Washington Weekly: Government Spending Fiasco

The Senate approved several Biden administration judicial nominees. The House passed a bill to allow Congress to overturn multiple regulations issued in the last year of a president’s term. Both chambers will work to pass legislation to extend government funding (see below).

Both the Senate and House will be out of session until January 3.

Government Spending Fiasco.

A deal to fund the government beyond today (when current funding runs out) hit a major snag on Wednesday when some House Republicans and President-elect Trump attacked a bipartisan compromise and forced House Speaker Mike Johnson (R-LA) to withdraw it. Trump and other Republicans were frustrated that the bill had expanded to include a variety of policy measures and additional spending that added billions of dollars to the budget deficit. The expanded deal was the product of negotiations between Republican and Democratic leaders (whose votes are needed to carry the funding bill). Some Republicans wanted additional spending (for example, funding for disaster relief and farmers), while Democrats had their own funding priorities (reauthorization of healthcare programs and extended disaster relief). On Thursday, Speaker Johnson scrambled to put together a deal more palatable to Trump and Republicans - a scaled-back spending bill (without the extra policies and funding) with a two-year suspension of the debt limit (a priority for Trump), but House Democrats and 38 House Republicans balked at that. As we write this on Friday morning, the situation is still very fluid and a new bill to fund government without the extra riders for a period covering just a few weeks may be voted on.

Piling On.

The spending bill crafted by Speaker Johnson that Trump rejected contained many provisions beyond annual government funding. These extra provisions were sought by various lawmakers from both parties as the Speaker needed to write a bill that would get a majority of support. It contained restrictions on US capital investment in areas connected with China’s military and intelligence operations, reforms to pharmacy benefit manager practices, and $100 billion for disaster assistance to not only the recent hurricanes that hit the southeast but other natural disasters throughout the year. It contained a provision to grant Washington, DC ownership of the land on which the old RFK Stadium sits. This step would allow the city to recruit its NFL football team back to the city (the current stadium is in suburban Maryland). It contained $10 billion in economic assistance to farmers to address “market forces outside of their control.” It also contained a provision that could have resulted in a pay raise for members of Congress. Attaching these measures to a must-pass bill (the government funding bill) would have given them a fast-track to be approved. The bill became too heavy with provisions and died under its own weight.

House Speaker in Serious Trouble.

Speaker Johnson has had a very rough week. The rollout of the government funding bill with the add-ons left him out on a limb with most Republicans frustrated over the expanded bill he negotiated with Democrats, whose support is needed for the bill to pass in both the House and Senate and be signed into law by President Biden. There is now a very real question of whether Johnson will be able to secure enough support to be the Speaker of the House in the next Congress. Republicans will have a razor thin majority next year of 219-215 on January 3 when the new Congress is sworn in. Assuming every House Democrat is present and votes for House Minority Leader Hakeem Jeffries (D-NY), Johnson will need 216 votes to secure the gavel. Speaker Johnson will need a lifeline from Trump to continue to serve as Speaker, and it’s not clear now whether he would get that. The door is opening to the likelihood that the Speaker next year won’t be Mike Johnson.

Midnight Regulations and Transition Shenanigans.

During any presidential transition from one party to another, there is always some rancor between the incoming and outgoing administrations about the former’s last actions in office. The outgoing administration tries to finalize hundreds of regulatory, spending and other decisions so they become official before the next administration takes over. We saw that this week with the Biden administration’s decision to sell border wall material owned by the government that the new administration would like to utilize in extending the wall next year. Incoming administrations wants to freeze such activities so that they can be deferred to newly elected officials. The House addressed that dynamic this week by passing legislation to require Congressional approval of rules and regulations enacted in the last year of any administration’s term. The Democratic-controlled Senate won’t take the bill up. Until January 20, we should expect some tit-for-tat between the Biden and Trump camps over the former’s late decision-making and executive actions.

Middle East Opportunities.

