Update 833 — Continuing Irresolution:
Speaker Still ISO Plan to Avert Shutdown
Mike Tyson once remarked that boxers have a plan going into every fight — until they get punched in the mouth. Speaker Johnson had a viable, bipartisan plan A this week to keep the government funded through mid-March and avert a shutdown via a Continuing Resolution (CR). But Donald Trump weighed in on Wednesday with the punch, demanding a two-year suspension of the debt limit likely to be reached this summer.
Having pulled plan A and lost a vote on a stripped-down plan B incorporating Trump’s demand, with 38 GOP House members voting against, Johnson has not found a viable plan C with less than ten hours before the government runs out of money. Below, we review how we got here, the options Johnson is considering and their pitfalls, and the implications for Johnson’s Speakership.
In other Hill developments, Congress is set to pass the Social Security Fairness Act today and successfully passed the National Defense Authorization Act earlier this week. The release of the Federal Reserve’s preferred indicator revealed a slight uptick in inflation along with third-quarter GDP being slightly revised upward. We discuss these developments – as well as a hearing on Trump’s tariff proposals.
Good weekends, happy holidays and New Year’s, all. See you in January.
Best,
Dana
Headline
Congress Races to Pass CR and Avert Shutdown
In the final days and hours of the 118th Congress, the GOP-led House has struggled fruitlessly thus far to find an agreement for a short-term government funding bill for the 2025 Fiscal year (FY25), ahead of the expiration of the current Continuing Resolution (CR) at midnight tonight (Friday). Negotiations for a stop-gap measure have been ongoing since it became clear a few weeks ago that there was not enough time or consensus to pass full-year funding bills for the 2025 Fiscal year (FY25), which began almost three months ago. While the current approach (plan B minus the debt limit) is coming up for a possible vote later today and the likelihood of its passage is not clear at the time of this writing, we walk through this week’s funding developments and their implications below.
Funding Plans: A Recap
Over the course of the last week, appropriators and leadership from both chambers have been in search of an agreement on a CR that would fund the government until March, avoiding today’s shutdown deadline.
With the Republican-controlled House expected to be the first mover in this process, Speaker of the House Mike Johnson — yet again faced with the task of balancing Republican factions with competing interests with an extremely narrow majority – has been central to negotiations both with Democrats and within his own party. Due to some Republican opposition to CRs in principle and the Senate and the presidency controlled by Democrats, Johnson was again forced to reach across the aisle to find bipartisan agreement.
The first proposal (plan A) would have funded the government at FY24 levels through March 14 and included (among other provisions):
- over $100 billion in disaster relief and farm assistance
- a one-year extension of the farm bill
- health extenders.
Although this proposal gained the blessing of Democrats, it was followed by extreme backlash from Congressional Republicans and the incoming Trump administration. Members cited the 1,500-page length of the CR as a main point of opposition, with some likening the measure to an end-of-year “omnibus” spending package. Others cited Johnson’s handling of the negotiations, which appeared to leave most Republicans on the sidelines.
Trump, partially driven by Elon Musk’s strongly negative statements about the measure, ultimately killed the deal, with Trump adding demands to handle the debt limit in the package (the debt limit expires at the end of the month, but it will likely not need to be addressed until next summer). Johnson, in turn, crafted a second proposal (plan B), which would again fund the government until March 14 and included:
- one-year extension of the farm bill,
- over $100 billion in disaster and farm assistance,
- a two-year suspension of the debt limit,
- some health extenders.
With an official blessing from President-elect Trump, Speaker Johnson brought the measure up for a vote last night under suspension of the rules, which requires a 2/3rds majority vote for passage. Though Trump’s CR did not have a chance to pass under suspension given an official no-vote recommendation from Democratic leadership, 38 Republicans chose to buck the President-elect’s demands and vote no on the bill, again sending Speaker Johnson back to the drawing board.
