What is a stimulus package?
There has been a lot of hype this week surrounding the Democrats $3 trillion stimulus package. But, what exactly is a stimulus bill? And what does it mean for us?
First, a stimulus bill, as the name implies, is designed to stimulate the economy out of a recession. Congress can use its legislative powers to appropriate funds from the Treasury that have not been appropriated in this fiscal year. The goal of a stimulus package is to increase demand, increase employment, and increase consumer spending.
Now that we understand what a stimulus package is, let’s breakdown the 3 different options available to congress:
- Monetary Stimulus
- Fiscal Stimulus
- Quantitative Easing
Stimulus packages that fall into this category are intended to decrease the cost of borrowing money by slashing interest rates. The goal is to encourage spending/buying by increasing the amount of money in circulation. The lower interest rates are, the cheaper it is for financial institutions, small businesses and consumers to get loans. Therefore encouraging consumer spending, hiring and increasing demand in the market.
A fiscal stimulus package is designed to increase government spending and decrease taxes. These packages inject money into the economy by giving consumers and businesses some of their tax money back. This increases the disposable income of consumers and businesses by unshackling them from burdensome tax requirements. Fiscal stimulus is most effective at encouraging hiring and decreasing unemployment. However, fiscal stimulus can be risky. Consumers and businesses could save the money returned to them instead of spending it and would render the stimulus ineffective.
Quantitative Easing (QE for short)
This one is a doozy. QE is an expansionary policy. This means it increases the size of the government through purchasing different types of assets, most often through bonds. By artificially increasing the demand for bonds, it drives the price higher. In turn, higher bond prices increase the excess reserves of financial institutions. Excess reserves means banks have more money, more money in the bank means there is more money to lend out. When banks have more money to lend, this decreases interest rates and facilitates commercial and consumer lending. In short, the government increases its control of financial institutions by buying bonds, and in turn decreases interest rates and increases the money supply in the economy.
What’s inside the Democratic stimulus package?
The $3 trillion package from the Democratic leadership is an example of a monetary stimulus package. It includes $1 trillion for state, local, and tribal governments, extends the $600 weekly unemployment payments to individuals (up to $6,000 per family) through January 2021, another round of $1,200 checks for individuals, $75 billion for testing/tracing for covid-19, $175 billion for housing support and student loan forgiveness, and also introduces a requirement that all voters be able to vote by mail in the upcoming election. Republicans have staunchly opposed this bill from the start calling it a wish-list with no real potential in the Senate. The bill narrowly passed the House of Representatives, 208-199. Fourteen Democrats defected and voted against the measure, while only one Republican crossed into the ‘Ay’ column.
Republicans oppose this bill for multiple reasons. First, there have been 4 previous stimulus bills. All of which have totaled less than $3 trillion. Not only is there sticker shock in the Republican caucus, but Republicans are not convinced the previous stimulus has been effective. Republicans want to stall and trim what ever fat off the bill they can. President Trump took to Twitter bashing Nancy Pelosi and House Democrats for attempting to ‘bail out poorly run states’. Instead of a monetary stimulus package, Republicans have been considering fiscal stimulus and another round of QE. Larry Kudlow, head of the White House National Economic Council, has proposed slashing the payroll tax in half for companies who move production back into the United States. Also, Mitch McConnell and Senate Republicans have called for liability protections for businesses to ward off a wave of frivolous lawsuits from the most recent stimulus packages. What another round of QE would look like is hard to say, but Republicans and President Trump are obsessed with keeping the stock market value high so it is very probable we will see another round in the coming weeks.
What happens next?
Since the bill has passed the House, it is now moving into the Senate. Republicans are sure to vociferously oppose the bill. Republicans have control of the Senate and will vote the bill down. But, there are 19 Republican Senators facing competitive reelection battles in 2020. This stimulus package will put these Senators at risk of losing votes if they vote against a bill that would provide support to their supporters. Voters are struggling, and Senators who vote against this package will have to explain why they voted against a bill that would provide support for them.
Unfortunately, I think the Democratic leadership in the House fumbled the ball here. Nancy Pelosi and House Democrats had an immense amount of leverage in this process. By drafting this wishful and fool-hearted bill Democrats have put all of the control in the Republicans hands. This bill will either remain on Mitch McConnell’s desk or will die by vote in a few weeks. It is no doubt the American people need help. Unemployment claims are up to nearly 30 million. Instead of writing a bill with some logical compromises and some wishful additions Democrats have drafted a wish-list of proposals that no Republican would ever support. This is not a time for politics. It is a time for compromise and logical, beneficial solutions for every day Americans.