(Bloomberg Opinion) — President Donald Trump dealt his re-election prospects a damaging blow on Tuesday by abruptly ending talks between his administration and House Speaker Nancy Pelosi on additional legislation to support the weak economy. Trump subsequently indicated a desire for some relief items, including support for airlines and direct payments to households. But after the president’s gyrations, the odds of more stimulus are very low.
Passing another round of fiscal-policy support following March’s $1.8 trillion Cares Act should not have been a heavy lift for Republicans in Congress, particularly in an election year when a strengthening economy would help incumbents. The great irony is that the success of Congress’s efforts to support the economy in this once-in-a-century crisis seems to have undermined the perceived need for those efforts to continue.
Some Senate Republicans and White House economic advisers are acting like hospital patients who receive treatment and feel better, only to conclude that their treatment wasn’t necessary because they feel fine. It’s like denying the efficacy of the polio vaccine by pointing out that very few people have polio. Or walking through a rainstorm with an umbrella and not getting wet, and concluding that the umbrella wasn’t necessary after all.
The challenge is to think of the counterfactual — of what the world would have been like if different decisions had been made. Yes, the economy has recovered considerably from its low point in March and April. But that does not argue against the need for additional fiscal-policy support. Instead, it argues that this support was critical and effective.
One way to get a glimpse of the counterfactual is to look at how economic forecasts change under different scenarios. Economists at Goldman Sachs had been expecting another round of economic-recovery legislation. They had built into their forecast an additional $1 trillion of government spending that would include federal supplements to standard state-provided unemployment benefits and additional grants to small businesses to support employment.
They now assume that no additional stimulus will be coming until at least 2021. This will reduce household income in the fourth quarter of 2020 relative to what it would have been if Congress had provided additional support, a shift that will weigh on consumer spending and GDP. Goldman Sachs forecasts that household spending will slow to 0-0.5% in September and October and will turn negative in November and December. If Congress were to pass the additional $1 trillion package, Goldman Sachs’s forecast is for the economy to grow by 6% in the fourth quarter. Without it, growth is cut in half, to 3%.
According to my calculations, even if the economy grows at a 35% annual rate in the third quarter (Goldman Sachs’s current forecast), fourth quarter growth of 3% would put the level of economic activity back to where it was in the spring and winter of 2018, setting the economy back by over two years.
Economist Ernie Tedeschi at Evercore ISI estimates that a compromise package based on negotiations between Pelosi and Treasury Secretary Steven Mnuchin would have boosted GDP by 3.5% and lowered the unemployment rate by 1.2%. There would be almost 4 million additional jobs at the end of 2021 under this analysis than there will be now that Trump has pulled the plug on additional stimulus.
These forecasts properly frame the choice facing Congress. The decision shouldn’t be based solely on whether the economy seems as if it needs additional support today. Instead, the question should be in part whether trading $1 trillion in additional government spending in order to double GDP growth in the fourth quarter makes sense (using the Goldman Sachs forecast), or whether trading nearly $2 trillion for an additional 4 million new jobs is a good use of taxpayer money (using the Evercore ISI analysis).
I would take the $1 trillion. The recovery is fragile. In many parts of the U.S., it will be too cold to dine outdoors, and the weather and school reopenings could lead to an acceleration of the virus’s spread. Cold and flu season could reduce economic activity by keeping people home who are feeling ill and are unsure of whether they have Covid-19. In addition, the faster the economy recovers in 2020, the less likely that temporary economic problems grow deep roots, which in turn would make it more likely the U.S. experiences a period of prolonged weakness.
The economic damage from the expiration of March’s fiscal policy support is evident. The economy added 661,000 net new jobs in September. But it added over 4 times as many jobs in May and more than 7 times as many in June before key provisions in the March law expired in late July and early August. Weekly jobless claims are still elevated, and income and consumer spending growth is slowing. You don’t need to turn to a counterfactual to see this — this is simply the factual.
A stronger sense of counterfactual reasoning would help with public-health efforts, as well. Upon returning to the White House after his hospitalization for Covid-19, Trump implied in a tweet that the number of people who have died from the coronavirus is comparable to the number who die from the seasonal flu each year, arguing against social-distancing measures to slow the spread of the virus. But without the extreme social-distancing measures the U.S. has employed — in the counterfactual world where the U.S. treated Covid-19 like a seasonal flu — the body count from the coronavirus would be multiples larger than it is.
It’s not too late for Congress to pass more stimulus. But the only person in Washington who can undo the damage Trump did to the negotiations on Tuesday is the president himself. He should work out a compromise with Pelosi and ask Senate Majority Leader Mitch McConnell to pass it, even if a dozen or two Republican senators vote against it.
It would be in the president’s political interest to do so, assuming he wants to win in November. But for him to see that, he needs to imagine the future with a stronger economy and imagine what last spring would have looked like if Congress hadn’t acted.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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