After considering solutions like a two- or three-week extension of government funding, which might crowd out Trump’s legislative priorities next month, Johnson and House Republicans teased a third proposal earlier this morning (plan C), which strips Trump’s demands on the debt limit and breaks up the CR’s must-pass components (government funding, disaster relief, and the farm bill extension) into three separate bills. While Johnson believed this would allow the separate components to pass or fail “on their own merits,” it now appears that they will consider the priorities as one bill later tonight under suspension, which would essentially be the Trump-blessed plan that failed last night minus action on the debt limit.
The road ahead for the ever-changing plan C is still unclear, and we do not currently know if the measure will get the Democratic support necessary to surpass the 2/3rd majority vote threshold required under suspension.
Implications of Funding Fallout
If nothing else, this process yet again showed the difficulties House Republicans have finding unity amid internally contradictory priorities. Speaker Johnson, to his credit, faced interference from members of different factions of his party (e.g. House Freedom Caucus) and their leader President-elect Trump. But the Speaker has made missteps at every turn, starting with his reluctance to work on full-year spending bills earlier this fall.
Republicans remain extremely divided despite securing a trifecta in the elections. Johnson may take the brunt of the reaction to related dysfunction when the House elects a Speaker on January 3. Some GOP members have already stated their opposition to Johnson following the latest CR debacle but it is unclear if other members could gain enough support to win the role (remember how time-consuming speakership elections were at the end of last year). For now, it seems Americans may pay the price for the House GOP’s inability to govern and Trump’s meddling in the legislative branch in the form of a government shutdown.
Other Developments
Social Security Fairness Primed for Passage
This week, the Senate began consideration of the Social Security Fairness Act, a bill to eliminate reductions in Social Security benefits for individuals who receive separate pensions from state and federal work. The measure passed under suspension in the House in a 327-75 vote last month and avoided the Senate filibuster on Wednesday in a 73-27 procedural vote. The Senate will look to consider final passage of the bill today before adjourning for the rest of the year.
If passed, the Social Security Fairness Act would eliminate two provisions that cut benefits for “who receive other benefits, such as a pension from a state or local government”:
- Windfall Elimination Provision (WEP) – Reduces Social Security benefits for individuals who receive pensions from employers that do not withhold Social Security taxes.
- Government Pension Offset (GPO) – Reduces Social Security survivor benefits for individuals who also receive their own pensions (i.e. spouses or widows).
The elimination of these two provisions will increase benefits for around 3 million Americans, however, it is projected to cost $196 billion over 10 years, according to the Congressional Budget Office (CBO). This money will come directly from the Social Security trust funds, which are projected to reach insolvency – the point at which Social Security will have insufficient revenues and reserves to cover scheduled benefits – in 2034. The CRFB has estimated that the increase in benefits could accelerate insolvency by six months, though revenue-raising reform will still be necessary regardless of the bill’s passage due to the large projected fiscal imbalance of the program.
The Social Security Fairness Act has not received a vote on final Senate passage at the time of writing, but the measure does appear to have the necessary support to clear the Senate today for President Biden’s expected signature.
Annual Defense Bill Heads to the President’s Desk
While chaos and uncertainty hover over appropriations on the Hill, Congress managed to pass the annual National Defense Authorization Act for the 64th year in a row on Wednesday. The $895.2 billion package heads to the President’s desk as the Senate passed the bill with an 85-14 vote.
Even though its passage was almost certain, this bill’s final hours were not without its own drama. A last-minute inclusion by Speaker Johnson of a controversial measure to ban some gender-affirming care for transgender children of service members led a group of 21 Democratic Senators to raise an amendment to strip the bill of the contested measure. It ultimately failed and many Democratic senators fell into line to pass the NDAA – citing it as too important to fail – while echoing their shared frustrations with Johnson’s actions which challenged the bipartisan tradition of the NDAA.
This authorization introduced a historic pay increase of 14.5 percent for junior enlisted troops with 4.5 percent raises for all other members, long overdue improvements to military housing, and investments in AI among other defense-related priorities. Once the President signs the NDAA, appropriators will begin to negotiate how federal funds will be allocated for the authorized programs outlined in this legislation.
