Hopes of Congress and the White House reaching a deal on further economic stimulus have faded, as an unexpectedly steep drop in the jobless rate has stifled appetite among Republicans and the White House for a compromise on new coronavirus relief.
Haggling over fresh federal support for the US economy will resume when lawmakers return to Washington after their summer break this week, as the impact of $3tn in relief funds approved at the start of the pandemic fades.
Economists and analysts expected an agreement to be struck by the end of the month to plough about $1.5tn in new government money into the economy, which could be pivotal to sustaining the US rebound. But prospects for a deal have diminished.
The strength of equity markets throughout August, as well as Friday’s data showing joblessness dropping to 8.4 per cent, below the unemployment peak during the Great Recession, has removed some of the pressure on Republicans on Capitol Hill, and Trump administration officials, to strike a deal.
“In the Cares Act [the March stimulus bill] we got to a deal because there was a crisis mentality on both sides, when the market was crashing and the economy was shutting down. The crisis mentality is just not there right now on the Republican side,” said Ben Koltun, senior research analyst at Beacon Policy Advisors in Washington.
After the release of the unemployment data on Friday, Larry Kudlow, President Donald Trump’s top economic adviser, told Bloomberg TV that the US could “absolutely live with” no deal on new stimulus. “Right now the economy is on a self-sustaining recovery path in my judgment and will continue along those lines, and will continue to surprise on the upside,” he said.
Democrats say the US economy needs an extra $3tn in fiscal stimulus to shield households and businesses from the impact of mass unemployment and income loss, and warn failure to strike a deal could be devastating. They have also pointed out that the US is experiencing a “K-shaped” recovery, with wealthier Americans bouncing back quickly to pre-pandemic levels of activity, while low-income families face hunger, joblessness and housing uncertainty.
Even Federal Reserve officials have called for a deal to be reached on new stimulus, saying it would provide vital support as the impact of the Covid-19 recession lingers.
“It really does behove us as a country, as a very wealthy country, to use our great powers to support people who did nothing wrong,” Jay Powell, the Fed chair, said in an interview with NPR that will be aired on Monday.
But Democrats may have missed the window when Republicans were feeling maximum pressure to reach an agreement, in July, due to new increases in infection in many sunbelt states that raised fears of a “double dip” in economic activity. At the time, Republicans proposed $1tn in new spending, but Democrats dismissed the offer as insufficient and held out for a price tag of more than $2tn.
When Congress returns this week, Senate Republicans are expected to propose new stimulus legislation worth $500bn, which is even farther away from the Democratic position, and will probably be rapidly dismissed.
Republicans and Democrats are separately discussing an agreement to extend funding for the federal government until after the end of September, which would avert a federal shutdown but remove another catalyst for action.
“The co-operative spirit we had in March and April has dissipated as we move closer and closer to the election,” Mitch McConnell, Senate majority leader, told reporters last week.
Ted Cruz, the Republican senator, told a virtual Texas business panel: “I am sceptical about anything being passed between now and November.”
Some Democrats are calling for compromise. “I think there is a recognition that we need to get something done and if we don’t, it’s going to hurt both sides,” Josh Gottheimer, a Democratic congressman from New Jersey and a member of the bipartisan Problem Solvers Caucus told the Financial Times. “I think a lot of people are really frustrated that both sides aren’t talking. You have to get back to the table.”
But while Mark Meadows, White House chief of staff, and Steven Mnuchin, Treasury secretary, have expressed some optimism that a deal can still be passed, Mr Trump has shown less interest in an agreement.
Instead of encouraging negotiations, Mr Trump has moved ahead with a series of executive actions to try to make up for the lack of fiscal support. But his unilateral moves so far have had a very limited impact on the economy.
On Friday the president remained combative, saying Democrats were “holding additional China virus relief hostage to reasons that nobody can understand”. He floated a proposal to direct $300bn in unused funds for lending to troubled business under the Cares act into the economy by executive order, which he probably could not do without congressional approval.
“His focus on the campaign trail is on other things right now. It doesn’t seem like [a stimulus deal] is seen among Republicans and Trump as an important political calculus to their electoral success,” said Mr Koltun.
Mr Meadows has indicated that the biggest sticking point for the two sides is how much money to allocate for state and local governments. Democrats have asked for nearly $915bn, while Republicans say they are willing to give up to $300bn.
The stalemate has left scores of cities and municipalities in the lurch, as many face budget shortfalls.
Dean Trantalis, the Democratic mayor of Fort Lauderdale, Florida, said cities were getting increasingly frustrated about the lack of consensus, adding it might be time for the two sides to address some of the key components in separate bills, just to ensure that something gets passed.
“They basically gave us a lifeline and then cut us off before things were able to stabilise,” he said. “The bill is very complex and I think we’re going to have to address it in a piecemeal fashion — try to get portions of it agreed.”
He added: “We can’t hold everything back just because we can’t get everything we want.”