From the Middle East to Eastern Europe, Asia, and Central America, the world awaits Congressional action on the administration’s emergency supplemental request submitted two months ago. This week, an unanticipated set of GOP demands on comprehensive immigration reform and a separate one on conditions regarding aid to Israel have forced a legislative recalibration and another delay on the request.
The amounts of assistance in question are not in dispute. Nor is the priority of the supplemental. But the changing facts on the ground as the world turns as well as the “opportunity” to enact ambitious reforms may mean that only the National Defense Authorization Act (NDAA) will see action this year, pushing FY24, a tax package, and conceivably even the supplemental into suspended animation until next year. See below.
Good weekends, all..
Supplemental Funding Package Stalls
On Wednesday, Senate Republicans blocked a procedural vote, 49-51, to introduce a national security supplemental to the floor, leaving American allies across the globe anxiously awaiting American support. Senate Republicans were joined by Senator Bernie Sanders (D-VT), who has been urging conditions in Israel funding. The package included vital funding for Ukraine and Israel as well as the Indo-Pacific and the border. Negotiations had been hindered by Republican attempts to include provisions from H.R. 2, a contentious and broad border and immigration bill that has stalled in the House due to its controversial policy provisions.
President Biden gave remarks shortly before the vote Wednesday afternoon to spur progress on further negotiations, where he revealed that he would be “willing to do significantly more” to provide resources and implement policy change at the border. Senator Lindsey Graham (R-SC) said he was encouraged by the remarks but was not convinced any deal could be struck before the holidays.
Talks resumed Thursday evening as negotiators Senators James Lankford (R-OK) and Chris Murphy (D-CT) met to discuss the contentious border policy changes needed to secure GOP votes, such as asylum and parole provisions. Discussions are expected to extend into the weekend.
In a letter to Congressional Leadership, Office of Management and Budget Director Shalanda Young warned the blockade of funding would not only “kneecap Ukraine on the battlefield” but could risk the spread of regional conflict.
A group of thirteen Senators introduced an amendment to accompany the national security supplemental to impose more generalized conditions on military funding. While the language remains broad, statements from the Senators identified Israeli compliance as the central target of this amendment that requires:
- weapons received by any countries by this bill comply with international humanitarian law, law of armed conflict and U.S. law
- the president to obtain assurances that receiving countries must cooperate with “U.S.-supported efforts to provide humanitarian assistance to those in need, subject to a presidential waiver”
- the president to produce a report within the first 30 days to ensure these conditions are met
With only four legislative days to reach a deal before the scheduled recess, Congress has little time to send vital support to American allies. This funding is also critical to replenish American stockpiles. But the lack of progress on a foreign aid package highlights more difficulties to come in the appropriations process, as the first deadline to avert a partial government shutdown approaches on January 19.
Unemployment Ticks Down; Labor Market Stays Strong
The November jobs report released this morning showed that total nonfarm payroll employment rose by 199,000 in November while the unemployment rate fell slightly to 3.7 percent from 3.9 percent in October. The unemployment rate has remained below 4 percent for the longest period since the 1960s. Job growth in September was revised down by 35,000, taking total nonfarm payroll employment growth in September from the previously reported 297,000 down to 262,000 jobs.
Source: Council of Economic Advisors
Job growth in November was driven by gains in health care, where 77,000 jobs were added, and in government employment, where 49,000 jobs were added over the month. Additionally, 40,000 jobs were added in the leisure and hospitality sector almost entirely in food services and drinking places.
Employment in manufacturing rose by 28,000 last month, reflecting an increase of 30,000 in motor vehicles and parts as workers at the Big Three auto manufacturers – General Motors, Ford, and Stellantis – returned to work following their recent strike.
Wages rose by 0.4 percent over the month and by 4 percent over the past 12 months. Meanwhile, labor force participation increased slightly to 62.8 percent from 62.7 percent in October.
Today’s jobs report shows that the labor market remains surprisingly resilient in the face of the Federal Reserve’s interest rate hikes. Given that inflation has continued its downward trend, the Fed’s Federal Open Market Committee (FOMC) may be inclined once again to hold the federal funds rate steady at the 5.25 to 5.5 percent range when it meets next week for its last meeting of this year. Tuesday’s consumer price index (CPI) data is likely to push the FOMC further towards another pause.
Big Bank CEOs Push Back on Proposed Capital Rules
Top executives at eight of the largest banks in America testified before the Senate Committee on Banking, Housing, and Urban Affairs in the annual appearance of big bank leaders before Congress on Wednesday.
Largest Banks U.S.Banks and Executives
Testifying at Big Bank Hearing
Republicans and bank executives continued their ongoing attack on U.S. bank regulators’ proposal to implement the final components of the Basel III agreement, also known as the Basel III Endgame, which include a new set of capital requirements for the largest financial institutions. The Fed, FDIC, and OCC’s Basel III Endgame joint proposal would enhance the financial system’s ability to withstand periods of stress like the one seen following the collapse of Silicon Valley Bank and other firms this spring.
Committee Chair Sherrod Brown (D-OH) highlighted the extent of the banking industry’s lobbying effort against the proposal which includes claims that the proposal would increase the cost of lending for individuals and small businesses. As Brown pointed out, those claims aren’t true and are designed to confuse the public. Nothing in the proposal would stop banks from providing robust lending. A reduction in lending would merely reflect a choice by banks who resist cuts to their profits and may prefer to engage in risky trading and derivatives bets rather than lending to the same customers their campaign targets.
