SENATE | Hammering Out Your Federal Budget (Postscript)

L to R: Senators Mitch McConnell and Chuck Schumer

January 22, 2018 – The following is "Update 244" from Dana Chasin, who monitors economic policy and the budget cycle in Washington for you. (Postscript January 23 by CityEconomist: Commentary in the NY Times and New Yorker.)

Dreamers Survive One Deadline,  Face Another on February 8.

Closing one of the shortest government shutdowns in memory, the Senate voted 81-18 to end debate on a stopgap FY 18 funding measure expiring February 8.

Minority Leader Schumer extracted a concession from GOP Leader Mitch McConnell: a legislative agreement regarding action on a DACA bill in exchange for Schumer’s support for the spending package. Once the Senate approves it, the House is expected to pass the bill in short order with the President likely signing the CR into law tonight.

How did the deal come to pass and who holds the upper hand in the next budget round?

The Deal

In negotiating this short-term extension, Senators continue to comply with Budget Control Act caps as toplines:

$549 billion for defense spending
$516 billion for nondefense discretionary
Both of these caps are set to increase by a combined $160 billion by 2021. Defense spending caps increase to $562 billion in 2019, $576 billion in 2020, and $591 billion in 2021. Non-defense discretionary spending caps increase to $529 billion in 2019, $542 billion in 2020, and $555 billion in 2021.

The package is identical to the previous FY 18 CR extensions, except that it includes a CHIP funding deal. Where a DACA package will be negotiated on its own, the stopgap spending deal includes a six year extension of the Children’s Health Insurance Program. 1.9 million children in 25 states would have lost CHIP benefits had this arrangement not been reached before Feb. 1.

Impact of the Shutdown

Past shutdowns have cost the economy billions of dollars per day when furloughed government workers and contractors were forced to stay home and miss out on paychecks. This time around, the impact was relatively limited by a shutdown that primarily spanned the weekend. With only one work day lost, stock markets barely blinked and economic losses will be minimal.

Democrats’ Position

Democrats kept their promise to not vote for a long-term funding measure without protecting Dreamers and won six years of CHIP funding to provide vitally important children’s health coverage, giving up nothing. Sen. Schumer also secured greater leverage, forcing McConnell into a promise to address DACA relief on the floor in advance of the next funding deadline.

Sen. McConnell’s promise, on the congressional record, that he will bring an immigration bill to the floor and allow for an open amendment process, means that Schumer extracted more explicit concessions from his Republican counterpart without having to give anything up. Sen. McConnell now faces the unenviable task of having to develop an immigration solution or risk going back on his word and facing another government shutdown.

Most significantly, the deal allows Sen. Schumer to keep his caucus united while putting pressure on an already factious Republican majority. Several prominent Democrats eyeing a 2020 presidential bid, including Sens. Harris, Gillibrand, Booker, Sanders, Murphy, and Warren voted against this bill in support of the Dreamers.

Republicans’ Position

Since Trump assumed office, the GOP has repeatedly been foiled by its own internal divisions. This weekend’s shutdown made it abundantly clear that the majority party is struggling to perform the most fundamental tasks of governing, adopting a budget. Despite Republican leadership’s attempts to paint the fiasco as “Schumer’s shutdown,” polls revealed that most of the country blames the party in control of the House, the Senate, and the White House for the shuttered government.

This weekend’s split pitted moderate Republicans who had previously expressed interest in finding a resolution to the DACA debacle against against immigration hardliners. The moderates, lead by “gang of six” Sens. Flake, Graham, and Gardner, had thrown their support behind a bipartisan DACA deal only to have it infamously blow up in the Oval Office.

Other Republicans are clearly less eager for a DACA fix. Last Friday, many Republicans were quick to frame the shutdown as an example of Democrats choosing “illegals” over children when Democrats voted down the House CR that contained six years of CHIP funding but made no mention of DACA.

Trump’s Absence

President Trump had already gone to sleep by the time the shutdown occurred on Friday at midnight. Other than a Tweet calling for Republicans to “go nuclear” and change the Senate rules allowing spending bills to pass with only 50 votes, he played no real part in negotiations over the rest of the weekend. The President did meet with Sen. Schumer on Friday at the behest of Sen. McConnell, but that conversation ended up at square one, with Trump telling Schumer to work it out with McConnell. In the end, Trump had little to to do with negotiating and drafting the bill.

Why Schumer Came Out On Top

DACA protections run out on March 5, now that CHIP funding has been secured and McConnell is on the record saying that he will begin a “neutral and fair” legislative process Democrats can go into the new Feb. 8 deadline resolute in their goal to protect the Dreamers.

Shutdowns often result in a blame game as motives are questioned and accusations of bad faith abound. Democrats needn’t fear that as they have made a simple demand that Republicans have acknowledged. Mitch McConnell has made and broken promises like this in the past, including the one he made to Sen. Flake in exchange for his vote on the tax bill. If Sen. McConnell either tries to exclude Democrats from the process, pass a watered-down or poison-pill ridden bill, or renege completely Democrats will not refrain from shutting the government down again.

