Special Washington Update: The Policy Agenda in Washington for Late 2021

While Congress has technically been in recess for most of August, Democrats in the House and Senate have been busy writing their budget reconciliation bill, which will be subject to floor votes late this month or in October. While passage of this bill is the top priority for Democratic leaders and President Biden, there also are other issues in play that could have a significant impact on investors and the markets. Below we outline the policy issues that we expect to dominate Washington for the rest of the year.

It is difficult to exaggerate the enormity of this bill’s scope and potential impact. The budget resolution passed by the Senate and House in August calls for as much as $3.5 trillion of federal spending over the next ten years on a wide range of domestic programs long favored by Democrats. It will include increased spending on subsidized healthcare, Medicare, Medicaid, federal education assistance, community college tuition assistance, child care services, clean energy and other programs and initiatives. To help pay for much of this spending, the bill will raise certain taxes on individuals and businesses. Democrats will use the budget reconciliation process to advance this amalgam of longstanding spending and tax policy wishes since this process only requires a majority vote rather than the de facto 60-vote threshold that is applicable to most other legislation in the Senate. Democratic leaders are still crafting this bill. House committees will begin to pass parts of the bill next week, with a target of wrapping up all of the committee work by September 15. The House could vote to pass the bill in full as early as the week of September 20, but we suspect the timetable will slip a bit. We’ll continue to keep you informed of the tax policy dynamics of the bill as they evolve.

The Senate’s passage of a bipartisan Infrastructure deal in August was a significant development and likely will be the highwater mark for bipartisanship this year. This $1.2 trillion package includes funding for highways, bridges, ports, airports, broadband and other physical infrastructure projects around the country. House Speaker Nancy Pelosi (D-CA) is holding the measure up in the House to focus efforts on the larger budget reconciliation package (see above), but she has committed to vote on the Senate bill no later than September 27. Some of the more progressive Democrats have threatened to withhold their support of the infrastructure bill unless the larger budget reconciliation bill is acted upon first. If the budget reconciliation bill isn’t passed by September 27, these members could wreak havoc on the timetable for the infrastructure bill and threaten its passage if there are not enough Republican members willing to vote for it and offset potential defections of progressives. While there may be some drama, we believe the infrastructure bill will pass in the House with a bipartisan vote.

The new fiscal year begins on October 1, but Congress is not close to passing the 12 separate bills to fund the federal government. The delays in passing these spending bills have become customary in Congress over the years. To prevent a government shutdown and give itself more time to pass these bills, Congress hopes to pass a single stopgap funding measure to fund all government agencies at current levels until sometime in December. The measure will have to hurdle a 60-vote procedural threshold in the Senate and therefore will require bipartisan support. Republicans could use their leverage to try to demand deficit reduction measures or a commitment for higher defense spending. The effort to extend government funding could be further complicated by the inclusion of an extension of the debt ceiling (see below). The political acrimony in Washington will make the passage of government spending bills this year more difficult, especially if the explosive debt ceiling extension is added to the mix. No one should rule out the possibility of a government shutdown later this year and its resulting market reaction.

At some point later this year, the Treasury Department will not be able to make payments on its debt obligations if the debt ceiling is not increased by Congress. The Treasury will soon let us know exactly when, but this could be the case as early as October 1. The potential for an unprecedented debt default is perilous. Markets reacted badly to previous crises in 2011 and 2013, with the former leading to the first ever credit downgrade of the US. The lack of bipartisan cooperation today makes the current situation difficult and dangerous. Republicans feel they have been shut out of big spending initiatives (like the $1.9 trillion COVID spending bill that passed earlier this year and the current reconciliation effort) that will add trillions of dollars to the debt. As such, they aren’t eager to cooperate in passing an increase in the debt ceiling. Unfortunately, this is a situation where each party is putting political considerations above the urgent need to extend the debt ceiling. Democrats are concerned about the political optics of passing a debt ceiling increase on a party line basis through the reconciliation process, while Republicans want an extension tied to a commitment to act on the growing budget deficit and national debt. Unfortunately, it will likely be resolved when financial markets react badly or one side blinks after a realization it will be blamed more by voters than the other party for the crisis.

