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US Fiscal Stimulus Update

publication date: Mar 23, 2020
 | 
author/source: Callum Turcan

Image Source: frankieleon

The US Congress is debating and working on a massive multi-trillion dollar fiscal stimulus package to mitigate the negative impact the ongoing novel coronavirus (‘COVID-19’) pandemic is having on the domestic economy and to provide for additional healthcare funds to cash-strapped entities to combat the virus.

To read our previous US fiscal stimulus article, click here.

By Callum Turcan

After a failed vote on the U.S. fiscal stimulus bill (specifically, a shell bill to speed the legislative process along) in the Senate on Sunday, March 22, a program that’s worth around $1.5-$2.0 trillion (negotiations are ongoing), the legislative body picked up where it left off on Monday, March 23. After initially proposing to hold a vote in the Senate on the shell bill at 9:45AM EST, Senator McConnel (R, Kentucky) and Senator Schumer (D, New York) agreed to push the vote back to just after 1:30PM EST. That vote failed to get the 60 votes required to advance the bill (to end debate on the bill, known as cloture which then allows for a vote on the bill itself), and now both Republicans and Democrats are back to the drawing board when it comes to finding a bipartisan compromise.

Where Things Stand as Of March 23

Within the stimulus package, as proposed by Senator Republicans, roughly $250 billion would be allocated to direct cash payments to households (under a certain income threshold that includes a phaseout clause), another $250 billion would go towards “beefing up” unemployment benefits, $350 billion would be spent to support small- and medium-sized businesses via forgivable loan packages, $500 billion would be directed towards “bailouts” and support for larger enterprises, $242 billion would go towards emergency funding to support ballooning healthcare costs with most of that directed towards state and local governments, and there are other considerations as well. Please keep in mind these figures are subject to change as negotiations continue.

There are several key issues that Senate Democrats have with the fiscal stimulus program as proposed by Senate Republicans, but the “bailout” provision is without a doubt the biggest hurdle to reaching a deal. While the program as proposed by Senate Republicans includes things like a cap on executive pay for entities that are bailed out (which would last for two years), Senate Democrats don’t think that goes far enough.

Senate Democrats would rather have more funds be directed towards state and local governments, the US healthcare system, emergency services, and similar entities, a package that as proposed would be hundreds of billions of dollars larger than what’s in the Senate Republicans’ bill as it relates to additional healthcare funding. Democratic leadership within the US House of Representatives has indicated that the legislative body will take on its own fiscal stimulus bill, as communicated by Speaker of the House Nancy Pelosi (D, California).

House Democrats made their bill public on Monday, March 23, which differs materially from what Senate Republicans have put forth (the bill, which covers both fiscal stimulus and emergency programs, is over 1,000 pages long and we’ll have more to say as we read over the proposed package). That indicates that there’s a very real chance the fiscal stimulus and emergency spending program could look much different than what’s being considered in the Senate.

While some measures in a final bill will likely stay similar, such as aid for smaller and medium-sized businesses, direct cash payments to US households, and the beefed up unemployment program, others (like the corporate bailouts via special grants and loans) are less likely to make it in the final bill, at least not without significant revisions. Another consideration involves Democrats (in both the House and Senate) seeking a large cash infusion to state and local governments to help cover the cost of the ongoing COVID-19 pandemic (much larger than what has been proposed in the Senate Republican’s bill).

Senator Warren (D, Massachusetts) laid out a list of demands that can be used as a baseline for what to expect from House Democrats in a USA Today opinion piece noting that any bailout must include provisions that compel companies receiving such federal aid to:

“Maintain payrolls and use federal funds to keep people working”

“Provide a $15 an hour minimum wage”

“Not engage in stock buybacks permanently”

“Not pay out dividends or executive bonuses while they receive federal funds and for three years thereafter”

“Provide at least one seat to workers on their board of directors — or more if they take bigger bailouts”

“Leave collective bargaining agreements with workers in place”

“Get shareholder and board approval for all political spending”

“Require that CEOs certify that their companies are complying with these rules and face criminal penalties for filing false certifications”

We must stress that these eight stipulations would represent very material changes to any firm’s operations, capital allocation decisions, and financial performance. Furthermore, Senate Republicans are likely to balk at some of these provisions. In particular, a permanent ban on share repurchases seems like a tough sell and would likely be hard to implement over the decades to come. Changes in minimum wage policies pose another big hurdle as it relates for Republicans and Democrats coming together for a compromise. The bill proposed by Speaker Pelosi and House Democrats includes many of the proposals (in some form or another) Senator Warren has laid out.

Senators Schumer, Murray (D, Washington), Brown (D, Ohio), and Warren have also proposed a student loan relief program that entails cancelling up to $10,000 in federal student loan debt and the cancellation of existing payments during the COVID-19 pandemic. While that would likely have only a marginal to modest impact on the economic outlook in the short-term, a material reduction in outstanding federal student loan debt could spur incremental consumer spending in the medium-term (smaller student loan payments resulting in greater spending elsewhere). With that in mind, these programs aren’t cheap and would have serious implications for the federal government’s finances. The House Democrats have included student loan relief in their fiscal stimulus bill.

Please note that as the US federal deficit explodes upwards, that increases the likelihood that in the future, the US corporate income tax rate will be raised by a significant margin, which in turn would have very serious consequences for the intrinsic value of equities as future expected free cash flows become smaller.

Concluding Thoughts

Political wrangling over the multi-trillion fiscal stimulus program continues, and we will keep our members informed of any updates as new information becomes available. There’s a lot of moving parts and room for material changes in any of these proposed programs. Nothing is final until it actually gets passed by Congress and signed into law by the President (or a veto is overridden; however, that appears unlikely as President Trump has signaled he intends on signing the fiscal stimulus measure and has been one of the biggest supporters of the bill put forth by the Senate Republicans). Expect additional votes to held in the very near future.

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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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John Helgerson
 

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