The Human Implications of the Washington Stalemate
The title of these weekly articles often starts with, “The Investment Implications of…..” This is usually appropriate since almost all big issues have investment implications and the focus of these articles has always been to see the investment...
The title of these weekly articles often starts with, “The Investment Implications of…..”
This is usually appropriate since almost all big issues have investment implications and the focus of these articles has always been to see the investment environment with clarity.
Sometimes, however, it must be acknowledged that the investment implications of an issue are far less important than its other impacts. This has been the case throughout this blighted, pandemic year and is particularly true of the stalled talks in Washington on the issue of further coronavirus relief.
Thus far, financial market reactions to this have been muted. However, a continuation of this political standoff could worsen the economic toll of the pandemic, result in further unnecessary illness and death, and further erode both the functioning of the democratic process and the trust Americans place in it. Indirectly, of course, all of this has impacts on financial markets also. However, to see them, it is important to first appreciate the human implications of the Washington stalemate.
First, a quick review of the state of the negotiations:
The CARES Act, passed in March, was designed to combat the impact of a short-term pandemic. One-time checks were mailed out to taxpayers, relief was provided to small businesses, so long as the funds were used within an eight-week window, and a special $600 extra weekly unemployment benefit was provided both to workers with unemployment insurance and gig workers, with an expiration date of July 31st.
In retrospect, it should have been clear, even in March, that the pandemic would haunt the economy into 2021. In recognition of this, on May 15th, the Democrat-led House of Representatives passed the $3.4 trillion HEROS Act, as a proposed further relief measure. Senate Republicans, in late July, published, although didn’t vote on, a counter-offer, dubbed the HEALS Act, estimated to cost $1.1 trillion. Since then, negotiations have been slow, with Republicans and Democrats arguing over both the size of any further package as well as its details.
Both sides seem to favor of another round of “one-time” checks to taxpayers and some money to help school reopen safely. However, beyond that, priorities differ, with Republicans pressing for incentives to rehire workers and liability protection for employers against coronavirus-related law suits. They have also proposed that the $600 bonus unemployment benefits be cut to $200 to ensure that workers receive more when working than they would have if they were receiving unemployment benefits. Democrats, conversely, have argued for a continuation of the $600 in extra unemployment benefits, as well as more money for state and local governments and money earmarked for expanded testing.
As talks between the two parties stalled in early August, the President signed a number of executive orders and memoranda related to some of these issues. However, the President’s actions were limited in scope, would take time to implement and are likely to be challenged in court since Congress, rather than the Executive, is assigned the power to tax and spend.
Finally, as an added complication, the United States Postal Service has been implementing cost-cutting measures to reduce its deficit and has warned states that this could interfere with their ability to supply and return mail-in ballots for the November election. The President has resisted efforts to provide the additional postal service funding that is contained in the Democrats version of the bill.
Such is the unseemly game being played out in Washington today. However, for many millions of Americans, the delay in passing another coronavirus relief bill could have very real and painful consequences.
The Risk of More Wide-Spread Poverty
The most obvious problem is the distress that will increasingly be felt by workers laid off in the pandemic.
Between February and April, the U.S. lost 22.2 million jobs and has since regained 9.3 million or 42% of those jobs. However, the initial job losses hit the lowest-paid workers the hardest and their jobs have seen the slowest rebound. As evidence of this:
· Between February and July, employment fell by 13.5% for those with a high-school diploma compared to just 1.7% for those with a 4-year college degree.
· Production and non-supervisory workers account for about 70% of total payroll employment. However, they have experienced 85% of the job losses in the pandemic.
· We estimate that the prior average weekly paycheck for laid-off production and non-supervisory workers was $693 compared to $820 for those not laid off.
The truth is that many of those left jobless in the pandemic, particularly in the restaurant, hospitality and retail industries, had been living paycheck to paycheck before the pandemic hit. Normal unemployment benefits, which are designed to replace roughly half of normal weekly income, would leave these workers in a desperate situation. This was avoided, through July 31st, by an extra $600 weekly federal payment.
There is a strong argument for a smaller number than $600 since it does provide most of these workers with more income than they would normally receive working. However, letting it lapse to zero, as has happened since July 31st, will quickly lead to missed rent payments and difficulty in buying essentials. Needless to say, a prolonged standoff, which lasted until after the election, would mean significant hardship for these workers and their families, as well as gig workers who were also receiving the $600, if they claimed to have lost their livelihood due to the pandemic.
It may well be that many of these workers will scramble to find any form of employment in the weeks ahead, cutting the rolls of those on unemployment benefits. This could result in lower unemployment claims, which are due out on Thursday, and further job gains of over a million workers in the August employment report due out on September 4th. However, the measured unemployment rate could remain above 10%, as millions of workers who had stopped looking for work now do so and are thus counted as “unemployed” rather than “not in the labor force”.
The Potential to Worsen the Pandemic
A second problem with no further coronavirus relief concerns efforts to control the pandemic itself. Since late July, the seven-day moving average of new confirmed cases has fallen back from 65,000 to just over 50,000. However, this is still resulting in a grim death toll of roughly 1,000 per day.
50,000 confirmed cases per day, with over 7% of tests coming back positive, still represents a pandemic out of control. In the weeks ahead, as the weather turns colder, attempts are made to reopen schools, at least partially, and lockdown fatigue worsens, it is unfortunately quite possible that this number could begin to rise again. This would, of course, be made worse if many low-wage workers feel that there is now no effective support system in place to protect them if they are jobless. Many may hesitate to get tested for fear that a positive result, even if asymptomatic, would force them to take time off. In addition, cash-strapped states will have trouble expanding testing and contract-tracing. All of this could lead to a worse winter in terms of coronavirus mortality and leave the United States with a longer road to wipe out the disease in 2021, even when a vaccine becomes available.
The Danger of a Contested Election
Finally, there is the question of the election itself. In normal times, most Americans would probably prefer to exercise their franchise in person on election day. However, a recent Pew Research Institute poll showed that this time around, presumably due to the pandemic, only 40% of voters would prefer to do so with 39% wishing to vote by mail and 18% wanting to vote early in person.
Importantly, over the course of the year, American attitudes towards the pandemic have become politicized, with Republicans generally less concerned about the pandemic than Democrats. As a result, the Pew survey showed that while 60% of Trump supporters would prefer to vote in person in November, only 23% of Biden supporters would.
This is, in a nutshell, why secure well-funded mail-in voting is so important. It may well happen that, on election night, in person votes are counted first and would likely skew heavily towards the President. However, main-in ballots will likely skew heavily towards Joe Biden. In a well-run election, or a landslide, this wouldn’t matter much. However, if some ballots are challenged because they were delivered late by the post office, or if some claim of irregularity is lodged, the result of the election could be challenged, leading to wide-spread protests if the President is reelected or threatening the peaceful and orderly transfer of power if the election swings to Joe Biden.
The failure of the parties in Washington to agree on a further relief package would increase economic distress, likely worsen the pandemic and could even undermine perceptions of the democratic process in the United States. As such, it represents a broad threat both to U.S. stocks and the dollar. Because of the investment implications of the Washington stalemate, investors may want to increase their allocation to overseas assets. Because of the human consequences, they may want to urge both sides to come to an agreement soon.
 See Election 2020: Voters Are Highly Engaged, but Nearly Half Expect to Have Difficulties Voting, Pew Research Institute, August 13th.