The Senate Banking Committee hearing Tuesday previewed the coming debate on the next legislative response to the economic carnage wrought by COVID-19.

While the hearing was nominally about the implementation of Federal Reserve lending facilities established by a roughly $2 trillion economic relief package, the focus looked ahead to an upcoming economic package. As most senators tried to use witnesses to bolster support for provisions they want in the next bill, some hinted where compromises might be struck.

Democrats, along with some Republicans, have called for bailing out state and local governments whose budgets have been decimated by the coronavirus crisis. As those governments have increased spending to fight the pandemic, they’ve seen tax revenue drop drastically.

Heidi Shierholz, director of policy at the progressive Economic Policy Institute and former chief economist at the Labor Department, told the committee that nearly 1 million government jobs at the state and local level have been lost already.

She warned those layoffs could create a vicious cycle that could drown the recovery: Government workers’ wages stop flowing to businesses struggling to recover, leading to further private-sector layoffs and bankruptcies.

Some Republicans have opposed including additional state and local aid in the next bill, saying the $150 billion provided in the last package, along with the Fed’s Municipal Lending Facility, would be enough.

Announced in April, the Fed’s municipal bond facility hasn’t begun operations yet, although Chairman Jerome Powell has said it could as soon as this week. The announcement alone helped calm municipal bond markets, which normally finance major capital projects, like building bridges and repairing roads, rather than day-to-day government operations.

Shierholz said forcing states to rely on debt to get through the coronavirus’s economic crisis would be repeating a mistake from the last recession. “State and local austerity in the aftermath of the recession delayed the recovery by over four years,” she said. “We’ll be facing that, and more, this time.”

Senate Banking Chairman Michael D. Crapo, R-Idaho, asked Shierholz if Congress should provide states additional grants, rather than just rely on the Fed’s lending facility. She agreed.

“In order to keep them from becoming a drag on the recovery, we need to make sure that their budget shortfalls are filled in,” she said. “It is one of the most important things you can do to ensure a robust recovery.”

Grants or loans

The panel’s other two witnesses — the U.S. Chamber of Commerce’s Thomas Quaadman and former Congressional Budget Office Director Douglas Holtz-Eakin — agreed that state and local governments need more fiscal help but held off on endorsing federal grants.

“I’m agnostic,” said Holtz-Eakin, who now runs the center-right American Action Forum. “I leave it to Congress whether grants or loans, but if we don’t get a robust state and local sector, we won’t have a robust recovery.”

Quaadman also said the chamber supports more aid to state and local governments, but demurred when asked if that support should come in grant form. He warned, however, that state and local government budget gaps will hurt the many businesses that rely on the government services and contracts being cut right now, and that efforts to increase tax revenue could slow the recovery.

“To have a large tax increase in the middle of the recession, as state and local governments will be forced to do, that is about the last thing we need,” he said.

Sen. Bob Menendez of New Jersey, a top-ranking Democrat on the committee, has floated a draft bill along with Louisiana Republican Bill Cassidy that would provide state and local governments $500 billion.

Senators from both sides of the aisle also raised concerns with another Fed credit facility that’s been announced but hasn’t yet started operations: the Main Street Lending Program.

Both Quaadman and Holtz-Eakin warned that the facility’s current lending terms were too strict to help many middle-sized firms that are too large for the Small Business Administration’s forgivable loan programs and too small to turn to corporate bond markets for financing to bridge the severe downturn caused by the pandemic.

The Main Street program is open to companies with between 500 and 15,000 employees, allowing them to get new loans or refinancing between $500,000 and $25 million at 3 percent interest over LIBOR with a four-year maturity. The loans would be issued through banks, which could sell 95 percent of the loan to the Fed’s facility.

Holtz-Eakin said the program’s minimum loan size should be halved, to $250,000, and that the term should be extended to 10 years, allowing borrowers to pay it back in smaller, more manageable increments. He also suggested the facility take 100 percent of the loan to ensure participation of banks, which will get paid origination fees and interest on the retained share of the loans.

“This is not about bleeding cash out of these firms,” Holtz-Eakin said. “It’s about providing cash.”

Quaadman said enthusiasm for the program has been muted by the lack of clarity around the operational details. “We expect that there will be much demand for these loans,” he said.

But he echoed Holtz-Eakin’s sentiments, saying the program was too restrictive in its current form.

Holtz-Eakin also encouraged the Treasury and the Fed to more aggressively use money given by Congress to backstop any losses on the loans.

Virginia Democrat Mark Warner agreed. “Think we want some of those Treasury dollars to be at risk, because that means the Fed will be more forward and leaning in.”

The Treasury Department has allocated less than $200 billion of the $454 billion Congress gave it to stand up the credit facilities, only half of which has been deployed as loan collateral. The Main Street lending facility has been earmarked with $75 billion, but Holtz-Eakin said the Treasury should raise that to $100 billion.

Lawsuit liability immunity for businesses has been another sticking point in the debate over the next bill.

Senate Majority Leader Mitch McConnell, R-Ky., has said the next package must provide businesses reopening pursuant to health guidelines a safe harbor from lawsuits from workers and customers who fall ill.

Delaware Democrat Chris Coons has said a deal could be reached, but most other Democrats have remained staunchly opposed.

The chamber has long advocated for insulating businesses from tort liabilities, and has been a leading proponent of COVID-19 lawsuit immunity.

Sen. Elizabeth Warren, D-Mass., said those safe harbors wouldn’t help customers feel safe, and managed to get Quaadman to concede that economic activity hasn’t bounced back as many Americans still fear contracting the virus.

“You agree customers and workers won’t come back until they feel safe… and you agree they’re not coming back, they don’t feel safe?” Warren asked

“That’s what the data seems to show,” Quaadman said.

“Giving companies a pass when it comes to the safety of the workers or their customers is not only morally bankrupt, it is bad economic policy,” Warren said. “Keeping customers safe [and] keeping workers safe is the only way we’re going to reopen this economy.”

Shierholz agreed with Warren. “Removing legal accountability from businesses would not make people safer, it would jeopardize the health and safety of workers and consumers and threaten the economic recovery,” she said.

The witnesses applauded the government’s swift actions so far, but they agreed more needed to be done to limit the depth and length of another recession.

“To focus on the budgetary impact at the expense of the economy is the most fundamental error we could be at this moment,” said Holtz-Eakin. “I think we’re making it.”

The House passed a wide-ranging $3.5 trillion economic relief package last month that Senate Republicans called dead on arrival.