This Week: The House debated legislation to authorize defense programs for fiscal year 2020 and is expected to pass the measure later today. The Senate confirmed several Trump administration nominees.
Next Week: The House will vote on legislation to authorize spending for intelligence agencies and a bill to increase the federal minimum wage. The Senate will vote on various nominations and four international tax treaties.
Financial Services Issues
A House Financial Services Committee (HFSC) panel this week held a hearing to consider several pieces of legislation to enhance corporate disclosures of environmental, social and governance (ESG) issues. Separately, Senator Elizabeth Warren (D-MA), along with several other Democratic senators running for president, introduced a bill that would require companies to report their greenhouse gas emissions and risks from climate change. In contrast to the specific ESG disclosure mandates prescribed in some of these bills, the SEC has taken a principles-based approach to allow market forces to determine the appropriate level of disclosure. While these bills are unlikely to advance into law in the current Congress, ESG issues are a major focus for many Democrats. At a HFSC hearing this past spring featuring the CEOs of the largest banks, Democratic lawmakers probed the banks’ lending and business activity with politically-disfavored industries (including weapons, tobacco, carbon-based energy and private prisons). Committee Chairwoman Maxine Waters (D-CA) recently asked a wide range of banks about their diversity and inclusion practices, and the committee yesterday passed several bills aimed at enhancing diversity in corporate leadership. ESG covers a wide and diverse range of issues and topics that will continue to permeate into broader debates about business and regulatory practices in the financial services industry for years to come.
Other Issues in Play
Budget Deadline Approaching
The clock is ticking quickly on the need for Congress to set funding levels for the federal government's discretionary budget for next year and to extend the debt ceiling. The current fiscal year ends on September 30, and Congress is scheduled to be in session for only five weeks before then (August is a recess month). It is very doubtful an agreement on funding levels can be crafted by then, so a plan B will have to evolve. It now appears that Congress will need to extend the debt ceiling by the middle of September or risk a default on its debts, which could rattle the markets as we approach that timeframe. With these deadlines looming, Congress will most likely try to pass a bill in early September that combines a short-term extension for funding with an increase in the debt ceiling, although this approach is likely to raise the ire of President Trump. His administration has proposed freezing any increases in government spending, and he has time and again expressed his displeasure with Congressional efforts to push off tough budget decisions. This all cries out for a multi-year budget deal between the two parties, but this just isn't realistic in this contentious political environment.
Specific Budget Challenge
Congress is currently operating under budget rules that try to incentivize bipartisan agreements by imposing automatic budget cuts (sequestration) if deals cannot be struck. The budget cuts are significant and would amount to $126 billion next year – $71 billion for defense and $55 billion for non-defense programs. A cut of this magnitude would represent about a 10% cut from last year's level of spending. Virtually every lawmaker has serious concerns with this approach since these draconian cuts would impact a wide range of spending priorities. Rather than cutting spending, most lawmakers want to increase it – Republicans in favor of more defense spending and Democrats in favor of more non-defense domestic spending. The reality these days is that a successful agreement to break the current impasse will need to raise spending for both. The constituency for more spending trumps the smaller constituency for deficit reduction, and that will not change anytime soon.
US-China Trade Negotiations
Following the high-profile Trump-Xi meeting in Japan two weeks ago, very little progress has been made to bridge the two countries' trade policy differences. High level staff from both countries spoke to each other on the phone this week, but that didn't move the needle much. As China's positions have hardened and as negotiators reckon with the magnitude and difficulty of the issues to be resolved, the mood in Washington has become decidedly pessimistic over the past week. A few modest commitments were made at the Japan meeting, such as the delay of new US tariff increases, pledges of Chinese purchases of US agricultural products and a loosening of the US ban on Huawei purchases, but they have not been detailed or finalized. Finalizing them would be a logical next step in these negotiations but, again, these would be very modest moves. We believe two things have to happen for any kind of a deal to be struck in the next couple of months. Trump and Xi have to get more personally involved and make concessions. Additionally, more pain in the form of higher tariff increases (from the US) and more restrictions on US companies and products (from China) will have to occur before significant progress is made.
US-India Trade Battle Escalating
While much of the media's attention is focused on US-China trade differences, tensions between the US and India have been quickly growing on the sidelines. Trade friction between the US and India is not a new development as US trade negotiators have long and mostly unsuccessfully fought for increased market access, lower tariffs and greater intellectual property protections in India. Currently, India is the ninth largest trading partner of the US. Beyond the ongoing application of higher tariffs on steel and aluminum imports to the US from India, the Trump administration recently removed India from a program that allowed India to export many products to the US duty-free and India retaliated with higher tariffs on nearly 30 US products exported to India (including apples, almonds, lentils and chemical products). All of this has led to a higher level of bilateral bickering and a significant disruption of a major trade alliance. US trade negotiators left yesterday to visit India through this weekend to determine if any progress can be made to address their differences. Our sense is that the US negotiators will have little patience in these talks given some of the longstanding issues with India on trade and investment. While there is an outside shot of a quick deal, the likelier outcome is a stalemate that will involve more tariff increases on each country's exports and even greater tension between the two countries.
Marriage and Taxes
The House Ways and Means Committee recently advanced the PRIDE Act, which would use gender-neutral language in the tax code. Additionally, it allows lawfully married same-sex couples to amend past tax returns and claim applicable marriage-related credits and refunds. The Joint Committee on Taxation has said this provision would cost nearly $60 million. The bill was adopted without objection in the committee and is likely to advance through the full House in the coming weeks. However, the lead sponsor in the Senate is Senator Elizabeth Warren (D-MA), whose prominence in the current presidential election may result in a stalling of the bill. Nonetheless, this issue won't go away and will likely be folded into a larger piece of legislation and adopted – either later in this congressional session or next.
Busy Next Week
Former Special Counsel Robert Mueller's testimony before two House committees will headline what will be a busy slate of activities in Washington next week. Mueller has said his testimony and answers to questions will go no further than what is contained in his report to the Attorney General, which has been public (minus redactions) since the end of March. The oversight hearing will be a media spectacle, but whether any new information comes from it remains to be seen. Beyond the Mueller hearings, Facebook and its proposed cryptocurrency program, Libra, will be in the crosshairs of House and Senate committees next week, with virtually all members calling for the company to withdraw the project or slow it down. Finally, the US and Mexico will meet to assess how effective the latter's help has been to slow the migrant rush along the southwest border. The US seems satisfied with the recent Mexican enforcement activity, and no one we have spoken to is expecting the US to renew its threats for higher tariffs on imported goods.
The Final Word
The Amash Effect
Last week, Congressman Justin Amash of Michigan announced that he was leaving the Republican Party and registering as an Independent. Amash has represented Michigan's third Congressional District since 2011. While his announcement was newsworthy in its own right, more interesting is his potential impact on the 2020 presidential election. Amash has been a rumored candidate for president and could now run as either an Independent or on the Libertarian ticket. Amash has not committed to a presidential run but has also not ruled it out. While the chances of Amash being elected president are practically non-existent, he likely would pull some votes away from President Trump in Michigan, a state that he won by a slim margin of only 10,000 votes in 2016 and one that he will need to win in order to be re-elected. The race between Trump and the Democratic nominee will certainly be the headline contest in 2020, but don't ignore Amash's impact on the race in the Wolverine State if he runs for president.