Washington Weekly: The Agenda for Late 2019

The House and Senate returned to Washington this week from a 45-day summer recess to address a wide range of pending policy issues. Looming in the background, of course, is the 2020 presidential election, which is already having a major impact on the congressional agenda. Republican lawmakers and President Trump want to enact some new accomplishments to tout in next year's race, while Democratic lawmakers are reluctant to give the President any new victories and will continue to scrutinize his behavior and policies in an effort to strengthen the case for a possible impeachment effort. We summarize below the issues we believe will be the main stories out of Washington from now through the end of the year.

Congress faces a looming deadline to pass the twelve individual spending bills that collectively fund the operations of the government by October 1, which is the start of the government's new fiscal year (2020). Congress and President Trump came to a bipartisan agreement in July on the overall level of government spending over the next two years, but that agreement didn't cover how to allocate that money among hundreds of government programs and spending accounts. Completion of this appropriations work is among Congress' top priorities. The House already has passed its versions of many of these spending bills, while the Senate began its work this week. We expect it will take some time for lawmakers to hash out disagreements on the appropriate level of spending for different parts of the government. Congress is likely to soon pass a bill to extend government funding past Thanksgiving to give itself some breathing room to hash out a bipartisan agreement. Fights over gun control and the President's efforts to direct additional funds toward the construction of a border wall (and other measures to address the migrant crisis along the southwest border) will generate headlines and inevitably complicate negotiations. Nonetheless, we believe these issues should not prevent a deal from emerging around Thanksgiving or shortly thereafter. The threat of a government shutdown will then be averted, and life will move on … until Congress goes through this process again next year.

Probably not. Senate Republicans are under pressure to have a vote on House-passed legislation to expand background searches to a wider array of gun purchases. However, Republicans are more interested in considering legislation bolstering mental health treatment and helping states adopt "red-flag" laws that would allow law enforcement to temporarily remove firearms owned by a person who may present a danger to himself or others, as determined by a state court. Nearly 20 states have some form of a red flag law in existence today. The President will be pivotal in determining what, if anything, happens in the Senate since Senate Republicans are only willing to take up a bill that they know he will sign into law. Furthermore, even if the Senate were to pass a measure that the President could support, it would be unlikely to satisfy most gun control proponents. So, whatever the near-term legislative outcome, the debate over further gun control will continue and intensify after every mass shooting. As we have noted before, the estimated number of guns (393 million) owned by US civilians is more than double the number of people who voted in the 2018 mid-term elections. The strong opinions from people on both sides of this issue are simply too divergent for any meaningful deal to materialize in the near future.

It's hard to be optimistic about the possibility of a US-China trade deal anytime soon. The issues are complex and strategically important to the success of both countries, and each side is reluctant to be seen as backing down in a negotiation. In order for a deal to begin to emerge, one side will likely have to capitulate in response to a serious economic downturn or a loss of political standing with a valued constituency. Neither of those dynamics is likely to happen anytime soon. If a deal were to emerge in the next four months, it is likely to be light on substance – perhaps new US agriculture sales to China, export restrictions on fentanyl from China, a bilateral panel to address specific cases of alleged intellectual theft, and the elimination of all tariff increases put in place since last year. A more substantive deal would have to be worked out over a much longer period of time and would presuppose more economic pain from higher tariffs on one or both countries. Nonetheless, the negotiating session between the two countries will resume in October, and the markets will continue to respond to every development – both positive and negative – along the way. We are also keeping an eye on the fluid situation in Hong Kong – any perceived over-reaction from either side could force the other to walk away from the trade talks.

Sometimes lost in the coverage of the ongoing US-China trade dispute is the status of the new trade agreement involving the US, Mexico and Canada (USMCA). President Trump has negotiated a new agreement with the two countries that serves as a replacement and update for the 25-year old North American Free Trade Agreement (NAFTA). The USMCA must be approved by Congress, and we expect the House to act first in November or December. We believe both the House and Senate will approve it, but any vote will be close and, of course, subject to many political considerations. House Speaker Nancy Pelosi (D-CA) controls the voting schedule in that chamber, and she doesn't have to bring the trade agreement up for a vote. It could be defeated through congressional inaction, and some Democratic strategists question whether they should allow a vote (and likely passage) of a bill that would reflect well on President Trump in a heated re-election cycle. Nonetheless, we think the Speaker will move forward with a vote late this year. A positive vote would be well received by financial markets, while a rejection would send a signal to the markets that the US trading system is again showing signs of dysfunction.

US trade challenges exist beyond China, Mexico and Canada. The US will decide by mid-November whether to impose higher tariffs on imported automobiles and auto parts, which have a significant impact on key allies, including Japan and various EU countries (this is why Japan has prioritized a trade deal with the US recently; see below). The US will likely extend its deadline and not impose the higher tariffs in November, but their mere threat is unsettling to many in those countries and industries. Trade tensions between the US and India also exist due to dueling higher tariffs imposed by each country on the other over the past year, with no favorable endgame in sight. All the talk about a US-United Kingdom trade agreement will be just that – talk – until BREXIT occurs, and this seems more like a 2020 project. On a more favorable note, the US and Japan seem to be on the verge of a limited trade deal, though there are some lingering issues that need to be resolved. As the election nears, President Trump will further express his angst over trade issues as the key impacted constituencies – agriculture and manufacturing – loom large in determining whether he will be re-elected.

