Only in Washington can politicians slowly make progress toward a stimulus deal while pounding the table and accusing the other side of being unreasonable. Yet even with negotiations over the next stimulus package at a standstill, the two sides moved $500 billion closer to a deal last week.

Here’s what happened and what’s left to be done.

Stimulus Negotiations Update

Last week the big news on a stimulus package was a telephone call between House Speaker Nancy Pelosi (D-CA) and White House Chief of Staff Mark Meadows. Following the 25-minute call, both sides offered little hope. Speaker Pelosi said the parties were at a “tragic impasse.” Mr. Meadows said stalled negotiations were due to Speaker Pelosi’s “fantasy objections” and that she wouldn’t explain what her offer would fund.

Move past the sound bites, however, and one can see real progress toward a deal. Recall that the starting positions were $3.4 trillion in the Heroes Act passed by House Democrats and $1 trillion in the HEALS Act introduced by Senate Republicans. During negotiations in early August, Speaker Pelosi offered to come down to $2.4 trillion if Republicans would come up to $2 trillion. That offer was rejected.

At the same time, Republicans offered to come up on specific issues, such as unemployment benefits and aid to state and local governments. Democrats rejected this proposal.

Following the call last week, however, Speaker Pelosi reduced her proposal by $200 billion, down to $2.2 trillion.

“We have said again and again that we are willing to come down [and] meet them in the middle,” Speaker Pelosi said to reporters. “That would be $2.2 trillion. When they’re ready to do that, we’ll be ready to discuss and negotiate. I did not get that impression on that call.”

At the same time, Mr. Meadows came up $300 billion, saying the President would sign a $1.3 trillion package: “The president right now is willing to sign something at $1.3 trillion,” Meadows told reporters. He also said that this number had been offered to Democrats.

So while both sides continue to wage a war of words, they did make meaningful progress toward a deal last week.

Stimulus Deal Negotiations Going Forward

While $500 billion is significant progress, there is one fundamental disagreement over how to approach further negotiations. Republicans want to evaluate and negotiate each major piece of the stimulus package. This was evident in past negotiations where Republican negotiators made offers on specific pieces of the legislation, such as unemployment benefits and state and local government funding.

In contrast, Democrats want to focus on the top line number. They want to reach agreement on the total cost of the package and then fill in the details later. This was evident in their offer to compromise on the overall cost of the next stimulus package.

The different negotiating strategies bubbled to the surface this week. Mr. Meadows described this in an interview following his call with the Speaker. According to Mr. Meadows, he asked the Speaker during the call what was in her $2.2. trillion proposal, and she wouldn’t tell him.

“I had a conversation with Speaker Pelosi. And even on her $2.2 trillion counter offer, she can’t tell the American people, nor me, what is in that,” Meadows said. As reported by The Hill, Meadows added: “I said,’What does the $2.2 trillion represent?’ You know what her response was? ‘I’m not going to tell you. Let me fill in the blanks.’ That’s not a proper negotiation, [nor] is it anything that the American people accept.”

A representative for Speaker Pelosi responded saying that these comments mischaracterized their discussions. They also claimed that Mr. Meadows was unwilling to break down the costs of the Republican proposal.

Resolving the different approaches to further negotiations is critical. If they can get past this hurdle, there’s one element of the stimulus bill that could go a long way to helping the parties reach a final agreement—aid to state and local governments.

How to Bridge the $900 Billion Gap

Aid to state and local governments represents $915 billion of the $3.4 trillion Heroes Act. In contrast, the Republicans have offered $150 billion. Thus, this issue alone represents $765 billion of the $900 billion divide. To date, Speaker Pelosi has been unwilling to reduce this figure, even while proposing that the overall package come down by more than $1 trillion. It’s here, however, that potential compromise may be found. Here’s why.

Simply put, state and local governments don’t need $915 billion, or anything close to that figure. Moody’s Analytics puts the budget shortfall at $500 billion. And that’s not what state and local governments need now, it’s their budget shortfall over the next two years. Even if the federal government covered this entire shortfall, it would close the gap by over $400 billion. An agreement to cover just the next year’s state and local government budget shortfall would narrow the gap even further. Such a deal would require both sides to compromise.

Here it’s worth noting that stimulus checks and enhanced unemployment benefits also help state and local governments. Stimulus checks bolster spending, which generates sales tax for most states. Unemployment benefits, in addition to increasing spending, also represent taxable income, benefiting those states that levy income tax. These benefits also help homeowners pay their mortgage, which in part goes to real estate taxes. And the federal government has already provided over $765 billion in federal coronavirus spending to state and local governments.

Related: $300 Unemployment Benefit Update

Some Democrats Getting Impatient

The question remains what, if anything, will incentivize either side to compromise further. Some House Democrats have urged Speaker Pelosi to reach an agreement. More than 100 House Democrats have signed public letters imploring her to find a solution to the impasse and to move forward on certain components of a stimulus deal.

For the Republicans, a stimulus deal could help some Senators at risk of losing their seats. Some believe the Republicans could lose the Senate, and a continued stalemate on another round of stimulus wouldn’t help their cause.

There’s clearly more work to be done on both sides. The $500 billion progress we saw last week was a positive step toward a stimulus deal. It remains to be seen how and when the parties make further progress.