Cheques imbalances: America’s partisan stimulus battle

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Not all oil fields are created equal. Some are much more costly to run, both in dollar and in carbon terms. This year's oil price crash has added to the industry's pile of long term worries. So companies are thinking about how to shed their riskiest assets. And the saying that money can't buy you happiness is some comfort for those who don't have much. But here's the thing. Polls from 145 countries suggest that the richer are on average happier. Don't despair. Money still can't buy you love. First up though, America's legislators return to Congress today as the country struggles to get to grips with COVID 19. Last week it shattered its single day record for new cases and 10 states broke daily death toll records, including Florida. On Fox News yesterday, President Donald Trump downplayed the grim statistics, saying the state's undeniably dangerous situation was no forest fire. We have embers and we do have flames. Florida became more flame like, but it's going to be under control from today. Congress will be taking up another coronavirus aid bill following the $2 trillion CARES act, which was passed in March. The most urgent question concerns the $600 a week unemployment benefit that's currently helping nearly 25 million out of work Americans. It's set to expire at the end of the month. Democrats want to extend it. People really do need this money. Baby needs a pair of shoes.

This is urgent.

Republicans aren't so sure.

Unemployment is extremely important.

That is a different issue from whether we ought to pay people a bonus not to go back to work.

And there are more areas of disagreement.

Democrats and Republicans are meeting in Congress to try and hash out what the next stimulus bill ought to look like.

For the coronavirus response Idris Kahloon is the Economist's U.S. policy correspondent and is based in Washington.

This is after several previous bills. Many trillions have been spent, and more trillions will have to be spent as well. And Democrats and Republicans so far have not yet alighted on an agreement. And that's going to be the subject of probably a week of strenuous debate.

Because what each side wants is quite different. I mean, how are the party proposals different?

Democrats in May unveiled their proposal, which is a $3.4 trillion package, which is enormous, that would extend unemployment benefits, would give aid to states and cities with struggling deficits, give another $1,200 check to every American. Republicans at the time weren't convinced that there needed to be another bill. They were hopeful that the trillions they'd already spent would be sufficient. They've now moved to agreeing that there should be a bill, but one that's more modest. So Mitch McConnell, the Senate majority leader, is looking at putting out a package that people say will be closer to 1.3 trillion and is a more sort of modest undertaking, with probably reduced unemployment benefits relative to the Democrats and more emphasis on encouragement for workers to return to work and for schools to reopen.

And how is it that the two parties have come up with such different proposals, at least in the sort of the dollar figure? What are the sticking points here?

Yeah, so giving Every American Another $1,200 check, as the Democrats have proposed to do, obviously adds up to a lot. Democrats want to extend the unemployment benefits that have been put in place. So the federal government has been topping up the typical unemployment benefits that a worker receives by $600 a week. When you multiply that by the tens of millions of people who are newly out of work, obviously that adds up. Democrats would like to extend those enhanced unemployment benefits through the end of the year, and Republicans would take a more sort of modest approach. They're worried about the fact that for a substantial share of workers, the checks that they're receiving are higher than their previous wages, and they're worried that this might act as an incentive to not go back to work. And the other big sticking point is going to be the spending that's done for the budget deficits that states and cities have incurred. A lot of these states, a lot of these cities, they have balanced budget amendments. They're going to be forced to take pretty draconian cuts because they've lost income both from personal taxes and from businesses. And Republicans are reluctant to, as Mitch McConnell said, sort of subsidize bad or profligate decision making that happened before the pandemic. And so there's going to be some negotiations that go on there.

I mean, how much of the disparity between these two proposals is a reflection of sort of the long standing predilections of each party anyway?

Yeah, so compared to sort of the modern European welfare state, the American one is more modest. Americans are much more worried in general about discouraging work when compared to the European example. And what the pandemic has sort of upended is that maybe you don't want people to actually going out and finding jobs. And so you've transitioned kind of rapidly with these enhanced unemployment benefits and sort of this universal check that's been going out into something that's temporarily like a European style system. Democrats seem happy to continue it for a while and Republicans are sort of balking at the idea of extending this for a longer period of time. Both sides acknowledge that this is sort of an extreme scenario and that policy innovations that haven't happened before that were thought unthinkable in America need to happen. But the sort of duration has become the sticking point as opposed to the necessity of them.

And to your mind, is this just the next stimulus bill rather than sort of the one that ends these discussions? I mean, the virus is still obviously raging in America.

People thought that the last stimulus bill, which was $2.4 trillion, would have been the last one. The fact that virus caseloads are surging, that America has consistently been topping its earlier peaks, you know, in recent days, suggests that this might not be the last one. And Congress has the levers available to it, which is to spend money. And it's done a reasonably good job at getting fiscal stimulus out there relative to other countries. But the ultimate engine necessitating these trillions and trillions that are being spent is the fact that the virus is continuing to rage uncontrollably in a lot of the country. And if you don't control that, then it sort of becomes self defeating at some point.

And from where you're sitting, what sort of compromise do you suppose will be reached? What sort of bill will Democrats and Republicans ultimately agree on?

