to people familiar with the effort, and it’s being advised by a stable of veteran Democratic and Republican consultants.”

Chart topper

The U.S. is reviving the economy despite on of the highest infection rates in the world. Michael Cembalest, JPMorgan Asset Management’s chairman of market and investment strategy, points out in his latest “Eye on the Market” note that “we’re already picking up signs of a revived economic pulse at a national level.” From the note: 

Daybook

Today:

  • The Senate Banking Committee holds a hearing on the oversight of financial regulators. Randal Quarles, the Fed’s vice chairman of supervision and Jelena McWilliams, chairman of the FDIC, are among those set to testify
  • Anthony S. Fauci, FDA Commissioner Stephen Hahn and CDC Director Robert Redfield are set to testify about reopening the country before the Senate Health, Education Labor & Pensions Committee
  • The Senate Judiciary Committee holds a hearing on liability during the pandemic
  • Toyota Motor, Honda Motor, Duke Energy, Logitech and Casper Sleep are among the notable companies reporting their earnings

Wednesday:

Thursday:

  • The Labor Department releases the weekly jobless claim numbers
  • Denny’s is among the notable companies reporting its earnings

Friday:

  • The Census Bureau releases its monthly retail sales numbers for March and advance numbers for April
  • DraftKings is among the notable companies reporting its earnings

The funnies

From The Post’s Tom Toles:

Bull session





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