It is game on in the race for the US Presidency. Judging by Trump’s dismissive rhetoric, he sees Kamala Harris, revealed this week as the Democratic vice-presidential pick, as a threat. The selection of, Ms Harris, an ostensible moderate, as Biden’s running mate is a significant indicator of the potential policy platform of the Biden campaign. Furthermore, her selection leaves Trump with less scope to attack. As time ratchets inexorably toward the election in November, we will comment upon further developments as they arise.
Meanwhile, electioneering aside, furious wrangling is underway in Congress to ensure the economy does not flounder. The expired CARES Act, which has given a massive boost toward economic relief, needs a replacement and, as ever, competing visions and biases of US Democrats and Republicans means a gulf exists between each party’s starting negotiating positions.
Before we look at the competing proposals, it is worth recounting the vast relief effort to counteract the demand shock levied by COVID 19, enabled by the CARES Act.
The CARES Act:
The total cost of the CARES Act was $2.2 trillion, a vast sum of money. One of the key provisions was sending stimulus check payments and enhanced unemployment benefits to US citizens at a total cost of $290 Billion, allocated as follows:
- a $600 per week increase in unemployment benefits – expired on the 31st of July;
- one-off payments of $1200 to individual US residents or $2,400 to married couples
- surplus payments of $500 for each child in a household;
- enhanced federal unemployment payments worth $600 per week in addition to state benefits.
Businesses also benefitted with around $659 billion allocated for small business loans, which were forgivable if the recipients used 75% of any loan to continue paying their employments.
Most economists agree the generosity of the CARES Act provisions helped cushion the US economy from the worst economic effects of COVID-19’s spread. Now, there is a growing sense that more is needed. What are the competing options tabled?
First, we will consider the Republican HEALS Act, which is costed at half the amount set aside for the CARES Act. It is competing against the Democrat’s HEROES Act, which is characteristically larger, at three times the value of the Republican plan.
Without going into the myriad nuances of each proposal, the table below lists the key measures contained in the rival plans:
Table 1 – HEALS Act vs HEROES Act
| HEALS ACT – $1TRN | HEROES ACT – $3TRN |
| Retains the $1200 stimulus payments introduced under the CARES Act. | Retains the $1200 stimulus payments introduced under the CARES Act. |
| Reduces the enhanced unemployment benefit payments from $600-per-week to $200-per-week | Retains the $600-per-week enhanced unemployment benefit introduced under the CARES Act |
| Unemployment benefits provided for two months | Extends the enhanced unemployment benefit until January 2021 for most workers, and March 2021 for gig workers and the self-employed |
| Provides a return to work bonus of up to $450 per week | $1,200 dollar payments for dependents (max 3) |
| $190 billion into the Payment Protection Program fund | $200 billion for housing programmes |
| $16 billion for COVID-19 testing | $100 billion for rental assistance |
| $106 billion to aid school reopening | $100 billion dollars for education |
A simple glance of the proposals evidences the chasm between the parties’ priorities. The Republican program reflects the concern espoused by some in the party of overly generous unemployment benefits disincentivising the unemployed from returning to employment as opportunities arise. Meanwhile, the Democrats traditionally much more willing to use taxpayer money for Federal programmes, offers more safety nets for those out of work and expands the provisions under the CARES Act.
Whichever way it falls, providing additional stimulus will benefit the world’s largest economy. Preserving the purchasing power of the US consumer is critical to the recovery of the US and the broader global economy.
Aside from help provided by Congress, restoration of economic normality will come with the successful production and distribution of a vaccination. Fortunately, promising developments abound on that front.
Although a healthy dose of scepticism surrounds the credibility of Russia’s Sputnik V vaccine, recent trials of the University of Oxford vaccine suggests a breakthrough, backed by thorough scientific and critiqued evidence. Samples collected from UK patients administered doses of the vaccine, found it elicited a two-step defence from participants’ immune systems. Without getting too technical, the vaccine led to the production antibodies and T-cells. In a two-pronged attack, antibodies disable a virus, while T-cells target infected cells and eliminate them. The presence of both antibodies and T-cells in the samples collected bodes well for future production of a vaccine.
Interestingly, to get a sense of the importance of a vaccine to investors, consider below the market reaction to one of dubious efficacy. News of the Russian vaccine caused US Treasury yields to increase by nearly twenty basis points in two days, a significant rise for a bond investor. In other words, bond investors countenanced putting more weight on recovery than recession, even though the testing regime and standards for the vaccine are less than rigorous.
The reaction observed this week is indicative of the positive sentiment that will follow any declaration that a vaccine is ready for global distribution.
Graph: 10 Year US Treasury Yields Rise on Vaccine Developments
Source: Bloomberg, data as of the 14th of August 2020
Summary
Trump seems rattled by the appointment of Kamala Harris as VP of the Democrats and will focus all his efforts on generating jobs and growth.
Whichever way you cut it, the US economy is going to get more stimulus.
Although caution is still required, news on the vaccine front is encouraging.
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