The Mega-Bailout Leaves 4 Mega Questions

Michael Grunwald is a senior staff writer for Politico Magazine.

16-20 minutes

House Speaker Nancy Pelosi. | Susan Walsh/AP Photo

Washington has pushed through massive government spending bills to deal with America’s last two massive economic emergencies, but the two parties have taken very different approaches to crisis response in the minority.
In 2009, Republicans locked arms in nearly unanimous opposition to an $800 billion economic stimulus bill under President Barack Obama, betting they could force Obama and the Democrats to own the Great Recession by keeping their fingerprints off the response. This time, Democrats provided nearly unanimous support for a $2 trillion coronavirus relief package under President Donald Trump, hammering out a bipartisan compromise to get government money into the economy as quickly as possible.
In 2009, the GOP strategy of “no” meant that Obama controlled the policy outcome, but it helped spark a political comeback that eventually led to Republican control of Washington.

In 2020, Democrats have tried to advance their policy priorities through negotiations instead of walking away from the table, even though they know Trump's political fortunes depend on economic relief.
They certainly helped get the money flowing: The bill went from draft to law in a week, and Trump signed it Friday. But did Democrats achieve their goals by playing ball?

A review of the CARES Act that Trump signed Friday suggests Democrats did manage to influence its direction, shifting some of its aid to individuals towards lower-income families, while imposing some conditions on its aid to businesses—changes that Trump is already taking credit for. They also successfully inserted some oversight provisions that Trump has already vowed to ignore.

But Republicans won some huge concessions from Democrats, most notably a $500 billion bailout fund for big businesses and a $170 billion tax break for real estate investors like the president. And Democrats didn’t get much that Trump didn’t actually want in exchange for helping him pour cash into the locked-down economy in an election year. They didn’t guarantee vote-by-mail in the November elections, or win any assurances that the Trump administration will start complying with House subpoenas, or get permanent stabilizers that could ensure fiscal support for the economy in future crises even if a Democrat were president.
Nevertheless, the Senate passed the CARES Act by a 96-0 margin late Wednesday, and the Democratic-controlled House followed suit in an overwhelming voice vote Friday. It was a far cry from the partisan obstruction of 2009, when only three Republicans helped Obama pass his stimulus bill in his first month in office—and one of them, the late Senator Arlen Specter, faced such an intense backlash from his own party that he decided to become a Democrat. This time, the Democratic opposition helped craft the response to the emergency even though it gave Trump a bipartisan victory—and the president still refused to invite any Democrats to his bill-signing ceremony.
The 880-page legislation does include plenty of random spending items proposed by House Democrats, like $25 million for the Kennedy Center for the Performing Arts and $45 million for the Agricultural Marketing Service. A few of those line items represent big-ticket investments in Democratic priorities, like $25 billion for transit agencies ravaged by the pandemic and $10 billion for the financially troubled Post Office.
But the overwhelming majority of the money in the bill falls into four categories: help for the health system, for people, for small businesses, and for big businesses.
The Democrats generally wanted more than Republicans wanted for health and families, and they generally got their way, while the two parties generally agreed on a $366 billion small business bailout that includes strong protections for workers. It’s the big-business bailout where Democrats mostly caved—and that’s the piece of the legislation that raises the most questions, because it’s dramatically different from any bailout the U.S. has ever done before.
There are questions worth asking about all four major categories.

Public health: Where are the tests?

House Speaker Nancy Pelosi and Senate Minority Leader Charles Schumer laid down an early marker that they wouldn’t support a bill without “a Marshall Plan to rebuild our health care infrastructure on a continental scale and ensure the resources are there to test and treat everyone who needs it.” There is about $180 billion in health-related spending in the CARES Act, including $100 billion to help overstretched hospitals, which was more than twice as much as Republicans proposed.

But other than a $1 billion provision that could be used on diagnostic tests if President Trump invokes the Defense Production Act to manufacture them, it doesn’t appear to do much to accelerate the kind of all-out COVID-19 testing and follow-up that helped South Korea control the virus. America is still lagging on testing, and this bill won’t fix that.

