1. “Phase 3.5” of the Covid-19 Rescue Plan is Complete
President Trump will imminently sign the Paycheck Protection Program and Healthcare Enhancement Act — an economic rescue package worth $484 billion. The bill, which moved quickly through Congress this week, is called “Phase 3.5” because it replenishes existing programs, rather than creating new programs as contemplated in a “Phase 4” rescue in the coming weeks.
Most importantly, the bill adds $310 billion to the Paycheck Protection Program (PPP), a new lending program designed to help small businesses (defined as companies with up to 500 employees) pay workers during the recession, thereby reducing unemployment. (In this respect the PPP resembles the “Kurzarbeit” scheme in Germany.) American subsidiaries of European and other non-U.S. companies are also eligible for PPP loans, provided that the entire company (including a foreign parent outside the United States) has no more than 500 employees.
Loans from the PPP are forgivable if the borrower spends 75 percent of the funds on employee wages, within eight weeks of receiving the money. For this reason the PPP is extremely popular; the original tranche of $349 billion was exhausted within 2 weeks, and the new funds will likely be exhausted even faster. Many employers, however, doubt that their businesses will be back up and running in eight weeks, casting doubt on whether the program will ultimately lower unemployment.
In addition, the new bill provides $60 billion in funds for a separate emergency loan program for small businesses, and $100 billion for health-related costs: $75 billion for health care providers “for lost revenues that are attributable to the coronavirus,” and $25 billion to to “expand capacity for COVID-19 tests.”
2. Boeing Bailout Could Impact Trade Agenda
Given the increased attention on the role of government subsidies, we are monitoring to what extent Boeing will access $17 billion in aid set aside in the “Phase 3” CARES Act for “businesses critical to maintaining national security.” The possibility of Boeing tapping a large subsidy could weaken the American position in the ongoing trade dispute with the E.U. over aircraft subsidies, and could also change the dynamics in theoretical “Phase 2” negotiations with China. The bailout question also comes just as the state of Washington has cancelled a tax subsidy that was one of the causes of the trade dispute with the E.U.
Boeing, which alone drives a significant segment of the U.S. economy supporting 2.5 million workers, last month had asked Congress for $60 billion in aid for the aerospace sector and subsequently praised passage of the CARES Act. The White House has explicitly said that Boeing will not be allowed to fail. Boeing’s CEO, however, has thus far rejected the condition that the United States take an equity stake in the company. One analytics firm believes that Boeing has ruled out a bailout.
With or without state aid, Boeing will need to take drastic measures in order to survive. Even with $15 billion in cash and a $9.6 billion revolving credit facility, the market for aircraft has collapsed during the crisis and the company has embarked in massive restructuring to prepare for a smaller “post-pandemic industry footprint.”
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On Wednesday, April 29, I will be speaking at a virtual event of the German-American Business Council (GABC) of Boston, on the topic of “Have EU-US Trade Talks Stalled During The Pandemic? — A Washington Perspective From Berlin.” The conversation will be moderated by Leslie Griffin of Allinea LLC. There are still places available; to register for the event please click here.
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3. “Phase 4” Rescue Bill Will Likely Happen in June
As Congress and the White House now contemplate another trillion-dollar rescue package, the political challenge will grow and likely delay action until June. Moreover, divisions are deepening not only between the two parties, but between the White House and Republicans in Congress.
The White House wants significant spending on infrastructure — a priority of Trump’s campaign in 2016 that was never realized. Trump’s advisors pushed this initiative early during the first 100 days in office, but Republicans in Congress persuaded the Administration to focus instead on more traditional GOP priorities of health and tax reform. Since then, Trump’s infrastructure plans have failed to gain support in Washington, in particular from Senate Majority Leader Mitch McConnell (R-Kentucky). With Congress in spending mode now, however, the crisis presents Trump with his best chance to meet his goal since the start of his presidency.
Treasury Secretary Steven Mnuchin confirmed this week that the White House will push for spending on infrastructure in the next bill, including “bridges and tunnels” as well as broadband to rural America. Mnuchin also said that the White House will seek a payroll tax cut and additional financial support for the states. Democratic leaders are also ready to negotiate, and will embrace many of these priorities, but will also insist on many other measures, including election reform (viewed as critical for the November election), and funding for the U.S. Postal Service. Democrats will also likely oppose any attempt to cut payroll taxes, which fund public pension and health programs.
Meanwhile, Senator McConnell has already signaled that Congress will “press the pause button” before diving into a Phase 4 package, expressing misgivings about the pace of government spending. McConnell has also expressed provocative opposition to aid for states, and will even feel pressure to scale back some current spending, for example the expanded unemployment benefits that Democrats secured in the CARES Act. Ultimately, Congress will come to an agreement — but the negotiations will consume all of May and probably part of June.
The Republican rhetorical shift to fiscal restraint portends another debate on the horizon over health spending. The Medicare Trustees in their annual report (released yesterday) declared that within six years, the Part A trust fund will be unable to pay 100 percent of benefits. The report did not factor in the impact of the pandemic, which will further accelerate the insolvency date and require reforms. The Democratic nominee-in-waiting Joe Biden, has also promised to expand eligibility to Medicare to those aged 60-64, which will require yet more spending. In short, Republicans’ willingness to spend now is temporary and will ultimately revert to opposition to Democratic goals to expand health programs.
4. New Restriction on Immigration is Less Substance, More Optics and Politics
President Trump has signed an order to suspend the processing of applications for permanent residency (a.k.a. “green cards”) for 60 days. The order applies only to those outside the United States, and does not directly impact Europeans and other non-citizens working in the U.S. The restriction is based on economic rather than public-health grounds, i.e. to protect Americans from foreign competition while jobless claims are spiking. (The Department of Labor announced today that American workers filed 4.4 million additional claims for unemployment last week.)
The order is designed purely for political consumption, as most immigration was already effectively halted. Immigration offices are already closed and performing only emergency services, meaning that they are processing very few green-card applications during the pandemic.
Nonetheless, the attack on green cards carries symbolic value, as permanent residency is a prized status that also carries many of the privileges of citizenship. The United States (home to more immigrants than any country in the world) historically has also used the permanent resident program to fill gaps in its workforce — particularly in scientific and technical fields. Many leading public figures (including Hillary Clinton, Mitt Romney, Bill Gates) have advocated for the United States to automatically award green cards to foreign students who receive advanced degrees from American universities in scientific or technical fields. Apple’s CEO has said that the company “would not exist without immigration.” As such, the ban, even if merely symbolic, could hurt the United States’s ability to attract more workers into high-tech fields in the future.