The fifth and possibly final Covid-19 relief bill, the American Rescue Plan Act (ARPA), was passed by Congress and signed by President Biden the week of March 8, 2021. Unlike the first four bills, which passed with bipartisan support, this one passed almost entirely on party lines. ARPA was passed in the Senate with no Republicans voting in support. In the House, only one member of the House Democratic caucus – Jared Golden of Maine – joined the Republicans in voting against the bill, for a slim House victory of 220-211. The House took up the original relief proposal from the Biden administration; however, in the Senate, they were forced to make changes to the stimulus checks and emergency unemployment benefits while eliminating an increase of the national minimum wage to $15 per hour.

The final bill comes in at $1.9 trillion and includes the following:

  • Stimulus checks of up to $1,400 per taxpayer
  • The payout cap was lowered from the House version by 20 percent from $100,000 per individual to $80,000 and from $200,000 per couple to $160,000
  • An extension of emergency unemployment benefits through September 6, 2021
  • The benefit payments will remain at $300 per week, not the increase to $400 the president and the House wanted
  • $92 billion for the Department of Health and Human Services (HHS) for pandemic-related research and development – and funds to manufacture and distribute additional Covid-19 vaccinations
  • $350 billion to state and local governments – including $10 billion for capital project grants, like broadband internet access
  • $50 billion to small businesses (half will go to the Restaurant Revitalization Fund)
  • $7.25 billion will go to the Paycheck Protection Program
  • $128.6 billion to the Elementary and Secondary School Emergency Relief Fund
  • $39.6 billion to the Higher Education Emergency Relief Fund
  • Supplemental Nutrition Assistance Program (SNAP) will continue its 15 percent increase through the end of September
  • $15 billion in payroll support for airline workers and contractors
  • $30 billion for transit grants
  • $3 billion in payroll support for aviation manufacturers
  • $8 billion for airports and airport concessionaires
  • Extends the Employee Retention Tax Credit through the end of the calendar year 2021
  • Extends payroll tax credits for employers who provide sick or family leave through September 30, 2021
  • Expand eligibility for federal tax subsidies toward Affordable Care Act marketplace insurance premiums through 2022
Will There Be a Federal Minimum Wage Increase?
Vermont Senator Bernie Sanders may have lost the battle for the $15 an hour wage hike by not getting it in the Covid-19 relief bill, but he is far from giving up the war. Senator Sanders has vowed to continue to push for the $15 an hour wage hike. However, he will continue to face major obstacles, not only from the Republicans, but from members of his own party. If he cannot accomplish the minimum wage hike through reconciliation, he will be forced to get it via the traditional 60 Senate votes. In order to find 60 votes, it is likely that he will have to negotiate to a number lower than $15 an hour – or cede defeat.

What’s Different This Time
ARPA differs from the previous four bills passed under the Trump administration for Covid-19 pandemic relief. The bills passed in 2020 provided relief to both businesses and individuals, with very little money going to state and local government. The first fiscal aid bill of the Biden administration apportions more than half its funding to individual taxpayers, a quarter to state and local governments, and less than 5% to businesses. While this may seem like a difference in governing philosophy, circumstances also helped to dictate where the money was most needed. Remember, the first four bills during the Trump administration were bipartisan efforts. Businesses were just as desperate for aid as American families were. Now, we are seeing a pickup in business activity and the economy more broadly – with the exception of the restaurant and travel industries. ARPA reflects this changed dynamic, directing aid to lingering trouble spots.

To Give or Not to Give?
The area of relief that has been most politicized is the aid given (or not given) to states and municipalities. Democrats argue that tax revenues – income tax, sales tax, and other taxes – are down drastically since the country’s economy incurred a shutdown last year and has remained hobbled to some degree by the pandemic. They have argued that if state and local governments do not receive federal aid they will be forced to cut crucial public services – including police, fire, healthcare and educational jobs. Democrats have also suggested that the tax revenue shortfall will last through 2023 and that states face the need to severely cut spending now to account for future imbalances.