House Democrats' investigative hearings on the Mueller report and the actions of President Trump have thus far failed to produce a "smoking gun" to warrant a vote to impeach. In an effort to widen the impeachment probe, House Democrats are shifting away from the Mueller report and more toward other allegations of potential abuses of power and corruption. This week, the House Judiciary Committee passed a resolution to expand its authority on impeachment hearings and to clarify that certain forthcoming hearings could be part of an impeachment investigation. House Democrats will use the rest of this year to hold impeachment-related hearings on a wide range of policies, campaign activities and past business ventures associated with President Trump. However, House Speaker Pelosi and the Democratic leadership still are wary of moving forward with impeachment proceedings at this time, especially when the majority of the public (as demonstrated by public polling) does not support such an effort. Even with the divide among Democrats over how to characterize their investigative efforts, expect continued hearings of former administration officials over the coming weeks and months as Democrats pursue a sounder rationale for a potential vote on impeachment.

All politicians favor reduced prescription drug prices, and legislation will move forward in the House and possibly the Senate to address this problem later this year. However, the good news likely ends there. Leading House Democrats will advance a bill this fall that will allow both Medicare and private insurers to negotiate drug prices directly with drug makers within certain cost parameters and incentives (insurers already negotiates prices with drug makers, but Medicare does not). Most Republican lawmakers will have problems with this approach because it would result in a heavy federal government hand in setting prices in the private marketplace and potentially stifle innovation in the pharmaceutical industry. Some Senate Republicans, including Finance Chairman Chuck Grassley (R-IA), have touted a more modest bill that would slow the rise of drug prices under Medicare. It is doubtful that the House and Senate can collaborate on a compromise bill this or next year due to their differences. However, a compromise could occur if President Trump, who made lower prescription drug prices a big part of his 2016 campaign, comes out in strong support of the House measure. His preferred approach is in many ways not that different from that of the Democrats. Republicans are under pressure to do something to address rising health care costs, and lowering the cost of prescription drugs would be a big step in that direction. 

With the influx of immigrants seeking asylum in the US having declined sharply since May, the immigration issue has taken a back seat to other issues in recent weeks. However, the challenge of processing and detaining asylum seekers remains, and surges of new immigrants are expected once the weather cools off in the fall and early winter. It will continue to be a big issue throughout the year since it is such a high priority of President Trump's. Senate Judiciary Committee Chairman Lindsey Graham (R-SC) is pushing legislation to fix some outdated asylum laws, but the measure won't move forward in the House. Instead, the White House will continue to be the center of activity on immigration. A key wildcard is how President Trump views Mexico's assistance in this crisis. The threat of higher tariffs in June prompted Mexico to enhance its enforcement efforts to slow the migrant surge. If President Trump's frustration with the border situation hits another boiling point, he once again may threaten higher tariffs against Mexico. 

The Senate is sometimes referred to as the world's most deliberative body, which is a nice way of saying it moves slowly. So, the Senate's inaction on a House-passed retirement bill, known as the SECURE Act, is hardly surprising. This bill contains many provisions, including an increase of the Required Minimum Distribution age to 72 and an effective elimination of Stretch IRAs. Despite the slow pace, we are optimistic that the SECURE Act will move forward in the Senate later this year.

Congress faces the expiration of both the National Flood Insurance Program (NFIP) and the Export-Import Bank (Ex-Im) at the end of this month. Given the challenges in finding agreement on long-term reforms of NFIP and Ex-Im, Congress may need to settle for a shorter-term extension of both, with Ex-Im, in particular, facing the threat of having its charter lapse. While the House Financial Services and Senate Banking committees will be busy with hearings on a wide range of topics, major legislative victories may prove elusive. One area where lawmakers continue to make progress is in modernizing the existing Bank Secrecy Act regulatory regime for combating money laundering. Additionally, the Capital One data breach will give greater urgency to efforts to develop legislation on data privacy and security standards, but differences on major issues like federal preemption will continue to make it difficult for lawmakers to reach consensus. The administration’s recent release of long-awaited plans on housing finance reform was debated at a Senate Banking hearing this week. With a major legislative reform package very unlikely to materialize, the focus will be on actions the administration can take pare back the activities and risk profiles of the mortgage giants Fannie Mae and Freddie Mac and to prepare these entities for eventual release from government control, although the administration will take care to not do anything that could roil mortgage markets before a presidential election. Finally, after finalizing changes to the Volcker Rule in the late summer, bank regulators in the coming weeks will complete their rule to tailor regulatory requirements for banks as required under the bipartisan regulatory bank relief legislation that Congress passed last year.

With the start of the presidential primary season only four months away, and the general election just over a year out, one subject being talked about with increasing urgency is election security. The House in June passed along party lines an election security bill that would authorize $600 million to be allocated to states to enhance their security ahead of the 2020 elections. This action comes on top of congressional approval in 2018 of $380 million for primarily the same purpose. Senate Majority Leader Mitch McConnell (R-KY) has stated that he has no intention of bringing the House bill before the Senate since he believes sufficient election security improvements already have been made and they should be dealt with at the state level. While greater attention will be paid to election security as we head into next year’s election, we do not expect Congress to pass any new legislation on this issue. 

Many other issues are currently in play and could move forward later this year under certain circumstances. "Surprise" medical billing legislation has some bipartisan support and could gain traction. If there is bipartisan support on how to pay for a nearly $300 billion highway bill, it can pass. Both the House and Senate will continue to hold oversight hearings for the technology industry as the states also have ramped up their efforts in this area. A delayed medical device tax from Obamacare is due to go into effect on January 1, and many in Congress will try to pass legislation ending or further delaying the new tax. We are more certain that the Senate will continue to act on executive branch nominations, including the likely approval of 23 district court judge nominations and at least one cabinet secretary nomination, Eugene Scalia, to serve as Secretary of Labor. A surprise vacancy on the Supreme Court (we raise this because the media has speculated about it, not because we expect it), would clearly turn into a top-tier and urgent issue that would extend into early next year.