Last night, in our post-mortem of Biden's hyperambitious $1.9 trillion stimulus plan we warned that "the bigger size, and inclusion of Democratic priorities such as a minimum-wage hike, also means that it will be next to impossible for Republicans to vote for Biden's proposal." Additionally, we said that "there is a distinct risk that the recent market euphoria will fade soon once traders realize, that Bide's use of the phrases “paying their fair share” and “closing loopholes” could spark a tax-hike driven selloff since the stimulus boost is already fully priced in."
We echoed this warning this morning, when we said that equities are hit "as attention turned to how much of the package will ultimately get passed by Congress, with the go-big price tag and the inclusion of proposals set to be opposed by many Republicans."
And judging by the market's reaction, traders are finally paying attention, and with good reason: according to Goldman, which just last week said it expects a $750BN stimulus to pass in the aftermath of the Democrats' blue sweep after their victory in the Georgia runoff, overnight hiked its assumption for how much stimulus will ultimately pass.
And therein lies the problem, because at a revised $1.1 trillion, Goldman estimate of a realistic stimulus, is just 60% of the number proposed by Biden.
Here is how Goldman frames its current thinking on Biden's $1.9 trillion proposal and what could realistically happen:
President-elect Biden has released the details of his COVID-relief plan, which the transition team estimates to cost $1.9 trillion (8.6% of GDP). We do not expect all of the elements of the proposal to pass, but we are increasing our assumption of additional near-term fiscal measures from $750bn (3.4% of GDP) to $1.1 trillion (5% of GDP). We expect to make modest further upward revisions to our forecast in light of these revised assumptions.
And here are the reasons behind Goldman's skeptical take on how much helicopter money will be unleashed:
President-elect Biden is proposing $1.9 trillion in new fiscal relief measures, in addition to the roughly $950bn Congress approved in December 2020. He has proposed substantial spending in all of the areas, including an additional $1,400/person in stimulus payments, further extension of expanded unemployment benefits (through September 2021 and including a $400/week top-up payment), state fiscal aid ($370bn in direct aid plus a number of indirect measures), and public health funding ($190bn). He has also proposed $170bn in new funds for schools to respond to COVID-19, expansion of the child tax credit and earned income tax credit (we expect these would cost around $150bn), and extension of health insurance premium subsidies (the cost is unclear but could be similar to the roughly $100bn cost of the May 2020 House Democratic proposal).
The proposal faces hurdles in Congress. Biden transition officials and congressional Democrats have indicated they hope to pass this proposal via regular order, not the budget reconciliation process. This means that it would need 60 votes in the Senate, and therefore the support of at least 10 Republicans. Goldman does not expect ten Republicans to support a $1.9 trillion relief package. While Democratic leaders might use the budget reconciliation process to circumvent potential Republican opposition, there are two arguments against doing this. First, recent political events put a greater premium on finding areas of bipartisan support, if possible. Second, the reconciliation process has never been used before to pass discretionary spending, and it appears that around half of the proposal—state fiscal aid, education grants, public health spending, to name a few areas—falls into this category. While it is possible that congressional Democrats might find a way to do this, it looks more likely that the need to find bipartisan support might constrain the size of the package.
Nevertheless, Goldman is increasing its fiscal assumptions and now assumes that Congress will enact $1.1 trillion (5% of GDP) in additional fiscal support. As shown in the table below, around half of the difference reflects an assumption of greater spending on education and public health. Most of the remaining difference relates to various safety net programs and unemployment insurance.
Adding insult to injury, most of the incremental spending Goldman now expects is likely to take slightly longer to reach the economy than the amounts the bank had previously assumed. Last month Congress approved $82bn in education grants and $69bn in public health funding, and those funds look likely to be used first before any additional funds are spent. Moreover, spending in some of these categories is likely to be driven by the need for spending—on vaccinations or testing, for example—rather than simply the amount of funding available.
Even so, the bank continues to expect passage between mid-February and mid-March, but the timing depends on several factors. Specifically, the potential impeachment trial in the Senate could consume much of the calendar over the next few weeks, as could presidential nominations. Timing also depends on whether Democrats ultimately fall back on the reconciliation process, which would require multiple legislative steps, or pass the bill under regular order, which could be quicker but depends on how long it takes to negotiate an agreement.
There is a silver lining: as Biden mentioned last night, this is likely to be the first of two major proposals. and a second proposal dealing with taxes, infrastructure, and benefit programs to pass around mid-year. In other words, more trillions are coming.
Biden will likely outline this second proposal in a few weeks, potentially around the time the White House submits a preliminary annual budget proposal to Congress.