What Trump’s Trillion-Dollar Bailout Gets Right, and Wrong

It makes sense to reassure the markets that money market funds will be safe, although it does raise the question of whether the funds should pay the government for insurance if they’re going to get backstopped whenever times get tough. It also feels a bit like a backdoor bank bailout, since one effect will be to reassure skittish companies that have been drawing down lines of credit from banks that they can rely on corporate paper instead.

But the most pressing question it raises is: Are these funds in more trouble than we realize? The last time Treasury did this was at the height of the worst panic since the Depression. Slipping this financial provision into an economic stimulus bill may be a far-sighted move to give Treasury the tools it would need to deal with a potential banking panic, but it could also send a message that Treasury is worried about a banking panic, and those kinds of messages can panic bankers.

Pardon the Interruption

The final piece of the Trump proposal is a $300 billion loan guarantee program to help small businesses keep their entire workforce on their payroll for eight weeks. This idea seems both unimaginably large—it’s seven times the annual budget for the State Department—and absurdly small, since there are 28 million small businesses in America, and it’s hard to see how restaurants or gyms or stores that don’t have customers are going to be able to pay back the loans after they pay their workers not to work for eight weeks. It feels like a program that could work if the business interruptions are very short, in which case it might not even get started in time to help, but it feels likely to get swamped by demand if the pandemic keeps the country on lockdown for long. The goal is to reduce disruption to people’s lives and careers—everyone prefers a paycheck to a government check—but this will be an extraordinarily disruptive crisis, and again, airlifting money to businesses is not always the most efficient way to help their employees, especially if the businesses end up failing anyway.

The Missing Links

The Obama stimulus included nearly $100 billion targeted directly at the most vulnerable victims of the Great Recession, particularly the poor and the unemployed. That aid turned out to be extremely effective not only in reducing poverty and easing pain but in reviving the economy; this Dartmouth study estimated that every dollar spent on the poor created from $1.96 to $2.31 in economic activity. The Trump proposal makes no effort to target the poor, although the bipartisan emergency response bill does include a modest boost in unemployment benefits and food aid.

Similarly, Obama’s stimulus sent about $250 billion directly to cash-strapped state and local governments, many run by Obama’s political enemies, so they wouldn’t have to slash services, raise taxes or lay off workers; studies found that aid to states also helped the U.S. avoid a second Great Depression, helping governors and mayors avoid “anti-stimulus” at the worst possible time. The Trump proposal did not include state aid, either, although Democrats did get a boost in the federal share of Medicaid payments in that bipartisan emergency bill.

In general, the Trump approach favors aid to businesses over aid to governments or the needy. And at least for now, it opts for just a few massive programs rather than a litany of small programs, an approach that will be sorely tested on Capitol Hill.

Congress larded up the Obama stimulus with all kinds of quirky add-ons, from fire stations to military hospitals to cemetery maintenance to emergency farm loans; Senate Appropriations Chairman Daniel Inouye inserted $198 million for Filipino veterans who had been denied benefits they were promised after fighting alongside Americans in World War II, an honorable but not particularly stimulative provision. The Trump approach has different vulnerabilities—strip clubs and porn studios may apply for business interruption loans, too—but its omissions could make it easier to pass and potentially easier to defend.

The trillion-dollar question is what Democrats will demand as their price for bailing out the sinking Trump economy. Pelosi has already warned that she wants to target the spending to the families that need it most. Democratic Senators Ron Wyden of Oregon and Amy Klobuchar of Minnesota have proposed to make vote-by-mail available to every American, a provision that could ease fears that coronavirus could disrupt the 2020 election, while Patty Murray of Washington and Kirsten Gillibrand of New York have said they won’t accept a stimulus without a dramatic expansion of paid sick leave for workers. The Obama stimulus included a powerful independent oversight board that scrutinized every dime, and perhaps as a result, it produced remarkably low levels of fraud and abuse; Democrats would like to see the same kind of oversight for Trump.

It’s also tempting to look beyond the current crisis. Democratic economists have floated the possibility of including permanent “countercyclical stabilizers,” which would automatically provide stimulus for a faltering economy even if a Democrat were in the White House and Republicans rediscovered their allergy to deficit spending. And after the Obama stimulus helped jump-start the clean-energy economy with massive investments in solar, wind and electric vehicle batteries, some Democrats are interested in using the Trump stimulus to advance long-term priorities like transit, green infrastructure, or at least virus-related public health initiatives.

Of course, time is of the essence, and the president is sure to demand immediate action on his proposals, while accusing House Democrats of leaving Americans to suffer if they don’t pass them right away. If they complain that the package doesn’t include funding for additional hospital beds, or for manufacturing ventilators, or for feeding the hungry, well, Trump and the Republicans seem perfectly willing to pass another stimulus bill after this one goes out the door. In Washington, a trillion dollars doesn’t seem to go as far as it used to.