The news keeps running ahead of this post! Mitch McConnell has confirmed a new stimulus package isn’t likely (see full explanatory quote at the bottom of this post). Read on for how and why we got here…
Absent new stimulus, we are likely headed off a cliff. While the Fed got the headlines, the $600 a week unemployment benefit and PPP did most of the heavy lifting keeping the economy from going off a cliff. A view supported by the Fed’s so-far-too-quiet begging Congress for a new stimulus package (see related post here).
Whether we land with a bump or a crash, cliffs are bad and usually avoidable. That will down-trend the economy and (likely) financial markets going into November. With real potential for a serious downward spiral, especially in more reactive (really bi-polar these days) financial markets. Especially with virus case counts likely trending up.
So how and why did we come to this pass?
Pelosi Set Up a Lose-Lose Situation for the Republicans
Pelosi has been running this show since summer. She set a ludicrously high bar at $3 Trillion, then “compromised” down to a (vaguely defined) $2 Trillion. She has refused to budge since. Leaving the Republicans with two choices.
- Climb down and accept her “compromise” number. Humiliating them in front of their base voters with a few months to go until the election.
- Refuse and spend nothing at all. Sending markets and the economy into a down-trend at least and potentially a downward spiral. With a few months to go until an election.
It looks like we’re heading down the more destructive path #2. Less because the Republicans made an active choice and more because they never got their act together. No cohesion in the Senate. No trust Trump would give Congressional Republicans air cover on any compromise deal. Lacking internal cohesion, they have never put a serious counter-proposal on the table.
McConnell will pass a face-saving $500B-$700B bill in the Senate (see below), but that is going nowhere. They know that. As the “party in power,” most voters will mostly blame the Republicans. They know that too. So how did the Republicans set up this trap for themselves? And why did Pelosi decide to spring it now?
The “Madman Strategy” Works Great Until Someone Calls Your Bluff.
Over the last 30 years, the Republicans have leaned harder and harder on the classic “Madman Strategy” in negotiations. Playing a game of chicken with the Democrats. Betting the Democrats will bail out first.
- Hold up some urgent, necessary action (like raising the debt ceiling) with a maximalist, no compromise stance that plays well with the base.
- Wait for the Democrats to “act reasonably” at the last minute to defuse the situation.
- Teeing up another round of base-pleasing via a sneering, hooting victory dance over the weak, compromising Democrats.
In the eyes of their base, they have made “compromise” into a Democratic vice and un-compromising intransigence (the madman strategy) into a Republican virtue.
That has left their base with deeply unrealistic expectations. The base doesn’t expect just wins, they expect domination. Own the libtards! Compromise is for the other side! For wimps! For the effete, vaguely European, urban elite Democrats! Manly, red-blooded, American Republicans know these colors don’t run!
Reliably Threatening to Drive the Car Off The Cliff is Reliably a Bad Idea
Over-reliance on that madman strategy has left Republicans at the mercy of Democrats. In a game of chicken, the Republican base expects them to drive the car off the cliff rather than stand down. That pays off in admiration and donations, but one of these days you’re still going to go flying off a cliff. The other guy gets to decide when.
Your opponent will call your bluff when the self-damage will be greatest, their gains will be worth it, and the blow-back damage to them is mostly manageable. That seems like a pretty apt description of this moment in time and Pelosi’s view of it.
The “madman” is pre-commited to do something stupid and self-harming. He is relying on the other party to save everyone from his folly. One day, they won’t climb down. They will force you to either 1; climb down, or 2; follow through on a “mad,” self-destructive threat.
- The “madman” threat here was to tank the economy and hurt millions of out-of-work American voters. Leaving Republicans dependent on Pelosi letting them claim a “win.” Less as a matter of policy and more as a matter of perception. It had to look like Pelosi backed down.
- If Pelosi didn’t climb down, the Republicans were pre-commited to one of two losing options. 1; If they climb down, they lose. 2; If they drive the car off a cliff, they lose. Moreover, the Republicans gave Pelosi the ability to force them into those losing choices.
Nancy Pelosi Decided to Call the Republicans Bluff On Further Stimulus.
Pelosi is dangling a rope cut deliberately too short for the Republicans to grasp it. This has been increasingly clear for months. She’s never been interested in a compromise deal. She’s only interested in looking like she’s seeking a compromise (to avoid blame). Her timing looks pretty good, with 2 months to go until a pivotal election.
If the Republicans had climbed down and compromised, they would have looked like wimps. Pelosi would have made that clear with a victory dance loud enough to show up on Fox News. Wimps don’t get the base to turn out in 2020. Wimps get primary challenges in 2022 and 2024 from wackadoodles promising even-greater-intransigence. Republican Senators who aren’t up for re-election in 2020 know that vote would be an albatross around their necks forever. They also know Trump will throw them under the bus on a deal that plays badly with the base.
How steep a cliff and how soon will we hit the ground? I think it will be bad (eventually) for the economy and worse (quickly) for markets. Meaning the market reaction comes before the November elections, but the economic damage compounds slowly over months. Although I’ve been totally wrong on the market for the last 6 months so…
Who gets the blame – or the smaller allocation of it? There will be blame all around, but I’m guessing more of it will stick to the Republicans. Voters will apportion most of the blame to the presumed madmen – Trump and the Republicans. The Democrats, assumed to be the party of compromise, will probably escape most of the blame. Usually the White House incumbent gets blamed for bad stuff. The public expects the Democrats to find a compromise.
