The House passed two bills relating to border security procedures. It also passed legislation allowing financial institutions to serve legal marijuana businesses at the state level without penalty. The Senate approved a House-passed resolution extending current levels of government spending to November 21 (see below) and the nomination of Eugene Scalia to serve as Secretary of Labor.
Both the House and Senate will be out of session until October 14.
Financial Services Issues
Real Time Payments.
On the heels of Facebook’s announcement of plans to create a payments system based on a new cryptocurrency called Libra, the Federal Reserve this summer announced its own plans to develop an instant payments system that would eliminate the lag on the processing of routine transactions and fund transfers. Such a real time payment system would help individuals and other businesses avoid overdraft fees and other costs that can arise due to that delay. However, a group of large banks, at the Fed’s urging, already have developed and launched their own real time payments system. They have criticized the Fed’s proposal and questioned its need. The Fed’s real time payment plan was the subject of hearings in both the Senate and the House this week. Democrats generally cheered the Fed’s efforts, while many Republicans expressed concerns about various aspects of the proposal, including the costs, the competitive challenges of a private system competing with a Fed one and the interoperability of the Fed’s system with the private one. Republican members in the House already have introduced bills that would prevent the Fed from moving forward with its plan until it conducts a more rigorous study of the costs and benefits of its plan.These bills are unlikely to advance and slow the Fed’s efforts on instant payments, which will have greater urgency with potential developments like Facebook’s Libra.
Other Issues in Play
Impeachment Overwhelms the Agenda.
The controversy surrounding the House impeachment inquiry dominated Washington this week. We have outlined how an impeachment process could proceed in a separate document that we can send upon request. The House impeachment inquiry will be the focus of at least six House committees for the foreseeable future. While this naturally will take up a lot of the bandwidth of these committees, House Speaker Nancy Pelosi nevertheless will be under pressure to show voters that she still can advance other important legislation in the midst of this impeachment inquiry. The focus on impeachment will have an impact on a wide range of issues, including the following.
US-China Trade Spat.
The pace of negotiations will slow further as China assesses how this impeachment crisis will affect President Trump's political standing. Prospects over a comprehensive and substantive deal were already fading, though there has been some hope over the last few weeks that a smaller deal might emerge to provide some relief to industries impacted by higher tariffs and to give both sides more time to try to deal with the broader, unresolved issues. The impeachment focus doesn't put an end to the US-China negotiations, but it adds an unhealthy ingredient to an already difficult challenge.
US-Mexico-Canada Free Trade Agreement.
Ironically, the pressure on Speaker Pelosi to demonstrate to voters that Democrats are not singularly focused on impeachment may persuade her to schedule a vote on the USMCA this year, which she has not done yet. A vote on USMCA, which is currently President Trump’s biggest legislative priority, would allow her to show that the House is capable of addressing other pressing issues. If a vote was to occur, the USMCA would likely pass and be a big accomplishment.
The President and the Speaker will need to work together if they want a legislative victory to control the problem of high drug costs. While there was optimism that a bill could advance into law given the bipartisan concern over high drug prices, this now seems much less likely given the latest round of acrimony between the President and Speaker.
Two Week Recess.
The next two weeks will be important in determining how fast or aggressive House Democrats pursue impeachment. House lawmakers will be interacting with their constituents and will certainly get an earful on impeachment. The vast majority of congressional districts are strongly Republican or Democratic, so many lawmakers will find themselves in echo chambers. We expect each party to return to Washington even more entrenched in their respective positions. Democratic base voters may push their lawmakers to pursue impeachment more vigorously, which could take this issue to the next level soon – a commitment for an impeachment vote in the House.
Next Shoe to Drop.
Unrelated to impeachment, the House and Senate are awaiting the final report from FBI Inspector General Michael Horowitz on possible violations of the Foreign Intelligence Surveillance Act (FISA) by the Department of Justice and the FBI during President Obama's term. Specifically, the report will outline whether the agencies inappropriately approved surveillance of a former Trump campaign official based on information contained in a report (the “Steele dossier”) by a former British intelligence officer hired by the Democratic National Committee. The findings could reinforce the President's belief that the former administration spied on his campaign.
Government Budget and Spending.
With Senate passage this week, both chambers have now passed a continuing resolution to extend the current levels of government funding through November 21. This action was needed since Congress is not close to reaching agreement on various spending bills by October 1, the start of the new fiscal year. This week's action provides Congress with another seven weeks to complete its work in this area. When we get to November 21, will Congress need another extension? Probably. Debates between the two parties on the level of spending and how money should be divided within the budget ultimately will come down to a fight over federal funding for the ongoing construction of a border wall along the southwest border. The wall expenditure is $5 billion, while the broader government spending plan for next year is $1.3 trillion.
Election Security Funds.
An eventual budget deal is likely to include $250 million for the states to make their elections systems more secure and less vulnerable to foreign hacking. This comes on top of another $380 million Congress approved two years ago that has not been fully (or mostly) spent yet. Giving money to the states for this purpose is an easy and safe option for lawmakers. They can agree on that, but they likely cannot agree on other measures to respond to foreign intervention in US elections, including mandated voter registration systems in the states, mandated citizen voting and a federal election system that states would apply. Voters won't notice a difference in their voting systems unless they live in states that already have successfully converted to a paper-based systems (most states are still in the process of transitioning).
Capital Gains Taxation.
Leading Senate Finance Committee Democrat Ron Wyden (D-OR) has introduced a bill that would effectively tax capital gains at ordinary income tax rates. Many Senate Democrats support the bill, but it won't advance with Republicans controlling the Senate. Separately, there are still significant conversations occurring among lawmakers and Trump administration officials on potential reforms to the taxation of capital gains. While President Trump said recently that his administration won't pursue changes to index capital gains (and thereby lower taxes on capital gains), there remains significant interest in the issue. We are still skeptical of any movement regarding the taxation of capital gains, but the noise will continue.
The Final Word
The Warren Surge.
It is clear from national and certain state polling that Senator Elizabeth Warren (D-MA) is surging in the Democratic presidential primary election. She is the only candidate who currently is making significant progress in this regard. This week brought good news for her campaign as she now occupies the lead position in credible polls for the first time in both Iowa and New Hampshire. While her lead in both states was slim and within the margin of error, the polls show that the race in those important states is between her and former Vice President Joe Biden. Biden still has a consistent lead over Warren in national polling, so does the progress in the two states really matter? Yes. Only twice over the past 50 years has a Democratic candidate failed to win either Iowa or New Hampshire and gone on to win the nomination (Bill Clinton and George McGovern). If Biden were to lose either Iowa or New Hampshire, he would still have a path to the nomination, but history says he would face long odds. Moreover, if there was one winner from this week's impeachment-related developments, it was Warren.