Mnuchin, Kudlow in epic clash over next stimulus package

A civil war is taking place inside the White House pitting Treasury Secretary Steven Mnuchin against National Economic Council chief Larry Kudlow, one of the nation's foremost supply-side economists, over a key provision of the fourth round of stimulus amid COVID-19 lockdowns, FOX Business has learned.

The acrimony is threatening to split key Republican factions just as negotiations for the spending plan heat up, according to four people with direct knowledge of the matter.

Kudlow, a long-time advocate of lowering taxes as a way to promote growth, is pushing for a payroll tax cut as a key part of the plan to spur economic growth amid the four-month-long pandemic recession, these people say. For months, supply-side economists, including Kudlow, have advocated a payroll tax holiday, or an elimination of the payroll tax, and a so-called negative payroll tax, a wage subsidy the government would give to employers who would pass it on to their employees, as part of the next, and probably final stimulus legislation before the November election.

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But Mnuchin, a former Wall Street executive, is said to believe a payroll tax cut will not be approved by Congress and will face stiff opposition from Democratic House Speaker Nancy Pelosi, these people say. He is pushing for another round of individual stimulus checks and an extension of unemployment benefits in the next package, which could mirror the last round of stimulus, the CARES Act.

While Mnuchin has been speaking with a number of free-market conservatives to hear their perspective, he is telling people he has to focus on a policy that Pelosi will agree to for the bill to ultimately pass and get funded.

Despite the disagreement on direction, both sides agree that another round of stimulus is needed to rev up economic growth particularly amid a surge in coronavirus cases in Sun Belt states that is imperiling the nascent recovery that began when the White House and Congress passed the first round of stimulus in February, followed by two more in the beginning and end of March. Also looming large for the White House is President Trump's uphill battle to be reelected president as Election Day approaches in November. Trump administration officials believe for the president to have any chance or reelection, the economy would need to show continued improvement.

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"This is getting a little personal," said one GOP lobbyist with knowledge of the matter. "Kudlow looks at Mnuchin as a Wall Street type who hasn't fought the good fight over tax cuts as he has since the Reagan years. Mnuchin thinks Larry is being unrealistic because there's no way Nancy Pelosi will pass a tax cut and give the president that type of victory before November."

Internally, the two men are jockeying for support from GOP officials. Mnuchin is seen as having an edge in the debate since he has support from the president's daughter, Ivanka Trump, and son-in-law, Jared Kushner, both of whom are advisers to the president. People close to the White House are speculating that Kudlow is said to have support from members of Congress, including prominent conservatives such as Sen. Tom Cotton, R-Ark., as well as supply-side economists like Art Laffer and Steve Moore who have the ear of the president. But a spokeswoman for Cotton said the senator is not taking sides in any internecine battle.

“It’s inaccurate to describe Senator Cotton as supportive of one side or another. He’s looking carefully at all proposals for a Phase 4 and has not taken a position on the payroll tax cut or any other elements described in this story,” the spokeswoman said.

Mnuchin has blocked out next week to meet with lawmakers and hammer out a bill that could be voted on as soon as next Friday, people with knowledge of the matter tell FOX Business.

A White House spokesman declined to comment on the infighting. “Any phase four economic package must prioritize pro-growth economic measures that incentivize employers and our great American workforce for re-employment and a return to the labor market. Under the President’s leadership, the greatest comeback in American history has already begun,” they told FOX Business. “President Trump’s policies of lower taxes, deregulation, reciprocal trade, and energy independence built a booming economy once and they will do so again.”

The Treasury Department declined comment.

This battle underscores tensions between the more conservative wing of the administration and mainstream economic officials such as Mnuchin, and could weaken the White House's position as the talks heat up. Kudlow, an economist and former financial TV host, has been used by the administration to frame its economic policy on the airwaves and in print. He has been a staunch advocate for free-market conservatism and so-called supply-side economics who has been advocating for lower taxes to boost economic growth since his days in Ronald Reagan’s administration.

Mnuchin, on the other hand, is seen as more economically liberal, given his long career on Wall Street, which relies on government subsidies including Federal Reserve action for much of its profits. People close to the Kudlow wing of the White House have described Mnuchin as “too Keynesian," a reference to the British economist John Maynard Keynes who argued that government spending is the best way to spark economic growth.

But people close to Mnuchin believe Kudlow is being too naive about the current political environment. "Larry thinks if we get a payroll tax cut it will be permanent even after the election," the GOP lobbyist said. "But Mnuchin says that this Congress will never pass one and he's probably right."

Under Mnuchin's plan, the stimulus would extend federal unemployment benefits—which provide an additional $600 per week to individuals already receiving state unemployment—as part of a coronavirus recession safety net for unemployed Americans. He would also want to wind down the additional checks from its current level to zero by the end of the year.

Kudlow has said extending unemployment benefits disincentives people from returning to work, and he has some prominent conservatives on his side. It's unclear if the rift will spill over into the public debate of the package that will start to heat up next week, but if it does, it could weaken the White House's hand in the negotiating table. Kudlow didn't return a call for comment.

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One thing is certain: The disagreement between the two men has been quietly brewing for weeks and at times seeping into the media. In an interview with FOX Business on Monday, Kudlow emphasized the importance of incentivizing people to get back to work—possibly offering a return-to-work bonus and decreasing the unemployment benefits.

Mnuchin, meanwhile, has been wary of criticizing such benefits even if he has stated that some parts of the current system, including the granting of individual checks, need to be reformed.

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