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"It's the Pandemic, Stupid"


The Senate Republican proposed stimulus and relief proposal comes up short in many ways. The biggest blunder is that it has the wrong order of priorities. The primary focus of any federal government program must be getting the virus under control. It's the pandemic stupid, and the current plan does not fix all of the economic "holes" it created. 

The Republican “Heals” Act


First, investors need to realize that the Republican ”Heals” Act (Heath, Economic Assistance, Liability Protection and Schools) is merely a proposal. Ordinarily, the House passes its legislation and the Senate then passes its version before negotiations start between the two chambers. Yet, in this case, the Republicans offered a list of items that they hope to be in the final legislation. In its present form, the Republican plan would not even generate enough votes from its party to pass in the Senate. So the final piece of legislation will be materially different. 

Second, emergency unemployment benefits appear to be the biggest sticking point. It is also the most urgent one since the current program ends on July 31. The Senate believes the current $600 additional compensation is too generous as it pays people more than they were making. That’s a fair criticism. But some people are only earning a fraction of what they did before since many businesses are operating at 50% or less, resulting in reduced pay for workers. Weekly jobless claims remain elevated, running around 1.3 to 1.4 million a week. Until the virus is under control curtailing the emergency unemployment program might do more harm than good. 

Third, the proposed plan has several extraneous items that should not be included. For example, increasing the deductibility of business meals from 50% to 100% sends the wrong message. The restaurant industry will only recover once the virus is under control. Changing the current tax law does little to help restaurants, and is only adding an unnecessary tax break that favors few. Also, providing $1.8 billion in funding for a new FBI building and relaxing the capital requirements for banks should be debated and handled in other legislation and appropriations. 

Fourth, the Republican plan provides no money for state and local governments to deal with the rising deficits emanating from the pandemic. The decision to close parts of the economy triggered a massive reduction in consumer and business spending. States revenue flow was crushed since they get nearly one-third of their revenue from sales and excise taxes. 

Failure to provide aid to states will only cost more in the long run. There's an old saying, "Pay me now or pay me more later". The decision not to include financial support to states makes for bad economics. States account for more than 10% of GDP and employ nearly 20 million. Congress is trying to "build a bridge" to the other side of the crisis. No bridge will be strong and deep enough if it did not offer assistance to states. 

Investors should focus on the details as well as the scale of the legislation that is finally approved. Congress needs to shift its priorities to fight the pandemic from all sides, and also partially fix "holes" created by the crisis. 

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