I think that there will need to be some continuation of unemployment supports. It would be really a shock to go from having $600 a week that the federal government is putting into your unemployment checks go down to zero in August. Now, the size of those might decrease, but you will need to do something because those benefits have done a lot in terms of keeping consumption at relatively high levels it even seems to have kept the poverty rate flat throughout this entire crisis, which is sort of remarkable in and of itself. So I don't think that you will see tens of millions of Americans sort of off the cliff in that sense, but I think that a lot of the rest of it is sort of up for debate. Whether states and cities will get any help with their budget deficits is very much up for debate. Whether there will be another $1,200 check distributed to every American, I think is uncertain as well.

And there's a big fight about the content of this bill. But do you get the sense that Democrats and Republicans are getting better at working together about this sort of this shared burden or worse?

No, you don't really get the sense, which is sort of odd, that in an era where you've been putting out these massive bipartisan bills, that the relationships between people like Nancy PELOSI and Mitch McConnell and Donald Trump don't seem to have gotten any better. It still seems, despite the sort of the moment of bipartisanship that this virus could have created seems to have passed long ago. And even as these negotiations unfold, it doesn't seem like the partisan tone and tenor of these discussions is going to be in any way mitigated.

Idris, thank you very much for joining us.

Thanks for having me.

Idris is a regular contributor to our U.S. politics podcast, checks and Balance, which comes out every Friday. The latest episode asks why America has fallen behind Europe in controlling COVID 19. Find checks and Balance wherever you get your podcasts. In the coming weeks, oil and gas companies will report their second quarter earnings. Thanks to COVID 19, those results are unlikely to please investors.

Brent crude futures plummeted further and are currently hovering around $19 a barrel. The COVID 19 pandemic has cut global oil demand by almost a third.

Exxon Mobil is warning investors of more huge losses to come. The crash in the oil price hasn't just hurt companies bottom lines. It's also highlighted the long term threats facing the sector shifting regulations, climate change, the switch to cleaner energy. That in turn has thrown an unflattering spotlight on some of the dirtier, more expensive oil reserves, raising the question what to do with the cruddiest crude?

The oil and gas sector has had to deal with the biggest drop in oil demand on record, particularly in the month of April because of lockdowns during.

COVID Charlotte Howard is our energy and commodities editor.

Planes weren't flying, people weren't driving their cars, and this has forced them to reckon in the Short term with issues that are going to face them in the long term. Issues of how to deal with rapidly falling oil demand and what that does to their business.

And so how do you see that playing out in the market?

Well, first of all, in their first quarter earnings, they announced a very steep drop. And in June you had BP and Shell say that they would take really big write downs of up to $17.5 billion for BP and 22 billion for Shell. And that really highlighted what is a long term risk for these companies, which is that they invest in long term, very big, very expensive projects. And the risk is that their assets decline in value very suddenly because the oil price gets cheap. And we saw that happen in dramatic fashion this spring. And it is a long term risk for them because of uncertainty about the switch from dirtier fuels to cleaner fuels.

And in that regard, not every asset, not every oil field is the same.

Exactly. So in Canada, for instance, you have oil sands. It takes a lot of energy to extract and refine those oil sands. In Iraq, there's a lot of flaring of methane, which is a very intensive greenhouse gas. So there are different oil fields around the world and they vary based on the cost for producing that oil and how much they emit as the oil is being drilled.

That is to say for some oil fields, for some of these assets, the low oil prices that we're seeing now, those assets aren't going to make any money.

Exactly. If the price of Brent oil, which is the international benchmark, if that was $100 or up, about 90% of the world's oil reserves could be extracted with a return of at least 10%. The problem is that the oil price now is hovering in the 40s. And at that level, about half of the world's oil reserves are too costly to produce. And so the price of oil is expected to rebound. It's going to go back up. But the real question is how much. And then that determines oil companies future. Whether the assets that they hold and whether the assets they continue to invest in will make a decent return or whether they're going to be stuck with these big projects that weigh down their balance sheets.

Well, if they're just weighing down their balance sheets, why not just sell some of them? I mean, if there are any buyers.

What'S becoming clear in Covid you see a little glimpse of the future and how difficult that process of owning only the best reserves could become. It used to be that big Chinese state owned companies were buying a lot of overseas assets. That has largely ended at Least for now, because of concern about a crackdown on corruption within China and closer scrutiny of foreign deals. You used to have private equity investors who'd come in, and after 2014, for instance, they expected that this would just be a normal cycle. Oil prices would rise again. You'd be able to IPO an energy company or maybe sell the energy company. That exit strategy does not seem particularly sound anymore. So some of the buyers that you used to see have become much more cautious.

But given that the future oil price is still something of an unknown anyway, doesn't that still leave room for speculators?