A defense authorization bill has become law every year in Washington since 1961. The passage of the annual defense authorization bill has become as common as Tom Brady making the playoffs. Over the next few months, the House and Senate will continue to work toward the passage of the fiscal year 2022 defense bill, which will require bipartisan support. One point of contention is its level of funding. President Biden requested $715 billion for defense in his budget proposal (a 1.6% increase from last year), but most Republicans want that bumped up to $740 billion. The other issue is Afghanistan and Congressional interest in examining the messy withdrawal from that country. House Republicans teed up over 700 amendments to the bill this week on Afghanistan. Although that list will be shortened, the consideration of this bill will put the Biden administration on its heels for its withdrawal from Afghanistan. Since the defense bill is considered a must-pass bill, it always attracts some other non-defense bills to it, which could raise future objections. This bill will ultimately pass this year, and we believe the higher defense figure mentioned above will prevail.

Amidst the recent rise in infection rates due to the spread of the delta variant across parts of the country, various pandemic protections and programs have expired or are set to expire. Notably, the Supreme Court recently invalidated the CDC’s eviction moratorium, which had been set to expire in early October. There will be efforts in Congress to extend the eviction moratorium, but that is unlikely given that Republican support would be needed in the Senate. Congress already has provided approximately $47 billion of rental assistance through the COVID relief bills and there will be a focus on breaking the logjam in allocating these funds. In addition to the eviction moratorium, the enhanced unemployment insurance program is set to expire next week. While there likely will be calls to extend this and other programs, even some Democrats have expressed concern about the impact of enhanced unemployment insurance on the labor market. Additionally, there may be limited appetite for more spending with Congress having passed over $5 trillion of spending through various COVID relief bills and with it currently considering trillions of dollars in additional spending through the infrastructure and reconciliation bills. Importantly, the Democrats’ reconciliation effort focuses on strengthening the social safety net and its expected spending in areas like paid leave and child care could be seen as addressing some of the ongoing effects of the pandemic. As always, a lot will depend on the path of virus, but an additional round of dedicated spending on the pandemic faces high hurdles.

President Biden faces key questions regarding the leadership and composition of the Federal Reserve Board. In particular, he likely will decide in the next few weeks whether to reappoint Federal Reserve Chairman Jay Powell for another term. Chairman Powell is widely respected on both sides of the political aisle and has the support of Treasury Secretary (and former Fed Chair) Janet Yellen. However, he has faced criticism in recent months from progressives like Senate Banking Committee Chairman Sherrod Brown (D-OH) and Senator Elizabeth Warren (D-MA), who have argued that he hasn’t been tough enough on bank regulatory requirements and that he hasn’t done enough on climate issues. The Biden administration also will have other appointments to fill at the Fed and is likely to announce a slate of nominees. There is one current vacancy on the seven-person board and the terms of two current vice chairmen (one for bank supervision and the other for monetary policy) respectively expire in October and January. Fed Governor Lael Brainard, a veteran of the Clinton and Obama administrations and the only Democrat on the board, is a potential contender to replace Powell though she alternatively could be slotted into the vice chair for supervision role (and could be an eventual pick for Treasury Secretary). While Chairman Powell is likely to be renominated, this is by no means certain.

September 30 is the last day of fiscal year 2021. In addition to being the last day of the current fiscal year, there are a number of deadlines for expiring federal programs. The National Flood Program (NFIP) authorization (timely now) and the current authorization for highway spending both expire at the end of the month, as well as a tax provision related to paid sick leave for COVID. These deadlines may serve as a catalyst for action. For example, the deadline for highway spending is likely to result in either passage of the bipartisan infrastructure bill or a short-term bill that keeps the pressure up to act and eventually leads to the same goal. Democrats may also seek to use this as an opportunity to increase the debt ceiling (see above) and attach it to another item that is likely to advance. All this means a busy September with many balls in the air for Congress to juggle, some of which will no doubt be dropped.