This is odd, because controlling the virus itself is by any accounting the most urgent priority not only for saving lives but for saving the economy. Even if Trump tells the nation to go back to work after Easter, restaurants and gyms and movie theaters can’t thrive until it’s safe to cluster in large groups without a serious risk of contracting a deadly disease. And it’s hard to see how that can happen before the U.S. adopts some version of Korea’s SWAT-team public health model of expansive testing, aggressive tracking, isolation and quarantine for infected individuals, and equally aggressive efforts to test, isolate and quarantine anyone they might have been near.

Former Maryland health commissioner Joshua Sharfstein says helping hospitals handle the coming surge of coronavirus victims will be necessary but not sufficient to fight the pandemic. “This is a public health crisis as well as a medical crisis,” says Sharfstein, who also served as deputy director of Obama’s FDA and is now a dean for public health at Johns Hopkins. “We need to stand up a massive public health response if we’re going to get this under control.”

Pelosi and Schumer have been boasting about their victories for health spending in the CARES Act—and Senate Majority Leader Mitch McConnell has crowed about them, too—but the bill will not ensure tests for anyone who needs them or launch a systemic approach to prevent the virus from spreading. Democratic senator Elizabeth Warren of Massachusetts wrote a Medium essay Thursday calling on Congress to pass additional legislation that would dramatically increase America’s diagnostic testing capacity, but now the Senate has recessed until April 20. The only way for Washington to address this problem before then would be for Trump to address it himself—and he claims Americans can already get tested whenever they want.

If the first requirement of opening up the economy is way more testing, where’s that money supposed to come from? The bill leaves us hanging.

Aid to families: Was it worth it?

Democratic leaders flexed their negotiating muscles to strengthen the emergency safety net and make sure families in need got a fair share of government aid. Their biggest get was what Schumer called “unemployment on steroids,” a $260 billion provision to expand and extend jobless benefits during the pandemic.

They also secured $150 billion in aid to states, to minimize layoffs of government employees and cuts in government services. And they succeeded in rewriting the original Republican plan to send checks to taxpayers, so that poorer families will now get more instead of less, and the richest families will get nothing.

All these provisions will direct cash to people in need, and Trump is already bragging about them, pointing out in his Friday press conference that “the average worker who has lost his job will receive 100 percent of his salary for up to four months,” a provision Democrats added to his bill.

Given that Democrats had the power to insist on just about anything they wanted as a condition of passing the relief bill through the House, it’s worth asking whether aid to families hurt by the crisis was the concession they should have focused on extracting. A coronavirus bill stiffing the millions of Americans who are losing their jobs would have been a political disaster for Trump, and Republicans knew it.

House Democrats did make more ambitious demands in their alternative bill, like an assurance of vote-by-mail and 15 days of early voting in all federal elections, along with $4 billion to help safeguard the 2020 election. They ended up settling for no assurances and just $400 million. They also proposed language assuring that during future downturns the federal government would automatically pump stimulus into the economy. Republicans rejected that as well, so they can once again become anti-stimulus warriors during Democratic administrations.

But the Democrats did hold firm on directing aid in Trump’s relief bill to more vulnerable people—people who may well end up grateful to Trump. It may have been responsible policy, but it wasn’t exactly savvy politics. It’s notable that while Republicans acquiesced to Democratic demands for more aid for poor Americans, they refused to allow checks to go to taxpayers who aren’t citizens—and aren’t voters. They know that most Americans don’t follow which party supported which provisions; they tend to focus on the results and give the president the credit or the blame.

In fact, during the negotiations, even as Republicans were pushing perks for big business and opposing Democratic efforts to shift aid to ordinary families, Trump was chastising Democrats for refusing to focus on ordinary families, accusing them of trying to exploit the crisis to pass Green New Deal-style energy provisions that weren’t even in the House bill.

Small Business: Will this work?

The CARE Act’s small business bailout is truly bipartisan, a creative proposal drafted by the leaders of the congressional small business committees, Senators Marco Rubio (R-Fla.) and Ben Cardin (D-Md.) along with Reps. Nydia Velazquez (D-N.Y.) and Steve Chabot (R-Ohio). It would provide federal guarantees for bank loans to businesses with fewer than 500 employees, then forgive the portions of the loans spent on payroll, rent, mortgages and utilities. This would provide an incentive for stores and spas and suppliers to keep paying their employees throughout the lockdown even if they can’t open their doors to any customers.