There have been some deals recently where the value of assets that are sold is based on the production now, but the reserves that are part of the deal that haven't been developed, the reserves that are underground, are being valued almost at zero. And that, I think, is going to be something that you see increasingly, which is that you have a really low price paid for some reserves almost as an option. So you buy them for a low price to prepare for the possibility that prices might rise in the future, that demand won't sink as fast as some people say, and that there will be a market for this oil. That's a pretty risky strategy, though, because Saudi Arabia, for instance, which has both enormous reserves and extremely low costs, has shown in March and April that it can really turn on the taps and fight for market share when it feels like it. So I do think that you'll have these assets change hands for lower prices, but it is a risk you mentioned.

One of the future unknowns, though, is the sort of regulatory regime, and that's only going to get tighter as people get more concerned about climate change. Right. Doesn't that make even the sort of outside bets even more outside?

You see companies increasingly evaluating investments not just on cost, but also on carbon intensity. The big oil companies on Thursday announced efforts to lower the emissions from their businesses. So I think this is something that's going to be an increasing focus for them going forward. And that means that it's going to be harder to find investors who are willing to pour money into, say, Venezuela. Let's say that the Maduro regime is gone and Venezuela really wants to get its oil industry back up and running. I think the biggest companies will look skeptically at Venezuela, in part because of continued political risk, but also because the oil resources there just take a lot of energy to extract, and therefore they produce a lot of greenhouse gases.

In that sense, the people who would take these knockdown assets are betting not only that oil prices will go up. They're also betting against the political will on climate change issues. Right?

It's both of those things. Yes. And you could argue that that's not actually such a bad bet. We've known about the risks from climate change for a while now. Europe is being very aggressive on climate, but the US to date has not been. Even in a Biden administration, you wonder how quickly and how dramatic action would really be. So you increasingly see very different views within the energy sector about the pace of the transition. Investors, governments, citizens increasingly see the risk of climate change and want the energy system to change rapidly. And then you have some who look at rising population growth around the world, rising economic growth, continued appetite for oil, and they say, you know what, actually this is going to take a lot longer than you think. But for oil companies, it's a really risky time. If you have oil projects that are too expensive, there's a real risk that the investors who are already viewing you skeptically continue to head for the hills.

Charlotte, thanks very much for your time.

Thank you.

For a lot more analysis like this, subscribe to the Economist. To find the best introductory offer wherever you are, just go to economist.com intelligenceoffer. The rapper the Notorious B.I.G. once suggested Mo money, mo problems, but new research suggests it might in fact be the opposite.

When it comes to countries, it seems like the more money they come across, the happier their citizens seem.

Wade Zhou is a data journalist with the Economist.

Although scholars do disagree about just how much happiness this additional wealth brings.

Well, let's start with how happiness is measured in the first place.

What figures in so the most common way researchers go about asking people how happy they are is asking them to rate their lives on a scale of 1 through 10. And as it turns out that gross domestic product, or gdp, is highly correlated with how happy people feel in a country on average. Now, GDP has come under a lot of controversy in recent years. People allege that it doesn't measure certain goods. For instance, if you make a sandwich yourself, that doesn't necessarily count towards GDP, even though you've put in 20 minutes of labor. It also ignores things like personal health, leisure time, and happiness.

Okay, so measuring GDP then has its shortfalls. What did you look at instead of.

So Gallup, a polling firm, has asked people in 145 countries different aspects of well being. So they've asked people, have you had enough money for food in the past year? Do you have friends who you can count on to help you in times of need? And do you feel safe walking home at night where you live. So all of these questions, they provide kind of a broad view of what makes life good, rather than just GDP alone.

And so you dug through all of this poll data. What did you find?

Essentially, when you match all these measures, even though some of them might seem a little bit nebulous, all of them correlate very strongly to the very tangible measure of how rich their countries are. Interestingly, respondents from richer countries also are more likely to say that they feel supported by their friends and families, they feel safer in their neighborhoods, and they tend to be much more trusting their politicians. One sort of universal constant that binds everyone on the planet, though, is that virtually everyone complains about the lack of affordable housing.

Okay, so setting aside affordable housing, pretty much every measure that you could reasonably think of to determine whether somebody's happy is strongly correlated to whether they live in a relatively rich country, I suppose. Are we to assume then that money to some degree can buy happiness?

I think so. So, of course, these are cross national data. Another way to think about the problem is to look at what happens in a particular country after a dramatic fall in GDP. When the 2008-2009 financial crisis hit, researchers were given the opportunity to look at how individuals felt after a severe economic shock. And what they have found in both the United States and several European countries is that although the countries were less happy overall, people who lost their jobs were especially hard hit, both financially and in terms of subjective well being.

And I suppose that has resonance with today, where we have a global pandemic and recessions already underway all over the place. I mean, are you foreseeing a recession of happiness as well?

Quite possibly. So if there's anything we Learned from the 2008-2009 financial crisis and its subsequent recessions, it appears that although the economy will eventually recover, we will. There's definitely a few years of lost growth. So the IMF currently predicts GDP to fall by 4.9% this year globally. Gallup's data certainly suggests that this will correspond to possibly a similar reduction in happiness overall.

So perhaps we should update the lyric to no money, mo problems. Wade, thanks very much for your time.

Thanks, Jason.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and see you back here tomorrow. Sam.