Meanwhile, Republicans have maintained that federal aid already given to businesses and individuals indirectly benefited state and local governments. They suggest that stimulus checks, aid to businesses, and expanded unemployment benefits have helped cities and towns stay open and helped keep people spending and paying taxes. GOP legislators also argue that tax revenue declines are low relative to historical data and have not been as drastic as initially estimated. Most job losses have occurred in low wage jobs, while the stock market has done very well. As such, Republicans feel state and local governments are in generally good shape. Their loudest objection to giving aid to state and local governments is their fear that this money will be used to bail out government balance sheets that have been underwater since well before the Covid-19 crisis.

The Multiplier Effect
Half of the new aid package will go to low and middle income Americans through stimulus checks for those who qualify. This will also be delivered in the form of unemployment benefits, expanded childcare credits, rental assistance, food aid, and health insurance subsidies. The hope is that consumption will continue to improve, which in turn benefits small and large businesses, as well as state and local tax revenues. President Biden and the Democrats believe that keeping consumption up and money moving will result in continued economic improvement while lowering the risk of a recession.

While Democrats, and many Republicans at the state and local level, suggest that providing much-needed fiscal relief to Americans who need it most is not ostensibly political, the spending bill will help to address income inequality, a top priority for Democrats and the Biden administration. The White House has continually cited the work of Columbia University researchers, which suggests the spending bill will reduce the number of Americans living in poverty by a third and cut childhood poverty in the US by half.1

Potential Market Ramifications
A recent survey of over 400 online brokerage retail investors conducted by a multinational investment bank suggested that 37% of future stimulus checks could be put into the stock market. If the total amount of stimulus check money sanctioned by ARPA is approximately $405 billion, that would mean $150 billion in new investment dollars. However, that number is likely overstated, as only about 20% of those receiving stimulus checks have a brokerage account. Nonetheless, if 20% of ARPA payments are invested, that would equate to some $30 billion in net new flows into the stock market. Since the first stimulus checks were being sent out in late March 2020, US equity markets had been averaging $2.6 billion in weekly inflows – which increased to $9.3 billion following Pfizer’s vaccine announcement in early November. While $30 billion – approximately 3 weeks’ worth of new investment dollars – would not represent record-breaking inflows, it’s nothing to shrug about. What’s more, newbie traders may be more likely to allocate to US equities as opposed to overseas investments.

Moving On
The passage of ARPA gives Democrats an early win, and clears the way for President Biden to start working on his other priorities, most notably infrastructure and taxes. Not surprisingly, the relief package passed by the House and Senate and signed by the president was passed on partisan lines. While Biden promised to work on unifying the Republicans and Democrats on the campaign trail, he and his Democratic colleagues paid little deference to bipartisanship in pursuit of their stimulus goals.

Will the Democrats work with the Republicans to write a bipartisan infrastructure bill? If West Virginia Senator Joe Manchin has anything to say about it, the answer could be yes. Remember, with a split Senate, the Democrats cannot lose a single member of their caucus if they want to pass initiatives through reconciliation, which requires only 51 votes to pass in the Senate (with Vice President Harris casting the tie-breaking vote). Getting a tax or infrastructure plan to the finish line in a bipartisan fashion is going to be very, very difficult. An infrastructure bill could come in anywhere from $1 trillion to $4 trillion. Considering that more than $5 trillion was tacked onto the deficit in 2020 to mitigate the Covid-19 public health and economic crisis, this bill will likely have to be paid for by raising taxes. Convincing 10 or more Republicans to raise taxes in order to collect $1–$4 trillion is going to be a monumental task. On top of that, a top priority for the Biden administration and the Democrats is climate change and creating a more environmentally sustainable economy. Their infrastructure package is certain to be green – probably emerald green in the first iteration. How green will the Republicans go with an infrastructure package? Will Democrats show a willingness to compromise? President Biden has stated he wants to unify Congress. His challenge will be to get the two sides to meet in the middle with an infrastructure and tax package, so everyone can declare victory.
1 President Biden Announces American Rescue Plan, The White House Briefing Room, 20 Jan. 2021:

The views and opinions expressed in this podcast are those of the speaker and not necessarily those of Natixis Investment Managers. These views were provided as of the date of recording and will not be revised. The information contained in this podcast does not constitute investment advice or an offer to buy or sell a financial product from any Natixis Investment Managers entity.