Washington Weekly: Debt Ceiling Extension in the House

The Senate confirmed various Biden administration nominees and rejected a measure that would have allowed the Equal Rights Amendment to be added to the Constitution. It also rejected a bill that would have directed the Department of Veterans Affairs to conduct cannabis research as a remedy for post-traumatic stress disorder and chronic pain. The House passed legislation to increase the debt ceiling and reduce discretionary spending levels (see below).

The Senate will continue to confirm Biden administration nominees. The House will be out of session.

Debt Ceiling Extension in the House.

As voters and financial markets begin to focus more on the need to raise the debt ceiling, the House passed such an extension in combination with a wide range of cuts in both federal spending and tax incentives for green energy. While the bill is a non-starter in the Democratic-controlled Senate (and with President Biden), it should provide a spark for negotiations that hopefully will lead to a bipartisan resolution. Given the realities of divided government, the final outcome must be bipartisan. That means any deficit reduction measures to accompany a debt ceiling increase likely will be much more limited than what is included in the House-passed bill. Right now, the ball is in the court of Senate Democrats and President Biden. Their options include putting forward a plausible alternative to the House bill that could pass in the Senate, negotiating from the House-passed bill or trying to start a separate process to craft a new and more scaled back bill with House Speaker Kevin McCarthy (R-CA) and Senate Minority Leader Mitch McConnell (R-KY). It seems to us that the third option is the most viable path forward for an eventual resolution.

A New X-Date.

We expect Treasury Secretary Janet Yellen to announce the new X-date sometime very soon. The X-date is the last day that the Treasury believes it can pay its bills before risking a default on its obligations. We hear from various policymakers that the X-date is more likely to be in late June or July rather than August or September, as some had previously projected. Whatever the exact date, the X-date’s primary purpose will be to set the effective deadline by which Congress must act to extend the debt ceiling or risk a default. Once that date is set, the shot clock for action will begin to run.

Pressure on Democratic Leaders.

So far this year House Republicans have faced the most political pressure in Washington (and perhaps among voters) on raising the debt ceiling. However, with the passage of the House bill this week, the pressure has shifted more to Democrats, particularly the President and Senate Majority Leader Chuck Schumer (D-NY). While both have called for a clean extension of the debt ceiling, that approach doesn’t have the votes to pass in the Senate (60 votes would be required). Democratic leaders may continue to insist on a clean debt ceiling extension, but they will need greater public support for that position and potentially a crisis in the markets to make that approach feasible. More serious negotiations on resolving this standoff on the debt ceiling likely won’t occur until we are closer to the X-date.

Regulator Reports on the Banking Crisis.

The release of the Federal Reserve’s report on the SVB collapse today will be an important milestone and serve as a trigger for further congressional hearings in the coming weeks. The Fed’s report (and another from the FDIC on Signature Bank) will indicate how much the regulators blame supervisory missteps or insufficient regulation for the banks’ failures. We expect regulators to focus on both as causes and to outline some regulatory changes that they believe would prevent such challenges in the future. While there is no consensus in Congress on increased regulation, the Fed has the authority to increase regulatory requirements on banks and we expect them to use that authority in the coming months.

Crime and Business.

With retail theft on a sharp rise, big businesses and the US Chamber of Commerce have weighed in heavily with Congress on the crime debate, an issue that has historically not been a priority for them. Retail crime has become more organized and sophisticated over the last few years, and most businesses simply don’t have adequate resources to stop it. Businesses have rallied around legislation that requires district attorneys to report the crimes they decline to prosecute. The goal is to provide an incentive for prosecutors to take retail crime more seriously and take repeat offenders off the street. The business community’s lobbying efforts will help this bill move forward and are consistent with their broader political efforts to elect more responsive prosecutors.

US-South Korea Love.

This week, South Korean President Yoon Suk Yeol visited President Biden at the White House and then addressed both chambers of Congress in a joint session. This is VIP treatment for an increasingly important US ally. It marks the second state visit hosted by the White House in the Biden administration (the first was with France) and marks the 70th anniversary of relations between the two countries. Visits like this are usually triggered by a significant need from one country or the other, and this visit was no exception. Given its increasing worries about North Korean President Kim Jong Un’s tendency to launch missiles over the peninsula as a means of flexing his muscle, South Korea wants greater US security assurances. The US meanwhile recognizes South Korea’s notable semiconductor production capacity and wants to strengthen that economic alliance. Of course, China also looms large over the US-South Korea alliance. This week’s visit follows stronger US security agreements with Australia, Japan and the Philippines (all concluded this year), and it’s clear that all of this activity is motivated by concerns over the deteriorating US-China relationship.

Carbon Tariff.

There is growing interest among some US lawmakers to apply a tax on foreign products that produce more pollution than comparable American products made in the US. There is growing interest in the tax (some refer to it as a “tariff”) from Democrats eager to expand their climate change agenda and from some Republicans who are drawn to the leverage it could give to US-produced energy and goods. The European Union is on track to implement a similar measure starting this fall. If the US follows suit, Russia and China would be disadvantaged since many of their products have a more significant carbon footprint. No specific proposal has been released yet in the Senate, but Senator Bill Cassidy (R-LA) is working with a number of others, and we expect draft legislation to be released soon. This debate also comes as lawmakers are searching for options to reduce the deficit. With the growing interest in this idea, it could be an interesting candidate for inclusion in future tax and deficit reduction bills.

Student Loans.

The House Republican proposal to increase the debt ceiling includes a variety of deficit reduction measures, including an elimination of President Biden’s student loan forgiveness program and an end to the current freeze on student loan payments (this freeze started under President Trump during the pandemic). The current freeze on student loan payments is currently set to expire on June 30. Also, in June the Supreme Court is scheduled to rule on President Biden’s plan to forgive student loans for millions of borrowers. With both looming, there is a good chance that later this year those with student loans will have to resume making payments. Particularly if the Supreme Court strikes down the loan forgiveness program, student loans could become an important campaign issue for President Biden and Democrats.

Age Limit for Social Media Use?

A bipartisan group of Senators introduced legislation this week to block children under 13 years old from using social media and to require parental consent for those between 13 to 17 years old. The group of four spans a broad political spectrum from liberal to conservative. This proposal is stunning to some and more reasonable to others. It shows the high level of scrutiny that many lawmakers want to apply to social media platforms. We don’t think the bill will advance this year, but it will be featured prominently in the broader debate over online safety needs for children. Less ambitious safeguards, such as a ban on certain advertisements aimed at children, may have a better chance of passing this year.

Biden 2024.

As expected, President Biden this Tuesday officially announced that he will seek reelection in 2024. As an official candidate, the President can now begin to raise money for his campaign. While this matters less for an incumbent president who is able to earn free media at will, it is still important for a few reasons. In addition to media buys, campaign money is needed to hire staff, facilitate travel for the campaign and fund the campaign’s get out the vote effort. Candidate Biden’s campaign raised (and also spent) over a billion dollars in the 2020 election cycle. If his 2024 campaign plans to spend the same, he’ll have to raise around $55 million per month from this point onwards, and the longer he waited to announce, the steeper the fundraising curve would have been. Last week, prior to the President’s announcement, the Democratic National Committee announced that they would not sponsor any primary election debates. This is typical for both parties when they have an incumbent in the Oval Office. The decision will allow Biden to focus entirely on the general election. President Biden’s announcement was predictable, but it serves as another signal that we are beginning the 2024 presidential election cycle.