POSTSCRIPT BY CITYECONOMIST (January 23, 2018)
In The New York Times, Michelle Goldberg says that the agreement sells out the Resistance and the women’s marches. Paul Krugman says it is a betrayal of the Dreamers. Carl Hulse says that the shutdown was a bad strategy and that caving in sooner was better than later. The Editorial Board complains that the President has sent “wildly contradictory" messages.

In The New Yorker, Benjamin Wallace-Wells asks whether Schumer “caved” to the detriment of the Dreamers. John Cassidy thinks the effects of the Women’s Marches are more lasting than the shutdown.

FEDERAL BUDGET | Trump Deal with Dems

L to R: President Trump, Mitch McConnell,
Chuck Schumer, Nancy Pelosi

An agreement between President Trump and the Democratic leadership extends government funding, increases the federal borrowing limit through Dec. 8, and provides more than $15 billion in hurricane and disaster recovery aid.

Here is commentary on the deal from Washington, D.C.-based insider Dana Chasin:

Fiscal Deal with Democrats

How did the deal come to pass -- and will it pass?  Who are the winners and losers if it does?  Will the curious coalition supporting the deal become a functional majority, since the partisan majority appears dysfunctional?  Read on.

Deal Details 

Earlier this afternoon, the Senate passed the motion to concur in the House amendment to the Senate amendment to H.R. 601 with a further amendment. That’s fancy talk for, the deal was agreed to by a vote of 80-17.  The GOP split 33-17 against and Democrat en bloc in favor, 47-0). The amended bill now goes back to the House for final approval before heading to the President’s desk.  The House may consider the vote at any time.  The President is expected to sign it.

The Senate measure, now on its way to the House, provides:

•  An extension of the statutory debt limit through December 8

•  A continuing resolution extending government operations for all 12 appropriations bills through December 8

•  FY2017 funding levels

•  $15.25 billion of disaster relief for victims of Hurricane Harvey, Irma, and other fiscal year 2017 major disasters

Omitted: new funding for the Wall. 

Winners and Losers

•  Democrats -- Democrats have won a wedge to drive their way into negotiations, but only a slim one.  Trump’s impatience and time are on their side though, and in the press conference announcing the deal, Trump hinted that he wanted to work with Pelosi to try to work on solving the question about the future of DACA beneficiaries. This is odd, seeing as only two days ago he announced the end of DACA, but Trump has been known to make a quick pivot if it will help him look like he’s accomplishing something big. 

•  Republicans -- 

The GOP has the advantage of suddenly having the weight of a government shutdown lifted off their shoulders for at least three more months, without appearing to use the Hurricane Harvey victims as pawns in an ugly floor debate over the budget. However, this means Republicans lose some of their leverage over tax reform issues because the pressure of the debt ceiling closing momentarily lifted.

 On top of this, the end-of-year legislative calendar just became utterly packed, and as Freedom Caucus Rep. David Bratt put it “Massive deals and cliffs and omnibuses that take place right before the holidays end up being very bad for conservatives…” He’s right.  While the some in the Freedom Caucus still have lingering memories of the concessions they won from Obama with the 2011 Budget Control Act (concessions that were won at the height of the Freedom Caucus’ influence), more recent end-of-year slug fests have hurt the GOP for more than they have helped. 

•  The Administration -- Trump and Ryan have never seen eye-to-eye, not since the primaries, and McConnell has fallen into ill-regard by the President as well after the Republican failure to secure the vote to repeal the ACA. Avoiding the usual processes is a sign of Trump’s impatience and also his determination to have his way to get something done, playing by the rules or not.  In doing so, Trump turned his back on Ryan and McConnell, who were pushing for an 18 month extension, and then a 6 month extension on the debt ceiling. His going rogue means that we’re finally seeing some of the infamous dealmaking here in this first bipartisan legislative act of eight-month old Trump’s term. 

At the end of the day, it’s a win for Trump. He badly needed a win-- practically any sizable win-- and he got one.  

Policy Implications

•  Debt Ceiling -- The debt ceiling has been extended. For now. A three month extension certainly means the issue isn’t going away anytime soon, and Republicans will face yet more difficulty whipping up support for an extension at the end of the year.

•  FY 18 Budget -- An extension of the FY 17 Budget means that (at best) FY 18 will be 9 months long.  This is not only a major concession, but it conjures a major question:  Are Republicans capable of producing the resolution necessary to pass their tax reform efforts? 

•  DACA -- DACA has been thrust to center stage. Not only did Sarah Huckabee Sanders speak in bluntly about the need for Congress to address the 800,000 DACA recipients left in limbo by Trump’s decision to end the Obama-era executive order, but progressive advocacy groups have pressed Democratic leaders to use their newfound leverage to aggressively press the issue. Hopefully this is good news the Dreamers as Democrats will likely push the issue now that they have some firm ground to stand on.

•  Health Care Finance -- With the reconciliation instructions for ACA repeal expired and Republican attention turned to tax reform, a last-grasp Obamacare repeal effort seems unlikely. But financing for individual health insurance markets is still needed and bipartisan efforts to address this need are underway in committee. Let's see if Democrats can use their new-found leverage to push new funding through.