Fed’s Preferred Inflation Gauge Ticks Up in November
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose 2.4 percent on an annualized basis in November, below expectations. This is slightly up from the 2.3 percent annualized increase in prices in October and the 2.1 percent annualized increase in prices in September. This is according to the November PCE report released by the Bureau of Economic Analysis this morning.
Core PCE – which strips out food and energy prices – rose by 2.8 percent on a year-on-year basis last month, on par with the 2.8 percent year-on-year increases in core PCE in October and slightly up from the 2.7 percent year-on-year increases during each of the three months prior to October.
Source: Council of Economic Advisers
Headline PCE rose by 0.1 percent on a monthly basis in November. Core PCE also rose on a monthly basis by 0.1 percent last month.
The overall 0.1 percent increase in prices last month came as prices of goods increased by less than 0.1 percent and prices of services increased by 0.2 percent. Food prices rose by 0.2 percent on a monthly basis in November, and energy prices increased by 0.2 percent on a monthly basis.
The new data show that inflation has slowed significantly since mid-2022, but core inflation particularly remains sticky above the Federal Reserve’s target of two percent. The trend is in line with stickiness seen over recent months as core inflation has remained high on an annualized basis, lapping the low readings of late last year, even as housing inflation has begun to fall. The new inflation data is likely to incline the Fed’s rate-setting committee, the Federal Open Market Committee (FOMC), to hold interest rates steady at its next meeting in January.
Third Quarter GDP Growth Revised Up to 3.1%
The United States economy grew by a healthy 3.1 percent on an annualized basis in the third quarter of 2024 according to the third estimate released by the Bureau of Economic Analysis (BEA) this morning.
Source: Bureau of Economic Analysis
This rate of growth is slightly higher than the 2.8 percent third quarter growth rate estimated in the BEA’s second estimate released late last month. The third estimate of GDP for the third quarter is based on more complete data and primarily reflected upward revisions to exports and consumer spending that were partly offset by a downward revision to private inventory. It showed:
- exports climbed 9.6 percent
- business investment grew a lackluster 0.8 percent, but investment in equipment expanded 10.8 percent
- spending and investment by the federal government jumped 8.9 percent including a 13.9 percent surge in defense spending
The strong GDP growth comes after the American economy grew by 3.0 percent on an annualized basis in the second quarter of 2024. The remarkably strong growth over the past two quarters shows that the U.S. economy remains resilient even as interest rates have remained elevated over the past roughly year and a half.
Hearings
Joint Economic Committee Talks Trump Tariffs
On Wednesday, the Joint Economic Committee convened for a hearing “Trade Wars & Higher Costs: The Case Against Trump’s Tariffs” to discuss the President-elect’s sweeping tariff proposals of 10-20 percent across the board and up to a 60 percent duty on imports from China.
In the wake of the 2024 election cycle where prices and inflation were front and center for American voters, acting Committee Chair Representative Don Beyer (D-VA) began the hearing by characterizing tariffs as “inflation aggravators” which would raise costs for American households, disproportionately impact lower-income families and shrink U.S. GDP.
Jeff Ferry of the Coalition for a Prosperous America testified that the benefits – rebuilding manufacturing, increasing jobs, and stimulating domestic production – from Trump’s tariffs in 2018 and 2019 outweighed the harm of price increases and referred to the hearing’s focus on the topic as too narrow. His fellow witnesses disagreed. Ed Gresser of Progressive Policy Institute warned tariffs raise prices, lower American living standards, harm exporters, and raise corruption concerns as well-connected firms may seek exemptions and handouts from the incoming Trump administration.
Representative Jimmy Panetta (D-CA) reminded the Committee that the agriculture sector typically bears the brunt of retaliatory tariffs. During the last Trump administration, $30 billion of agriculture products were targeted in retaliation, representing 22 percent of all retaliated goods. When asked about how housing prices would be affected by across-the-board tariffs by Representative Beyer (D-VA), Gresser, Brendan Duke of the Center for American Progress, and Erica York of the Tax Foundation all agreed that raising taxes on imports would increase production costs and result in an increase in housing prices.