Debate on stimulus has dragged over recent days, without a clear outcome to this point. As deadlines imposed by lawmakers approach, an executive order has emerged as a wildcard option, though many scholars dispute its legality. What would the option of an executive order enacting stimulus look like, and what might it mean for the markets?
It appears stimulus by executive order may not be feasible in the view of many legal scholars, but if it were, then it would likely reduce the size and materially change the composition of any stimulus package. Stimulus checks and other measures would be out, payroll tax cuts, as the White House favors, would be in. However, the markets may be disappointed as the framing of the executive order as Trump outlined it yesterday, it may achieve less than even narrower Republican stimulus proposals in terms of overall spend.
First off, the feasibility of an executive order in this context is unclear. Legal scholar John Yoo argued last month in the National Review that it’s possible. He believes that the recent Supreme Court ruling in Department of Homeland Security v. Regents of the University of California expands presidential power to enact policies while in office, even if those policies will later face legal challenge. Trump has taken note of this and met with Yoo last week to discuss the topic. However, Yoo’s opinion on the topic appears something of an outlier at this point, and most legal scholars of presidential authority take a very different view. So an executive order may not be possible in this context, but nonetheless Trump implies he may attempt it if stimulus talks stall.
The total spend of any stimulus provides a good proxy for its economic impact. The Cares Act cost, passed last March, cost around $2 trillion dollars. Positions for this next potential round of stimulus have swung between $1 trillion from Republican proposals based on the HEALS Act and closer to $3 trillion from the Democrats following the spend in the HEROES Act. U.S. GDP is of the order of $20 trillion dollars, so if a deal passes then the GDP impact would be significant of the order of a 10% to 30% boost to GDP over the approximately 6 months the renewed stimulus might last for. Those are large numbers, but bear in mind GDP fell materially in Q2 despite massive stimulus. The worry for markets, of course, is just how bad growth would be without stimulus.
Hence stimulus can be extremely impactful in boosting the economy and is one reason that stock markets have rallied in recent months, despite otherwise generally weak economic data and inconsistent progress in containing the pandemic. If stimulus measures do fail this August, the without compensating positive newsflow, markets are unlikely to react well.
No Stimulus Checks
However, an executive order may achieve less in terms of spending power than the current stimulus proposals from lawmakers. Yesterday, Trump defined a potential executive order, in a tweet, as follows, “I’ve notified my staff to continue working on an Executive Order with respect to Payroll Tax Cut, Eviction Protections, Unemployment Extensions, and Student Loan Repayment Options.”
Clearly, that framing excludes the popular stimulus checks, which appear to attract bipartisan support. Hence an executive order is potentially smaller in scope than most versions of a bipartisan stimulus package, even the smaller Republican starting point as embodied in the HEALS Act. The major items in terms of cost in any stimulus package are stimulus checks, the payroll protection program (PPP) and unemployment insurance. Trump’s proposed executive order would only hit one of those three. Eviction protections and student loan repayment options, while critically important policy decisions, are less material to the economy and markets when compared to more direct stimulus spending.
Furthermore, some scholars believe the president may only have the ability to move funds that were allocated in the recent stimulus packages, but have not yet been spent. The market would react less well to that since the focus is the economic boost from massive spending, and indeed, most of that money is already out the door. Moving dollars around doesn’t increase the overall level of stimulus spending, which is what the economy and markets care about.
The reason these stimulus measures are expensive is that programs such as unemployment insurance payments persist for several months on most plans. That’s why the measures cost hundreds of billions. If an executive order provides a few weeks of stimulus payment, for example, then the economic jolt is far smaller.
Payroll Tax Cut
The wildcard from any executive order is the payroll tax cut. That could be material depending on its scope and duration. Last year the cost of a payroll tax cut over 2 years was estimated at $300 billion. That’s about the same cost as another round of stimulus checks. So an aggressive payroll tax cut could become a major item in an executive order and provide a tailwind to markets.
However, even if both a material extension to unemployment benefits and a payroll tax cut were successfully implemented by executive order, the overall package would still likely cost under $1 trillion and the net impact would be lower still if, funds were obtained from stimulus measures that had already passed, since reduced spending in other areas would offset these new measures in terms of total stimulus spend.
An executive order to provide stimulus would require bipartisan talks to collapse over the next few days and overcome legal issues that many scholars see. Even them, an executive order is likely smaller in scope even relative to the Republican HEALS Act proposal. This means that an executive order might achieve around a half to a third of the spending power of the Cares Act, and even when assuming funds are pulled from other stimulus measures.
It seems possible that a bipartisan deal from lawmakers, where it to happen, could sustain a similar level of stimulus to the Cares Act. However, stimulus by executive order, even if feasible, would likely be smaller causing a decline in growth for the remainder of 2020 relative to the boost we saw from stimulus in the April-July period. Stock markets would be similarly impacted and likely won’t react well if broader stimulus talks fail, even if an executive order offers a potential stopgap.