Washington Weekly: Will the BBB Pass?

Both the House and Senate passed legislation to increase the debt ceiling by $2.5 trillion (see below). The Senate also passed the fiscal year 2022 defense authorization bill, clearing the way for President Biden to sign the measure into law.

The House will be out of session. The Senate will continue to work on its version of the Build Back Better Act (see below) and vote on Biden administration nominees.

Democrats’ Build Back Better Act.

While President Biden and Senate Democratic leaders continued their push to pass the Build Back Better Act (BBB), the bill’s fate rests with Senator Joe Manchin (D-WV). With the Democrats’ narrow Senate majority – 50-50 with Vice President Harris as the tie-breaker – any Democratic Senator can defeat the bill by withholding his or her support. While other Democratic senators have concerns over specific provisions of BBB, those concerns are manageable and none of those members are expected to oppose a final bill. Given that Senator Manchin is unsure whether the bill is even needed in the current environment of higher inflation, his concerns are more fundamental. The reality in Washington is that no one really knows what Senator Manchin’s bottom line is. At minimum, he will require the bill to be scaled back in size and scope, but it’s not entirely clear he will support a final bill once changes are made. Given this uncertainty and the continued daylight between his position and that of President Biden and Democratic leaders, consideration of the BBB in the Senate will need to be punted to January. At that time, its fate once again will be determined by Senator Manchin.

Will the BBB Pass?

We still think it will pass (in January), but we have reduced our odds to about 60-40. The longer the bill lingers, the more difficult it will be to pass.

Debt Ceiling Extended into 2023.

With all Democratic votes and one Republican vote (Congressman Adam Kinzinger of Illinois), the House and Senate passed legislation to raise the debt ceiling by $2.5 trillion. This extension is expected to allow the Treasury to service US debt through early 2023, which is an important marker since it is past the point of next year’s mid-term elections. At a time of record budget deficits (the fiscal year 2021 budget deficit was just under $3 trillion) and rising federal debt, we think fiscal policy issues will be important for voters in the upcoming 2022 and 2024 elections. In political ads next year, Republicans will blame the $2.5 trillion debt ceiling increase on increased spending by Democrats. The good news is that markets won’t have to worry about the issue for at least another year.

Voting Rights in the Senate.

Amidst mounting frustration over the slow movement of BBB, some Senate Democrats pushed for a vote on a voting rights bill. The House passed a comprehensive voting bill earlier this year. The Senate has a more scaled-back bill that would reverse election process restrictions and changes enacted into law this year by various states. While popular among Democrats, the Senate bill will not get past the Senate’s 60-vote procedural hurdle. Virtually all Republicans oppose the bill’s federal standards and prefer giving states free rein in setting their election laws. This basic disagreement will prevent any voting rights bill from passing the Senate this or next year unless the Senate changes its filibuster rules. To do this, there would need to be unanimous support among Senate Democrats, which doesn’t exist at this time. The real action on voting procedures will continue to be in the battles over state law changes and the legal challenges to those efforts.

More China Activity.

The House and Senate this week passed legislation that would ban US imports from the Xianjiang region of China unless it can be demonstrated that the goods were not made through forced labor. The bill represents a compromise agreement after Senator Marco Rubio (R-FL) in recent weeks agitated to get a version of the bill added to the final defense authorization legislation. The measure reflects bipartisan concerns about the Chinese government’s treatment of its Uyghur minority population. Those concerns also led Congress last year to pass a sanctions bill and the Treasury Department this week to add some Chinese companies to a list that bans them from US investment. Also this week, Congressman Brad Sherman (D-CA), the chairman of the House capital markets subcommittee, introduced a bill that would shorten the time period from three to two years for the SEC to delist Chinese companies that don’t meet US auditing requirements (this delisting construct was passed by Congress late last year). This bill has already passed the Senate and has been endorsed by SEC Chair Gary Gensler. The House seems poised to pass it in the coming months, thus raising the risk of forced delisting of Chinese companies a year earlier (in 2023).

SEC Agenda.

SEC Chair Gary Gensler this week knocked a bunch of items off his to-do list with the SEC’s issuance of various regulatory proposals. Reflecting ongoing regulatory concerns about the stability of many money market funds, the SEC proposed a set of reforms to overhaul the existing regulatory structure. In particular, the SEC proposes to eliminate funds’ ability to ban redemptions or impose redemption fees (which SEC Chair Gensler argues encourages runs) and instead dramatically bolster money funds’ liquidity requirements and require certain funds to institute a complicated swing pricing system that factors in the liquidity cost of redemptions. In addition to the money fund proposal, the SEC also issued proposals to improve disclosure of total return swaps, increase corporate disclosure of share repurchases, and update certain insider trading rules. In moving forward on these proposals, SEC Chair Gensler will have to contend with disagreement within the Commission as only the last proposal received bipartisan support. The money funds and the share repurchase proposals in particular will receive sharp pushback in comments. More broadly, SEC Chair Gensler has outlined an ambitious agenda that spans climate disclosure, fixed income market reforms, equity market structure and digital assets, among others. Expect the SEC to hit the ground running with a climate disclosure proposal early next year.

Chamber vs. FTC.

US businesses and the US Chamber of Commerce are taking aim at the Federal Trade Commission (FTC), the primary regulator of business competition, due to concerns with its regulatory agenda and record of transparency. The Chamber argues that some of the FTC’s recent actions overstep its legal authority and pose a threat to businesses at a time when they face such challenges as worker shortages, supply chain issues and inflation. A key concern is the FTC’s use of the civil penalty authority to send enforcement statements to entire industries. Another is the FTC’s use of “zombie votes,” which allow the FTC to count votes from departed commissioners during current proceedings. A group of Republican senators last week introduced a bill that would prohibit these types of votes, though the FTC argues that they are part of longstanding rules at the commission. With the Chamber looking at potential legal recourse and the FTC denying many of the Chamber’s requests for public records, this dispute does not look like it will subside any time soon.

Gas Prices.

The national average for a gallon of gas is around $3.40, the highest level in seven years, and up 58% from this time last year ($2.15) and up 34% from 2019 ($2.53). California has the highest average gas price ($4.67) and is followed by Hawaii ($4.33) and Nevada ($3.88). Gas prices likely will remain high through the holiday travel season, which means they will be noticed more by the traveling public (and voters). To many people, gas from the pump is their most consumed good and has been the poster child for rising inflation. Recent public polling shows a noticeable jump in concern from voters over rising inflation as they drive around to buy holiday gifts or gas up for the annual trek to Grandma’s house for the holidays.

Redistricting.

Amidst a slew of recent political news, one important development that hasn’t generated much national attention is Congressional redistricting even though it will have a real impact over the next decade. As things stand, nearly half of the 44 states with two or more Congressional districts have completed their redistricting and a handful of other states are expected to finish in the coming weeks due to year-end deadlines. Republicans have gained a modest advantage from the redistricting process, but the biggest loser so far has been competitive general elections. The number of safe Democratic and Republican districts (those that voted for Biden or Trump by 5%+) has significantly increased under the new maps, while the number of competitive districts (those decided by 5% or less) has declined by nearly 60%. This trend shows the emphasis both parties are placing on creating safe districts for their candidates. A potential byproduct of these new lines is that they could encourage the entrance of more strongly partisan candidates who could be more competitive in the primary election, which is what really matters in a safe seat. In an environment already fraught with partisanship, having more extreme candidates win primaries for safe seats is unlikely to make the situation any better.