President Biden has been in office for seven months and has not yet articulated a broad policy statement on US-China relations or clearly stated his position on most of the dozen or so issues that have in recent years produced heightened tension in the bilateral relationship. We believe this will soon change. With the nomination of longtime diplomat Nicholas Burns to serve as US Ambassador to China, the President will soon have a full team to deal with the national security and competitive threats posed by China. Once Ambassador Burns is confirmed by the Senate this fall, we expect the President to announce a general policy on China and to discuss how he will follow (or not follow) the Phase 1 trade agreement struck between the countries during the Trump administration. Red lines of varying degrees may also be issued with respect to Taiwan, Hong Kong, human rights, China’s military actions in the South China Sea and ransomware/cyber-security attacks. The administration also will continue to be focused on enhancing US production of computer chips and other technology and reducing reliance on China for many tech products. Also, such issues as the origins of COVID, Huawei, China’s access to US financial markets and foreign policy conflicts around the world will give the two countries plenty to fuss about. The big development over the next few months, however, will be the new Biden policy on China and how that may improve or worsen bilateral relations. The US and China are in competition to lead the world, and more tension will characterize the relationship for a long time.

The Supreme Court will begin its 2021-2022 term on October 4 and has so far agreed to hear 33 cases (this number will increase as the court usually hears about 70 cases during its term). A critical case the Supreme Court will hear this fall (Dobbs v. Jackson) will challenge parts of Roe v. Wade and will be the most significant case regarding abortion that the court has heard in three decades. The significant nature of this case was underscored this week when the Supreme Court rejected an emergency application to block a restrictive abortion law in Texas before it went into effect. The Supreme Court also will hear cases on immigration, Second Amendment rights, religious liberties and disability discrimination. The Supreme Court will continue to hear cases until spring of next year, with decisions being rendered on a rolling basis up until the end of June. The timing of these decisions (just months before the mid-term elections) could have significant political impacts. Then there is the ongoing speculation about the possible retirement of Justice Stephen Breyer, who was appointed by President Clinton and is now 83 years old. The public’s response to the Supreme Court actions could be a significant factor in voter turnout for the 2022 mid-term elections and play an important role in determining which party controls Congress in 2023.

Other issues will be acted on or addressed in some way behind the scenes. A House committee will try to advance a bipartisan bill addressing enhanced cyber-security protections in response to recent attacks on the computer system of various companies. A bill to establish new policing policies and reforms is still being negotiated by a bipartisan group in the House and Senate, but their work has not progressed recently. A bipartisan bill that passed the Senate and would increase spending on domestic computer chip and semiconductor production is stuck in the House, but a final bill could emerge or at least parts of the Senate bill may be added to the government spending bills. Particularly following an executive order this summer, the Biden administration will begin taking more aggressive actions in the area of anti-trust and competition policy.

Given that control of the Senate was only decided in January, we suspect most readers are understandably not eager to start hearing about elections again. Nonetheless, the next elections are in sight, starting with the recall election of Governor Gavin Newsom (D-CA) on September 14. Despite the seeming improbability of a recall of a Democratic governor in California (a state that Biden won by 29%), this is certainly a possibility given the likely low turnout and a dispersed field of 46 candidates. If the governor is successfully recalled, it appears almost certain that Republican candidate Larry Elder would receive a plurality of the vote among those 46 candidates. Regardless of the outcome, attempts to recall governors in states where it is allowed will continue as political polarization gets worse. On the opposite side of the country, New Jersey and Virginia will be facing more traditional gubernatorial elections on November 2. Both states are currently under Democratic control, and while it is unlikely that will change, the margins of victory in those races as well as the down ballot outcomes in state legislature races will provide the first preview of the 2022 mid-term elections. Additionally, the mid-term elections will be in the news quite a bit as states begin work on their redistricting process. With the census having finally released the detailed data needed for redistricting, states will be under a time crunch to redraw their congressional district lines in time for primaries that begin early next year (a process that normally takes half a year). This accelerated timeline will likely lead to missed deadlines, delayed primaries and court challenges. These unforeseen factors will be worth watching as the redistricting process has the ability to make or break both parties ahead of the mid-term elections.