Washington Weekly: SVB Fallout

The Senate confirmed various Biden administration judicial nominees. The House was out of session.

The Senate will continue to confirm Biden administration nominees and vote on a bill to repeal the 2002 authorization of military force in Iraq. The House will vote on a bill that would increase parents’ rights in public education (see below).

SVB Fallout.

The failure of Silicon Valley Bank (SVB) and the regulatory response to it was the dominant issue on Capitol Hill this week and will be in the weeks to come. Earlier this week we issued a special report on the policy implications of the SVB collapse that can be accessed here. Treasury Secretary Janet Yellen testified in the Senate yesterday and was more circumspect about the SVB failure than some progressive Democrats who quickly introduced legislation to repeal regulatory relief for regional banks that Congress passed in 2018. Senate Leader Majority Leader Chuck Schumer (D-NY) has called for a bipartisan legislative response, but that is unlikely to get off the ground with Congress potentially divided on the causes of the collapse (lapses in basic risk management and supervisory practices versus regulatory relief). Instead, any policy responses likely will be in the regulatory domain after the Federal Reserve completes its own internal review by May.

Jockeying on the Debt Ceiling.

At this point, it looks like each party has set an extreme negotiating position on deficit reduction measures as part of the ongoing standoff over the extension of the debt ceiling. On the Democratic side, President Biden’s proposed 2024 budget raises taxes on wealthier Americans and businesses to provide nearly $3 trillion in deficit reduction over ten years. Meanwhile, the conservative House Freedom Caucus last week touted a plan of nearly $3 trillion of wide-ranging federal spending cuts. The amounts of deficit reduction in both plans are likely exaggerated, and frankly, neither plan will be adopted. But, they represent starting points. Now it is up to other lawmakers to identify ways to achieve deficit reduction in a way that can attract bipartisan support. The Treasury next month will indicate its expectation of the “X-date” (the date when the government runs out of room to maneuver with extraordinary measures and can no longer meet all of its obligations), and that announcement will add some urgency to identify more specific deficit reduction measures that could be rallied around to break the impending debt ceiling impasse.

US-China – Next Shoes to Drop.

President Biden is considering whether to sign a bipartisan resolution passed by both the House and Senate for the US to declassify all of its intelligence on the origins of Covid. We don’t know much about the content of this information, but it likely will highlight disagreements even within the intelligence community over the origins of Covid. It likely has yet-unseen evidence to back up the different views. If so, this will no doubt reinforce the belief of some that Covid originated at Wuhan laboratories. President Biden is reportedly apprehensive about signing the measure into law out of concern that it will further stoke US-China tensions. Separately, the CEO of TikTok will testify at a House committee hearing next week as Congress and the Biden administration consider separate measures to address sensitivities around the company’s personal information collection activities and its relationship with the Chinese government. Measures under consideration include a ban of the company’s products in the US (from Congress) or a mandate to sell its US operations (from the administration). Momentum has been building for some type of action but given the President’s reluctance in embracing a full ban (113 million Americans over 18 years old are TikTok users), any legislation likely will be scaled back and simply give the President authority to ban additional products as he sees fit.

House Energy Bill.

House Republicans unveiled a comprehensive energy policy package that will focus on an expansion of oil and gas production in the US, greater exports for US-made energy (particularly liquified natural gas), eased environmental safeguards in energy production and an accelerated approval of energy infrastructure projects through permitting reforms. This bill has been prioritized by House Republicans, who signaled its importance by assigning it the first bill number of the session (i.e. H.R. 1). This legislation will be voted on later this month and pass on a mostly party line. The Senate will ignore it but will try to find a bipartisan compromise on permitting reforms. Although the broader bill will not advance in the Senate, House Republicans hope that several broader trends - including the emergence of the US as the world’s largest oil and gas producer, the decades-long transition from fossil fuels to sustainable alternatives and the need for US allies to wean themselves off Russian energy (and purchase US energy) - will make this issue an appealing one to voters.

Oil and Gas Politics.

The Biden administration on Monday approved the Willow Project, a massive drilling project on federal property in Alaska that was initially approved in the Trump administration but then put on hold early in the current administration. The project will allow ConocoPhillips to produce 576 million barrels of oil over a 30-year period from three sites. The administration paired this announcement with another to restrict drilling on other federal land in the Arctic. We noted last week that the President has to consider his 2024 re-election prospects as he makes key policy decisions. He will pick his spots to move to the middle on select issues. The decision to approve Willow can be put in that category of going to the middle. Environmental groups are upset with the project’s approval, but politically, they don’t have many options other than to express their concerns, move on and support the President next year.

Education.

Education is shaping up to be a centerpiece of the House Republican agenda in the current Congress. Although Democrats generally have been viewed as more trusted by the American people on education policy based on past public polling, Republicans have been gaining ground more recently. House Republicans recently introduced the “Parents Bill of Rights,” which would require schools to publicly post their curricula, disseminate information about school violence and affirm parents’ right to address school boards. This effort will advance in the House next week with a lot of publicity, but it will die in the Senate.

IRS Funding.

Republicans are crying foul that President Biden’s proposed 2024 budget calls for an additional $30 billion in funding for the Internal Revenue Service (IRS). This is on the heels of the nearly $80 billion in IRS funding that the Inflation Reduction Act provided last year. About half of that $80 billion is intended for enforcement, which is a pleasant way of saying expanded audits on taxpayers. The new request for $30 billion would be used to continue expanded IRS enforcement measures. Republicans will not accept this and seek to repeal the $80 billion that has already been approved. The disagreement over IRS funding could be addressed as part of the budget negotiations to unlock the current debt ceiling stalemate in the coming months. Republicans may be successful at chipping away some of the funding but are unlikely to repeal all of it. The short story is that we still expect increased audit rates for higher income Americans over the next couple of years.

Retirement Account Cap?

Now that the dust is settling from the release of President Biden’s budget proposal, we are looking past the headlines and into some of the details that may have been overlooked. One that caught our attention was a part of the “Build Back Better” initiative that was not enacted into law. It essentially would put limitations on retirement accounts. The President’s proposal has multiple components to it, including forced distributions for retirement accounts over $10 million and reporting by plan administrators to the Treasury on accounts with balances that exceed $2.5 million. While these proposals won’t be enacted this year or next, it demonstrates the commitment the Biden administration and some key lawmakers have to address the size and contents of retirement accounts to generate new tax revenue. This issue does not seem to be going away and may come back into play in 2025 depending on which party wins the elections.

Third-Party Viability.

Every few years, the idea of a viable third-party presidential candidate seems to gain traction in the media, though the last competitive third-party presidential candidacy was nearly 30 years ago. While third parties over the years have influenced elections primarily by siphoning off a portion of the vote from one party or the other, they haven’t been able to overcome the structural obstacles of modern politics to become a mainstay in elections. Two developments in this election cycle have presented interesting third-party opportunities. First, Senator Kyrsten Sinema’s (AZ) change of party affiliation from Democrat to Independent might be the best chance for a third-party candidate to win a Senate election featuring both a Democrat and Republican in recent memory. Second, the politically moderate group No Labels, which has attempted to draft Senator Joe Manchin (D-WV) to run as a moderate third-party option under a “unity ticket,” has qualified to be on the ballot in several states, including Arizona. It will still be an uphill battle for third-party candidates, and Arizona voters will play an outsized role in determining their chances for success next year.