Washington Weekly: Year-End Finish Line in Sight

The Senate approved several Biden administration judicial nominees. The House passed the fiscal year 2025 defense authorization bill (see below). It also passed a Senate-passed bill to add 66 federal judgeships over ten years to trial courts in 13 states where populations and caseloads have grown and a bill to prohibit the Department of Energy from enforcing certain energy efficiency standards for washing machines. 

The Senate will vote on the House-passed defense authorization bill and continue to vote on Biden administration judicial nominees. The House and Senate will vote on legislation to extend government funding through March of next year (see below).

Annual Defense Authorization Bill.

The House this week passed an $883 billion defense authorization bill for fiscal year 2025. While this bill doesn’t provide direct funding for defense programs, it authorizes funding for specific programs and policies that will be provided through appropriations, and it broadly sets policy for the Pentagon for the current year. The bill has bipartisan support and contains provisions dealing with national defense, including strengthened international partnerships, a stronger missile defense and replenishment of weapons systems. Another primary focus of the bill is to provide a 10% increase in pay for junior enlisted servicemembers and a 4.5% raise for all other servicemembers. The raises are a response to military recruiting challenges, especially at the entry level. The House-passed bill will be passed by the Senate in the next week and signed into law by President Biden.

Year-End Finish Line in Sight.

With action on the defense bill about to be completed, Congress has two more bills to pass before it can leave Washington for the holiday season. The first is an extension of government funding for the current fiscal year beyond its current expiration date of December 20. The second is a bill to provide just under $100 billion for assistance to victims of recent hurricanes and other natural disasters. The two bills likely will merge and be passed as one measure next week. Notably, government funding will be extended into March, when yet another battle to extend government spending (until October 1) will occur.

Ukraine Funding Ending.

The Biden administration this week approved a $2 billion loan to Ukraine that may be repaid by the income generated by frozen Russian assets. The administration also recently floated a proposal to spend an additional $24 billion for Ukraine, but Congress would need to approve that request, and the idea was quickly rejected by House Republicans and many in the Senate. The $2 billion loan likely will be the last US assistance to Ukraine for the foreseeable future. The US has provided about $175 billion in military and humanitarian assistance to Ukraine since 2022. Will or should there be more? While President Trump has pledged to end the war, we are not dismissing the possibility of more US funding. If Putin rejects a Trump peace proposal, the President-elect could threaten further funding requests as leverage to help secure such an agreement.

Social Security/Medicare.

In the context of the recent focus in Washington on deficit reduction, government efficiency and potential elimination of some government agencies, we have received questions about possible reforms (including reductions) to Social Security and Medicare, which together represent about one half of government spending. We continue to believe that no changes are imminent. And it is unlikely any changes would affect current beneficiaries or those close to retirement. In the future, reforms to both programs (as well as Medicaid) need to be considered to address their growing funding challenges. Lawmakers and presidential candidates from both parties are well aware of this. Yet, we don’t expect a serious conversation for at least a few years until Medicare is under greater financial stress. Policymakers and candidates for office may continue to talk about changes to Social Security and Medicare, but we are very confident that no meaningful changes will be made to these programs anytime soon.

Paying for a Tax Bill?

We all know a major tax bill will be considered next year in Congress that will impact every taxpayer. What we don’t know (and what is a major point of contention among Republican lawmakers) is the degree to which the cost of tax cuts should be offset by spending reductions and/or tax increases. Many Republicans believe the extension of the current low rates do not need to be offset since they are simply extending current tax policy. Others believe that the cost of the lower rates should be offset (partially or fully) given an already significant budget deficit and national debt. Extension of the 2017 tax law is estimated to cost an estimated $4.7 trillion over the next ten years. Other provisions, including tax reductions pledged by President-elect Trump from the campaign and SALT cap relief, likely will be added to the impending tax bill and will increase that cost. Republican lawmakers won’t start to write the comprehensive tax bill until this intra-party battle is resolved, and it is likely that Trump will weigh in soon to try to settle the differences.

Deficit Up Again.

The Congressional Budget Office indicated this week that the government’s budget deficit totaled $622 billion in October and November, an increase of $242 billion over the same period from last year. Can lawmakers and the President ignore an ever-increasing budget deficit, particularly as Congress gears up for a large tax bill next year?

Fannie and Freddie Back in the Spotlight.

Government sponsored entities (GSEs) Fannie Mae and Freddie Mac have long dominated the mortgage market and have been under effective government control since the financial crisis. Ideally, a move away from government control would be resolved by a housing reform plan out of Congress, but there remains no consensus on that. As in his first term, there is interest in having the Trump administration release the GSEs from conservatorship as private entities, but that would be subject to a long (multi-year) and difficult process and could pose risks to the housing market. The two entities need to build a lot more capital to meet regulatory requirements. The government also would need to be paid back for its stake. While supporters of privatization may push for lower capital requirements and for the government to be paid back less, the optics of that are challenging. There likely would need to be a government guarantee for the companies to continue to operate and fulfill their public mission, so the perception and pricing of that guarantee will be a key issue with important repercussions for the housing market. While privatization can’t be ruled out and will generate buzz, it will not be quick, easy or without risk.

Kids’ Online Safety.

As the year comes to an end, there is a frantic effort by some lawmakers to pass bipartisan legislation to address online safety needs for children. The bill would make it mandatory for social media platforms to default to the strongest privacy settings (instead of there being an “opt-in” option) for users under the age of 17. It also would require social media companies to provide additional parental controls and options for minors to protect their personal information and opt out of personalized algorithms. The bill creates a “duty of care” for social media companies, putting the burden on the companies to prevent and mitigate harm from addictive and dangerous behaviors and topics. While the bill has strong bipartisan support, it will likely fall victim to the tight schedule and will have to be taken up again next year.

No Labels Return?

No Labels, a political group designed to represent the middle of the US political spectrum, held a national meeting this week to showcase the movement’s reach and relevance to politics. Speakers included over a dozen moderate members of Congress and other political figures who believe the two major parties have become too extreme. You may recall that No Labels flirted with the idea of becoming a political party this year and fielding a presidential candidate, but it ultimately decided against both. The group has built some momentum over the last few years with voter dissatisfaction over the two main parties. It likely will consider a presidential run in 2028. Can a moderate third party run for office credibly in this day and age? We think it can but not right away. It will likely take significant time (years) and resources before a group such as No Labels has electoral success.

2024 Trends.

A month removed from the elections, and with nearly every state having certified their vote counts, some additional trends have emerged from the presidential contest. President-elect Trump’s win of the national popular vote continues to be one of the biggest surprises from November. How that happened is even more telling. Across the board, every state swung to the right. That ranged from a 1.0% rightward shift in Washington state to a 10.5% rightward shift in New York. Four of the five states that swung the furthest away from Democrats (NY, NJ, CA and MA) are reliably Democratic states. Following the election, Democrats have been quick to offer no end of critiques on what went wrong. Many of those critiques are conflicting. It remains to be seen if 2024 was the start of a long-term realignment, or a Trump-centric anomaly, but it’s clear that campaigns will have to reevaluate the electoral college map going forward.