President-elect Trump has found another major initiative to add to his lengthy to-do list next year: how to influence a likely reconfiguration of the balance of power in the Middle East. The surprising downfall of Syrian President Bashar al-Assad has led to a reduction of Russian and Iranian influence in the area and greater influence to Turkey, Israel and possibly the US. Iran was already reeling as a result of losses in nearby Lebanon from Israeli military strikes. So, what should the US do? It will certainly consult with Israel and other Middle East allies. Peace and stability will be the goal, but that has eluded regional stakeholders for many years. The US will have challenging negotiations with Turkey as it figures out how to address the predicament of the allied Kurdish fighters in Syria, which Turkey considers terrorists. Regardless, Trump has a tremendous opportunity to promote US interests in the broader region and further reduce the influence of US adversaries, particularly Iran. Trump has limited experience as a statesman negotiating for peace, and this unexpected opportunity will test him. It seems like a significant deal can be made in the region, and the question is whether Trump will want to be involved and how good of a dealmaker he may be.

Overdraft Fees.

Biden administration financial regulators have been mostly quiet since the election. One exception has been the Consumer Financial Protection Bureau (CFPB), which this month finalized a rule to cap overdraft fees (fees banks charge when an individual spends more than the amount in his/her bank account) at $5. The limit on overdraft fees fits into a broader Biden administration agenda against so-called “junk fees.” The CFPB earlier this year also finalized a rule to limit credit card late fees. Although some banks have taken their own steps to eliminate or curtail overdraft fees, the banking industry pushed back hard against the overdraft proposal (as it did against the credit card late fee proposal). It argued that the proposal would amount to an effective ban on overdraft fees and that consumers value overdraft protections as a source of backstop liquidity. Both it and the credit card rule are being contested in court and could be subject to a rollback process in a Trump administration. Republicans may try to overturn both rules in Congress, though it’s not entirely clear the votes will be there given the tight Republican majorities in the both the Senate and House.

Social Security Curveball.

Last week, we wrote about our low expectations for meaningful reforms to Social Security in the coming years. While we maintain our views that any reforms to reduce Social Security benefits are years away, the Senate is expected to pass a bill in the next few days that will increase such benefits to certain workers. The bill will repeal two provisions in law that have served to reduce benefits for certain individuals who also receive a public pension. This bill has already passed the House. Its passage is welcome news for approximately 2.6 million Americans, primarily in the state and federal workforces. However, it would also add an estimated $200 billion to the program’s future deficits, making the overall solvency of Social Security more challenging. We believe this is a one-time effort to help a small group of employees and that further ideas to expand Social Security will not be enacted anytime soon.

Trump and TikTok.

President-elect Trump has professed his love for TikTok and pledged to try to help the company from its current legal predicament, which is a product of a bill passed last year that mandates a sale of the firm to a US entity in order to avert a ban in the US. However, his ability to help seems limited. TikTok has until January 19 to find a US buyer. Trump doesn’t become president until the next day. The new president can order a review of any sale or imposed ban, but he can’t override the law that put those options in place. The law allows for a 90-day delay on any ban, but this delay would not alter any action made by or before January 19. At this point, we think a ban is more likely to occur than a sale. One big wild card is the Supreme Cout’s announcement this week that it will consider the constitutionality of the law at a hearing on January 10. The Supreme Court could delay action as it considers the case, and it is possible that a subsequent ruling could save TikTok’s operations in the US.

Private Placement Life Insurance.

Earlier this year, we noted that Private Placement Life Insurance (PPLI) had drawn the ire of Senate Finance Committee Chairman Ron Wyden (D-OR). He believes that these policies are tantamount to a tax avoidance scheme for the wealthy. Chairman Wyden has pointed out that these policies carry around $40 billion in death benefits across just a few thousand policies and that the policies typically require premiums of more than $1 million. He released draft legislation this week to essentially deny the existing tax benefit of life insurance to beneficiaries. With Chairman Wyden’s tenure as chairman of the committee ending on January 3 and Republicans taking control, we do not expect any movement on this issue in the coming years.

The Beard.

Incoming Vice President JD Vance will be the first vice president in nearly a century to sport a beard or any facial hair (assuming he doesn’t shave). Vice President Charles Curtis in the Hoover administration had a mustache and was the last VP with facial hair. The 31st VP to serve, Curtis was a member of the Kaw Nation and was born in the Kansas Territory. Curtis was the first Native American to serve in the US House and as VP. Curtis remains today the highest-ranking Native American who ever served in the government and was also the first multiracial person to become VP. The only other biracial person to serve as VP is the current VP, Kamala Harris.