Some Democrats have attacked an exception to the 500-employee limit for big hotel and restaurant chains as a stealth bailout for the Trump family, which is expressly barred from the big business bailout. But even if that happened, the bulk of the aid would presumably be directed to help employees of Trump’s resorts keep their jobs. Other critics have complained that the program’s loan forgiveness only applies for two months, and that $366 billion will not be nearly enough to get millions of struggling small firms through the crisis. But if the program works, Congress can always extend it and throw more money at it.

The real question is whether the program will work. It’s not clear whether the Small Business Administration’s modest bureaucracy can get it going fast enough to save firms from the brink, or administer 13 times its annual deal flow in just two months with any effectiveness. Its track record administering emergency loans, in fact, has at times been shockingly bad.

“Good idea, might be a mess,” summarizes one former Federal Reserve official.

Big Business: What the hell is this?

Republicans won two gargantuan victories for big businesses in the CARES Act: a $500 billion bailout fund and $280 billion worth of business tax cuts. Democrats insisted on some oversight provisions, including a new independent watchdog to oversee the money, but Trump issued a signing statement on Friday declaring he will not allow that special inspector general to issue reports without “presidential supervision.”

Democrats also imposed conditions on bailed-out corporations—like requirements that they keep most of their workers, limit executive pay and stop paying dividends—but it’s not clear how some of them will work, and which ones Treasury Secretary Steven Mnuchin will be allowed to waive.

Honestly, it’s hard to tell how a lot of the bailout fund will work. There are fairly clear guidelines for Treasury to spend $29 billion on loan guarantees or other aid for passenger and cargo airlines. The same rules seem to apply to $17 billion for businesses “critical to national security,” which observers originally assumed was a legislative euphemism for Boeing, but judging from Trump’s recent rhetoric, could apply to the oil industry as well.

But the biggest questions are swirling around the other $454 billion provision that seems to authorize a circuitous Rube Goldberg-style corporate bailout, where Treasury will backstop the Federal Reserve to inject liquidity into financial markets that will ultimately support medium-to-large-sized businesses. The language is very confusing. But at a moment when the Fed is already rerunning much of its playbook from the 2008 financial crisis, using its role as a lender of last resort to keep credit flowing, the CARES Act seems to encourage the Fed to take very un-Fed-like new risks in very un-Fed-like ways.

“This looks like totally uncharted territory,” says an official at one Wall Street bank.

Mnuchin and Fed chairman Jay Powell have some discretion to design the programs, but it seems likely that some of the $454 billion would backstop Fed credit facilities to buy investment-grade corporate bonds, and perhaps lower-rated bonds from less creditworthy corporations. In the past, the Fed has pumped about $10 into the economy for every $1 backing its programs, so the $454 billion could conceivably inject $4.5 trillion worth of liquidity.

But if these bonds are more likely to default, the money might not stretch as far as Congress hopes. And the legislation also suggests that the Fed could also start buying individual bank loans to companies, a major departure into new realms of risk. At the same time, the legislation suggests that mid-sized borrowers would not have to pay any principal or interest on the loans for at least six months, as long as they keep 90 percent of their employees on the payroll.

The Fed is not usually in the business of buying loans where borrowers don’t have to make payments but do have to maintain their payrolls even if they aren’t making any money. It’s a worthy goal to help companies that were solvent before the pandemic muddle through until the pandemic is over, and the Fed’s massive loans to AIG during the financial crisis—which were ultimately paid back with interest—showed that central banks sometimes need to take big risks to defuse big crises. But since defusing this crisis will ultimately depend on containing the virus, not restoring confidence to the financial markets, the Fed might be putting its financial credibility on the line for a problem it can’t solve.
Or maybe not. One can imagine Treasury and the Fed using the $454 billion in a relatively conservative way, backstopping relatively safe municipal and corporate bonds. That would reduce the initial risk of default, but might not provide much help to the most desperate precincts of Corporate America, which could create a wave of bankruptcies and deepen the crisis. One can also imagine a more aggressive approach, in which the Fed went on a loan-buying spree without much concern for the riskiness of the loans, which could burn through even $454 billion in a hurry.
For now, though, it’s all imagination, because nobody seems sure what happens next.
“I don’t really get it,” said an aide to one Democratic senator. “I hope someone gets it.”

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