Washington Weekly: Government Funding

The House approved a new $17 billion disaster aid funding bill to help individuals and communities affected by wildfires, flooding, hurricanes and other natural disasters in various states and Puerto Rico. It also passed legislation to preserve insurance coverage for individuals with pre-existing medical conditions (a requirement under Obamacare). The Senate confirmed a group of Trump administration nominees.

The House will approve a package of legislation to protect and expand certain health care measures and lower prescription drug costs. The Senate will vote on various nominations.

Ex-Im Progress.

Amidst the tumult of the US-China trade talks, there was progress this week on trade finance. The Senate took an important step forward with the approval of three nominees to the Export Import Bank (Ex-Im), a government agency that extends lines of credits and guarantees to US exporters. Ex-Im has been hobbled for years due to vacancies on its board. The confirmation of these nominees will break the impasse and give Ex-Im the needed quorum to approve credit transactions above $10 million, something it hasn’t been able to do since 2015. The situation had been a worrying one for major exporters (e.g. Boeing, GE, and Caterpillar) that rely upon Ex-Im as an important source of trade finance. However, Ex-Im still isn’t completely out of the woods since it needs Congress to renew its charter before it expires on September 30. Given that some on the right view Ex-Im as a dispenser of corporate welfare, Ex-Im’s extension ultimately will need to be paired with reforms of how the agency conducts business in order to get sufficient Republican support in the Senate. Bipartisan discussions are ongoing, particularly in the House, and we think that an Ex-Im reauthorization and reform package eventually will get over the finish line.

US-China Negotiations.

What a difference a week makes. A US-China trade deal seemed close to resolution a week ago, but today we are dealing with new US tariff increases - from 10% to 25% - on $200 billion worth of Chinese imports. In turn, China this morning announced retaliation on US imports. The sudden change of status underscores the complexity and volatility of these negotiations. The negotiations have pitted two governments with very different negotiating styles and desired bottom lines against each other. They both have been guilty of underestimating and not understanding each other. Nevertheless, since both sides want and need a deal, we are still more bullish than bearish on their eventually reaching agreement. With tensions running high, there may just need to be a brief pause to turn down the heat. China seems to have lost its nerve over certain commitments, while the US remains aggressive in making demands that are not easy for China to accept. The economic pain from the higher tariffs will soon be felt and likely force the two sides to redouble their commitment to a deal but we are less confident of this than we were a week ago. One side will eventually have to cry “uncle” — something that neither side is accustomed to doing or good at doing. 

A New Tariff Fight?

While US-China trade challenges dominated the media attention this week, another trade spat has been quietly brewing over whether the US will impose higher tariff levels on imported automobiles and auto parts. The US Commerce Department sent a confidential report to the White House in February that likely recommended that course. President Trump is expected to act on this question by the end of next week. Higher tariffs on imported autos and auto parts would be particularly painful to various EU countries (especially Germany), Japan and South Korea — all US national security allies. We believe the drama surrounding the US-China spat will diminish President Trump's appetite for a second major fight over tariffs. Instead, he will try to use the threat of them to gain other trade concessions in separate agreements with the EU and Japan. These potentially higher tariffs are a major annoyance to US relations with the EU and Japan, particularly the former, and we’ll hear more about them once the current rift with China is resolved.

Medicare for All.

A hearing in a House committee last week on Senator Bernie Sanders' (I-VT) "Medicare for All" legislation may be the beginning and end of its consideration in the lower chamber. Many House Democrats support this measure, though, the less drastic alternative of strengthening the Affordable Care Act (Obamacare) has wider currency among Democrats. Between those options are plans that combine a strengthening of Obamacare with an experiment to give some younger individuals earlier access to Medicare. The hearing last week was meant to placate the House supporters of the Medicare for All plan before the chamber turns to potential Obamacare reforms. The lack of Republican support for any of these proposals and the division among Democrats over the scope of health care reforms will likely prevent any major action this year in the House. While Medicare for All will continue to be a popular rallying cry for most of the current Democratic candidates for president, the proposal doesn't have sufficiently broad support among Congressional Democrats to make meaningful headway.

Social Security Rescue Plan to Advance.

With new studies showing further strains on the solvency of Social Security, House Democrats are rallying behind a plan to shore up the program's finances. A bill endorsed by virtually all House Democrats and sponsored by Congressman John Larson (D-CT) will boost program benefits, shield those expanded benefits from taxation and apply the payroll tax to earnings of over $400,000 annually. The current earnings cap is $132,800. The measure would also set a new minimum benefit for lower-income retirees. Larson's bill will begin to move forward this summer and will be opposed by Republicans, who will not support the tax increases under the proposal without corresponding benefit reforms. The bill's movement will have the positive effect of focusing attention on Social Security's troubled finances, but lawmakers from both parties are nowhere near agreement on a plan to ensure the long-term viability of the program. That will only happen when the Social Security trust fund gets closer to insolvency, which could occur in a little more than a decade.

Government Funding.

Currently, federal government operations are funded through the remainder of the fiscal year, September 30. The House Appropriations Committee has begun work on the 12 separate bills to fund the government for fiscal year 2020, which starts on October 1. Reflecting the priorities of many House Democrats, the committee's outline includes a notable $9.9 billion (or six percent) increase for the Departments of Labor, Health and Human Services and Education. On the other end of the spectrum, the Homeland Security and Defense Departments would get smaller increases of one percent and three percent, respectively. This plan will be a starting point for negotiations that House Democrats will have with Senate Republicans and the White House. These efforts will gain steam over the coming months as the two parties try to work out a compromise that somehow reconciles their different priorities on federal spending while also at least giving lip service to the growing federal budget deficit. In the end, Congress will probably agree on the easiest course – increase spending across the board and damn the deficit.

Off the Beaten Path.

With so much focus on other issues, Senate Majority Leader Mitch McConnell (R-KY) indicated again this week that he wants to pursue legislation that raises the minimum age for the purchase of tobacco to 21 years old, something 12 states and Washington, DC have already enacted. This would be a big societal change as those 18 and over can now buy tobacco products in most states. Leader McConnell is still counting votes to see if he has enough to proceed with his measure, but we expect action on this issue fairly soon. States have already raised concerns about the tax revenue they would lose, while public health advocates and health insurers love the idea.