New York (CNN Business)If he wants to get reelected, President Donald Trump needs the economic recovery to continue. That’s why his decision to unilaterally abandon talks over a bold stimulus package is so bizarre.
The economy is screaming out for more help. The unemployment rate has never been this high heading into a presidential election. Airlines are cutting tens of thousands of jobs. Restaurants and retailers are going bankrupt. And small businesses are closing for good.
The last thing we need to do is cancel our recession insurance at a moment like this."
Markets tanked Tuesday after Trump shocked Wall Street by rejecting Democrats’ stimulus offers and halting talks over a major package.
Not only is stimulus needed, it’s very popular with voters, some of whom have recently soured on Trump’s economic track record. Long his signature issue, Trump’s lead over Biden on the economy has vanished in recent polling.Trump knows all of this. That’s why just last month the president was pushing Republicans in Congress for more, not less, fiscal stimulus. Read MoreThe risk for Trump is that his sudden reversal could backfire by derailing the fragile recovery. At a minimum, it guarantees a slower, more painful recovery.”It was an unforced, egregious error that puts the economy at substantial and needless extra risk,” said Larry Summers, former US Treasury Secretary for President Bill Clinton. “The last thing we need to do is cancel our recession insurance at a moment like this.”
Double-dip recession risk is rising
Perhaps that’s why Trump seems to have backtracked a bit. He sent out tweets late Tuesday and early Wednesday that expressed support not for a major stimulus package, but for standalone legislation on airline relief, small business support and stimulus checks. Still, it’s not clear whether Congress will support one-off measures. And the fact that comprehensive stimulus talks are dead is a negative for the economy.
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Harlow sounds off on politicians after Trump calls off stimulus talks 02:33″There’s no doubt the risks of a double-dip recession, while still well under 50%, are substantially greater today than they were three days ago and much greater than a month ago when everyone could have reasonably assumed there could be stimulus,” said Summers, who served as President Obama’s top economic adviser during the Great Recession.It’s not just Obama-era officials saying the economy needs stimulus.Jerome Powell, who Trump nominated to lead the Federal Reserve, practically begged Congress to act earlier on Tuesday. He warned that failing to provide enough support would lead to a “weak recovery” and “unnecessary hardship” for families and businesses. “The risks of overdoing it seem, for now, to be smaller,” Powell said during a speech.Kevin Hassett, Trump’s former top economic adviser, said Washington still needs to cushion the negative economic shock from the pandemic.”Jay Powell is right to emphasize that more fiscal policy is needed,” Hassett told CNN’s Poppy Harlow. “With so many businesses still closed around the country, we remain close to the edge of an economic calamity.”
‘Abrupt shift’ from Trump
Stimulus hopes have been dimming for some time. Late last month, Goldman Sachs cut its economic growth outlook for the fourth quarter, citing failed negotiations on a stimulus package. And yet Goldman Sachs economists expressed surprise at Trump’s sudden reversal.”The president himself had pressed publicly for an agreement just a few days earlier, so this represents an abrupt shift,” the Wall Street bank wrote in a note to clients Wednesday. “One would expect politicians in both parties to want to continue negotiations, if only to maintain the appearance of progress as the election approaches.”Perhaps Trump’s decision to call off stimulus talks is just a negotiating ploy aimed at heaping pressure on House Speaker Nancy Pelosi to make a deal before the election. But there is no guarantee that will work, especially with a CNN poll showing Biden jumping out to a 16-point national lead ahead of Trump.”This seems unlikely to produce an agreement on a large fiscal package,” Goldman Sachs economists wrote.
‘Water cannon’ vs ‘squirt gun’
The failure to get a major stimulus deal through Congress will put more pressure on Powell and the Fed to keep the recovery going. Powell has expressed a willingness to do more if needed, the Fed has already promised to keep rates near zero for a long time, gobbled up trillions of dollars of bonds and even purchased corporate debt for the first time ever. The Fed’s emergency steps successfully unlocked frozen financial markets, made it easier for companies to borrow and caused mortgage rates to drop to record lows. The Fed is not best suited to speed up the economy for the simple reason that borrowing costs and access to capital are not the problem.”At a moment like this, fiscal policy is like a water cannon,” said Summers, now a professor at Harvard University. “And the remaining capacity of the Fed is like a squirt gun.”
Repeating the mistakes of the Great Recession?
Senate Republicans have been reluctant to go big on a stimulus package because of worries about the giant hole in the federal budget. But that never appeared to be a central concern for Trump, the self-proclaimed King of Debt. After all, it was Trump’s tax cuts and spending surge that created $1 trillion deficits — long before the pandemic erupted. Now would be an odd time for Trump to embrace fiscal responsibility.Although Powell acknowledged Tuesday that the federal budget is on an “unsustainable path,” he added: “This is not the time to give priority to that concern.”
The risk is that Trump is repeating one of the mistakes of the Great Recession: prematurely moving away from fiscal stimulus because of deficit concerns in Congress. Federal relief was phased out before the economy fully healed, leading to a slow recovery and, ironically, economic anxieties that helped fuel Trump’s rise. “That was a substantial error,” Summers said. “We’re in danger of making that same kind of error again.”
Source: edition.cnn.com