Brown demonstrated how misleading the industry’s claims are by asking executives to raise their hands if they believe that their firms would not be able to achieve the increased capital requirements under the proposal. No executives raised their hands. In fact, when Senator John Fetterman (D-PA) pressed JP Morgan Chase Chairman and CEO Jamie Dimon on the bank’s $5.7 million in share buybacks over the past year, asking why they prefer to direct those funds to buybacks rather than lending. Dimon responded, “it is the shareholders’ money.”
The Committee also grilled bank executives on:
- Stress tests – Senator Thom Tillis (R-NC) suggested that concerns from progressives that banks game stress tests are unfounded and asked executives whether they agree. Tillis asked the group, “how many of you think it’s absurd to think that people would actually assert that you game a stress test?” No executives raised their hands in agreement.
- Crypto – Senator Elizabeth Warren (D-MA) pushed for legislation to strengthen rules to prevent the use of crypto assets in money laundering.
In recent years, executives of the nation’s largest banks have appeared annually before Committees in both chambers. As House Financial Services Committee Ranking Member Maxine Waters (D-CA) pointed out last week, Chair Patrick McHenry (R-NC) chose to break that tradition this year.
House Budget Considers Budget Process Reform
On Wednesday, the House Budget Committee held a Member Day hearing centered on budget process reform. This hearing allowed members of Congress who serve on other committees to address the House Budget Committee and offer proposals. Despite being open to all members, only Republicans voiced their ideas, which included:
- changing the fiscal calendar,
- passing a balanced budget amendment, and
- instituting a structured national debt repayment plan.
A common theme of recent House Budget Committee hearings, the creation of a bipartisan fiscal commission, was explored by many members as a venue to assess and form tangible proposals for these initiatives. The most salient legislative proposals for a fiscal commission are:
Representatives Carlos Gimenez (R-FL) and David Rouzer (R-NC) also emphasized concerns about the CBO’s budget projections, arguing that they contribute to budgetary decisions that increase the national debt. They argued that the CBO should be held accountable for misestimates. These concerns received pushback from Ranking Member Brendan Boyle (D-PA), who noted that they have missed the mark on some estimations of these programs’ costs, but not in a way that would suggest a pattern. It is more a factor of the extreme difficulty in estimating large programs over the longer term. Republicans are likely to continue attacks on CBO, as they have historically done.
Ways and Means Oversight: Financing the National Debt
On Wednesday, the House Ways and Means Subcommittee on Oversight held a hearing titled “Hidden Cost: The True Price of Federal Debt to American Taxpayers.” Members and witnesses used this opportunity to point fingers at the causes of the national debt, as well as assess the potential for the Treasury Department to finance U.S. debt at the lowest cost.
The Treasury Department issues securities to finance our federal debt. Growing deficits will continue to contribute to an unsustainable level of national debt and could lead to a nightmare scenario: a default. Although U.S. Treasury Securities are seen as one of the strongest investments, demand by overseas buyers, particularly Japan and China, has become less reliable. While the Treasury Department can take advantage of interest rates to make financing debt less costly, this hearing stressed the importance of fiscal policy in bringing down debt.
Democrats and Republicans will continue to be divided over the strategies to address this issue, with one side blaming tax cuts and the other blaming “out-of-control” mandatory spending. A fiscal commission was brought up in this hearing as a venue to address this issue, however, there is reason to be skeptical about the pattern of Republicans proposing extensions of Trump-era tax cuts while arguing for a reduction of entitlement benefits.
Ways and Means Tax Subcommittee Assesses Tax Reform
The House Ways and Means Committee Subcommittee on Tax held a hearing on Wednesday titled “Tax Policies to Expand Economic Growth and Increase Prosperity for American Families.” Subcommittee Members and witnesses weighed the importance of increasing federal revenues against the benefits of economic growth that are associated with decreased tax burdens for Americans and corporations. The benefits of replacing national income taxes with a national consumption tax on the sale of goods and services were detailed by witnesses. In their words, national consumption tax could:
- allow individuals or households to control their tax liability by limiting their purchases of goods and services, giving more control to the consumer.
- make it easier to enforce taxation as the destination of goods and services is simpler to find than the location of intangible assets or income.
- encourage equity if paired with credits for low-income earners.
Although this type of tax would be controversial and require sweeping changes to tax policy, a few specific examples of consumption taxes that were mentioned are:
- Value Added Tax (VAT)
- A national sales tax (as proposed through the FairTax Act of 2023)
- Destination Based Cash Flow Tax (DBCFT)
Republican-proposed consumption taxes have no chance of passing through the House and Senate with Democratic support. However, tax policy will continue to be on top of mind in the face of major TCJA expirations at the end of 2025, including:
- Individual income tax brackets and rates.
- Pass-through tax provisions.
- Estate tax provisions.
These expirations open up a critical opportunity for Democrats to institute reform, which will surely be met with an equal effort from the Republican Party.
Tuesday, December 12
- December FOMC Meeting (Day 1)
- House Committee on Financial Services Subcommittee on Capital Markets hearing: Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing
Wednesday, December 13
- December FOMC Meeting (Day 2)
- November CPI
- Senate Judiciary Committee Subcommittee on Competition Policy, Antitrust, and Consumer Rights hearing: The New Invisible Hand? The Impact of Algorithms on Competition and Consumer Rights
- House Ways and Means Committee Subcommittee on Oversight hearing: Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape
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