Washington Weekly: Government Funding Woes

The House approved a bill to reauthorize the Export-Import Bank and voted on a number of veterans-related bills. The Senate approved various Trump administration nominees.

Both the House and Senate will prioritize the passage of a continuing resolution to extend government funding from November 21 to December 20 or later (see below).

Tech in Finance Pushback.

Growing concerns about large technology companies entering the financial industry are beginning to trigger legislative responses from Congress. Senator John Kennedy (R-LA) this week introduced a bill that essentially would ban commercial firms from owning a bank. In the House, Congressman Chuy Garcia (D-IL) has been developing legislation that would increase oversight of commercial companies owning banks and ban the largest tech platforms from establishing a digital currency or from owning or affiliating with a financial institution. House Financial Services Committee Chairwoman Maxine Waters (D-CA) has been very critical of Facebook’s plans to create a payments system based on a new cryptocurrency called Libra and has been supportive of Congressman Garcia’s legislative efforts. While she may seek to advance legislation in this area, it is unlikely that the Senate would take it up. Nevertheless, the legislative activity underscores the challenges that Facebook will have in getting Libra off the ground. The cold air coming out of Washington also may accelerate a growing trend of big tech companies partnering with major financial institutions in offering banking products like credit cards and checking accounts to their large networks of users.

Impeachment.

The House began the public phase of the impeachment inquiry this week with hearings featuring three witnesses from the State Department. All three gave testimony that generally supports the rationale behind House Democrats' push to impeach President Trump. Little new information was uncovered in these hearings, but the ability to hear directly from the witnesses probably had some impact on those who tuned into the hearings. The timetable for a final House vote on impeachment is still up in the air, but we expect a vote in mid- or late December. This would mean that the Senate trial would begin in January. Senators told us this week that they expect a trial to last between four and eight weeks, which would mean that it likely would run through the crucial early contests for the Democratic presidential nomination fight, most notably the Iowa caucus on February 3 and the New Hampshire primary on February 11. Six senators currently running for president would need to participate in the Senate impeachment trial rather than campaign in these early states, which likely would hurt their chances to win those states.

Broader Political Impact from Impeachment.

How the House and Senate processes for impeachment evolve over the next few weeks will impact voters as they brace for a competitive presidential election next November. Many pundits point to the 1998 impeachment (but not conviction) of then President Bill Clinton as a political disaster for Republicans, who suffered losses in the mid-term elections later that year. It is too early to know whether Democrats will suffer from the current impeachment proceedings. There is at least one big difference from the current atmosphere compared to 1998. In 1998, President Clinton had an approval rating of 65% among voters (which rose to 73% the following year). President Trump's approval rating today is 44%. Much of the damage done to Republicans in 1998 can be attributed to Clinton's popularity at the time, particularly among independent voters. With many voters unwilling to give President Trump the benefit of the doubt, he may have a harder time emerging from this process in a stronger political position.

Government Funding Woes.

With government spending set to expire November 21, Congress will soon need to pass a new spending agreement or a short term extension. We expect action on the latter sometime next week, with a new extension running to December 20. Getting additional time will be a relief to lawmakers, but it won't necessarily make the job any easier. Democrats and Republicans have to agree on how to spend $1.37 trillion covering all of the federal departments and agencies over the course of the remaining nine months of the current fiscal year. This is not an easy task in this contentious political environment as the new deadline will be close to the time the House votes on impeachment. Ultimately we believe the two sides can find agreement on all issues, while the funding of the border wall along the southwest border will be a final sticking point. As we get closer to the next deadline of December 20, it's possible that lingering disagreement on this issue will force both sides to opt for another extension to avoid a government shutdown. The perennial difficulty Congress has in enacting spending bills for the government will shine yet another spotlight on its current dysfunction.

$1 Trillion.

Budget estimates released this week revealed that the federal deficit now exceeds $1 trillion.This marks the first time since 2013 that the budget deficit has exceeded $1 trillion. At that time, the $1 trillion milestone triggered a bipartisan effort in the Congress and with the Obama administration to reduce the deficit through a combination of spending cuts and revenue raisers. Today, there doesn't seem to be much appetite from members in either party or chamber to address the deficit. Senator Rand Paul (R-KY) offered an amendment to reduce federal spending by 2% in a recent bill that provided $332 billion to four federal departments, but the Senate easily voted it down. Senator Mitt Romney (R-UT) has convened a group of lawmakers to reform US entitlement programs, primarily Social Security and Medicare, in an effort to lower the budget deficit (entitlement programs account for nearly two-thirds of all federal spending), but his initiative has drawn sparse support. Deficit reduction is not a priority in Washington, and it may take a crisis for it to come back into focus.

Erdogan Visit.

The timing of Turkey's President Erdogan's visit with President Trump this week was interesting given that it occurred in the midst of US impeachment hearings and continued Turkish military activity in northeastern Syria. A strong bipartisan majority in the House and Senate is supportive of the enactment of new sanctions against Turkey in light of its military activity, with the House already having passed a bill a few weeks ago. There is pressure in the Senate to pass a stronger sanctions bill, but that legislation won't move forward anytime soon. Senate leaders, at the Trump administration's urging, will wait to see how Turkey further conducts its military campaign and how the situation on the ground works out. Although President Trump was criticized for his decision to acquiesce to the Turkish military operation and pull US troops out of northern Syria, there is still a hope that an acceptable outcome could evolve in the region that gives Turkey its desired buffer zone and the Kurds a viable settlement area. While this is still a possibility, new sanctions from the Senate will remain on the sidelines. If the military situation on the ground puts the Kurds in a more vulnerable position, however, the Senate will act quickly to impose the new sanctions.

Donor Advised Funds.

In the wake of the 2017 tax law, there has been increased interest in Donor Advised Funds (DAFs), which allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. DAF accounts have grown by more than 50% in the past few years with contributions to DAFs growing to over $37 billion last year. Lawmakers generally approve of DAFs and are thinking about ways to improve them, but there are also concerns that these charitable vehicles may need some more guardrails to ensure that grants are being made in a timely manner. The news of increased giving to DAFs will bring additional questions and scrutiny. This may ultimately translate into changes to DAFs, but no such changes are imminent since there is not enough momentum to move anything forward at this time.

Louisiana Runoff.

Tomorrow (November 16) is the gubernatorial runoff election date in Louisiana featuring incumbent Governor John Bel Edwards (D) and businessman Eddie Rispone (R). The initial gubernatorial election was held on October 12 and had a total of six candidates, which made it very difficult for any one candidate to win outright. This triggered a runoff election featuring the top two performers. While Edwards was unable to cross the 50% threshold in October, he did come within 3.5% of that in a state that voted for President Trump by a margin of 20% in 2016. Both Democrats and Republicans are closely monitoring and investing in this race as they try to establish momentum going into the 2020 elections. Much like the recent Kentucky and Mississippi gubernatorial races, the election in Louisiana will be seen as a referendum on President Trump and a preview of the 2020 election. This will be the main theme picked up by the news media when you read about it in the Sunday papers.