Pelosi knows all of the above. She took the logical path to maximum gain. Play this game of chicken to the end. Forcing the Republicans to either climb down or drive us all off a cliff. She wins either way. Provided Pelosi keeps up the “compromise theater” act, she probably gets away blameless for with what is, in fact, a madman strategy of her own.
A Deepening Crisis and Declining Market Helps Democrats Politically.
Pelosi’s political interests are better served by a bill NOT passing – threatening market optimism and exacerbating the current economic crisis. That might be bad for the nation, but it is good for her narrow, short-term political agenda.
With the key caveat that she can pin most of the blame on the other party. Where she is doing a decent job if not brilliant. Good enough to avoid most of the blame in November. Yes we’re going off a cliff, but she wins the election. And the damage looks manageable given a new (presumably Democratic) Congress in 2021
Markets Move Fast and a Crash Helps Pelosi Most. The Economy Moves Slower. The Damage Can be Mostly Un-Done After The Democrats Gain Power.
A market crash would depress Republican turnout and boost Democratic turnout. It takes away one of Trump & Co’s last talking points. It hurts affluent Suburban Republicans most. They will mostly blame their own team. Affluent Democratic voters will also take a hit, but that hit is more likely to energize them to turn out and vote (against Trump). The tiny remainder of “swing” voters left will also shift against Trump & Co.
The economy is also struggling, but it is a slower-moving beast. Damage done in October 2020 can be (partially) un-done in February 2021. Especially if the new Congress has a Democratic majority to pass bottoms-up stimulus bills in the House (assured) and the Senate (less assured). That logic holds even if Trump remains in the White House BTW. The Senate is more important than the Presidency.
In 2021, credible moves to revive the economy would probably also revive the markets. Wall Street may lean Republican, but a Democratic President and Congress are more likely to direct stimulus where it has proven most effective – at the bottom of the pyramid. The Fed is nearly begging for more fiscal stimulus to veer the economy away from deflation. The market is likely to respond well to fiscal taps opened wider and targeted more efficiently. Poor people spend. Rich people save. We need more spending and less saving.
But, even if a crash and downturn cause permanent damage, Pelosi gets what she wants. That may be all that matters. She’s the Democratic Speaker of the House, not Mother Theresa.
The above is why I stopped expecting a new stimulus package back in July. Pelosi’s actions suggested she was going to call the Republicans bluff. Force a climb down or a drive off a cliff. She is going madman on the madmen…
Why Do People Assume Pelosi Wouldn’t Do What Mitch McConnell Clearly Would?
The above is ugly, cynical, selfish politics at its worst. Exactly what we would expect Mitch McConnell to do if the tables were turned. Or Boris Johnson. Or Donald Trump. Or Putin.
But for some reason, most people seem to assume that Pelosi wouldn’t do this. Why? I think because they are so used to the “reasonable” Democrats compromising in the face of the Republican’s madman strategy. They assume the Democrats will eventually cave in and “do the right thing for the nation” in the face of Republican intransigence.
That assumption works in Pelosi’s favor here. If there is no deal, people won’t jump to the conclusion the “compromising, weak Democrats” were the responsible party. Because the Democrats are, well, “the Responsible Party.” If we go off a cliff in a game of chicken gone wrong, most people will blame the assumed maximalist madmen. Pelosi, assumed to be reasonable, can “unreasonably” force the Republicans into collective suicide.
That is pretty good politics. Given the things at stake in this election, it might even be good policy. We need more stimulus and the Democrats are more likely to deliver it. Even Wall Street will eventually figure that out.
OK. THis post has been a bear to write so I am going to stop wrestling with it and just wrap up here. I’ll leave you with a great Key & Peele clip below. The Republicans are the guy shouting “hold me back” in the face of an incipient bar fight”. I’ve also included the “Game of Chicken” scene from Rebel Without a Cause.
News Update and Commentary from Sunday’s Axios “Sneak Peek” Newsletter.
Senate Majority Leader Mitch McConnell said he’s skeptical Congress can reach a deal before November because “the cooperative spirit we had in March and April has dissipated as we’ve moved closer and closer to the election.”
Driving the news: Nearly every morning during recess, Senate Republicans had a call with the White House’s top negotiators, Treasury Secretary Steven Mnuchin and Chief of Staff Mark Meadows, to discuss the status of the stimulus talks and where the vastly opinionated conference can find common ground.
- Most GOP senators, particularly those in competitive re-election races, agree that they need to do something to cushion the economic blow of the pandemic, despite largely disagreeing on what legislation should like.
- The conference has decided that they can get behind a narrow, scaled back package that addresses only the key issues with widespread GOP support, including more money for schools, widespread liability protections and restructured unemployment benefits.
- “We have a focused, targeted solution that we hope the House would pass,” Sen. John Barrasso (R-Wyo.) said Tuesday.
Between the lines: Many Senate Republicans privately expect this effort will fail but see the expected vote as a maneuver to put Democrats, who passed their $3 trillion HEROES Act in May, on defense.
- “They would like to change the conversation and highlight the immediate needs in a skinny bill and force Democrats to essentially shoot it down,” a Senate GOP aide told Axios.