•  Entitlement Reform -- A long-time goal of the Republican Party’s right wing which wanted to use the debt ceiling negotiation as a way of extracting spending cuts and entitlement reforms. This now seems dead on arrival.

Since Trump is still looking to get something big done, it seems he wants to try to get tax reform passed through reconciliation--in a Republican-majority Congress where it should be a cakewalk--this buys him some time to do that. The Congressional Parliamentarian delivered instructions to the Republicans this week that require them to use reconciliation by Sept 30th before it expires. The talk so far has implied that the Republicans want to still try to push through the ACA repeal through reconciliation this month, but Trump’s focus has completely turned to tax reform. 

With a series of speeches this month about fiscal policy (occurring in places like Missouri and North Dakota), he seems to be attempting to pick off Democrats like Heidi Heitkamp and Claire McCaskill and pressure them to supporting his agenda. But if his agenda is oppositional to that of Paul Ryan and Mitch McConnell out of spite, who is to say what might be on the table when he finally gets down to brass tacks and gives some concrete numbers in a tax reform proposal.

Analysis: Causes and Implications

This was not how this deal was supposed to shake out.  While the GOP had hatched a plan over the weekend to attach Harvey relief funding to the debt ceiling, the original plan had been to extend the ceiling by 18 months, pushing the next difficult vote past the 2018 midterms.  But Trump is certainly one to hold a grudge and he’s been trading barbs with McConnell and Ryan for months. 

On top of this, Republican leaders in Congress are perpetually stuck between the necessities of governing and intransigence on their right flank. Because the Freedom Caucus decided to play hardball with the debt ceiling, Speaker Ryan was unable to deliver a GOP majority and had to turn to Democrats for votes. Pelosi and Schumer took this leverage to the White House where Trump was all too happy to make Ryan look like an absolute fool in the process of striking a deal with the Democratic leaders.

Congressional Democrats definitely got a win here, but it’s probably a less of an emphatic one than much of the media coverage would suggest.  Yes, Democrats got three more months of an Obama-era budget, and yes, they put pressure on Republicans by showing that they can get Trump to work with them on must-pass issues.  This means they have increased leverage when it comes hot-button issues like tax reform (i.e. stopping the Republicans from passing major tax cuts), DACA legislation (i.e. making Republicans actually pass something), and address the ACA (i.e. getting more money to shore up private health insurance markets). 

But this newfound and putative leverage should not be overstated.  Republicans can’t count on Freedom Caucus votes come December, so Democrats certainly get more room to maneuver, but that doesn’t mean they’re about to play hardball with something as important as the debt limit.  What Democrats are hoping is that this new found bargaining chip will give them enough purchase to protect Obama era legislation while protecting some parity for defense and non-defense spending in the upcoming negotiations over discretionary spending.

Forecasting the Republican Struggle

At the end of the day much of the media energy about this deal simply derives from how bad this all makes the Republicans look. Tactically, the Republicans are now in the politically awkward position of having to wrangle over the debt ceiling once again all the while time keeps slipping away from a legislative agenda that is stuck in the mud. While Republicans gained some time now to focus on their tax reform efforts, they will lose time later (in December or early 2018 depending on the Treasury's extraordinary measures) when they once again have to turn their attention to the debt ceiling. Republicans will now have to have to pass a completely new budget resolution and new reconciliation instructions in order to get to simple majority vote in the Senate to move on their tax reform plans. 

Democrats are rightly cautiously optimistic that the deal will give them increased bargaining power going forward. But the real story here lies with the Republican Party. What Trump’s turn to the Democrats suggests is that Republicans have lost the ability to govern.  While the Senate killed health care reform the House has an uphill battle to pass the budget resolution that is necessary to tax reform without ceding power the Democrats.  The GOP is a party at war with itself, with little to suggest interest in or capacity for governing as majority parties generally do in a democracy. 

DEBT CEILING | 8 Proposals

Michael D. Shear, online July 15, 2011 (in the Saturday, July 16 NY Times), provides a “cheat sheet” on the various proposals for meeting the August 2 deadline for raising the debt ceiling. Comment: Not mentioned is the fact that Both Moody’s and S&P have threatened to lower their triple-A ratings on long-term U.S. debt if the deadline is not met, with S&P going further and expressing hawkish views about the terms of any compromise. The threat of a downgrade at least partly offsets the argument that cuts in spending now might bring on a double-dip recession. Here is an abbreviated summary of eight overlapping and evolving proposals, with a few additional facts from a Washington newsletter (W&J Washington Update, July 15) and other sources, and my comments:

1. The Obama-Boehner $4 Trillion Grand Bargain.The “big deal” worked on between President Obama and House Speaker John Boehner (R-OH) would add up to more than $4 trillion in deficit reductions over ten years, with $1 trillion of it from new tax revenue. But the tax revenue portion of this bargain made it unpalatable to Republicans. Boehner backed off from this last weekend but the President still likes this idea. Comment: S&P also likes this approach, saying that there is a 50 percent chance it will downgrade U.S. debt within 90 days, and suggesting that anything less than a $4 trillion deficit-reduction plan over ten years could trigger a downgrade.

2. The Biden Half-Bargain. House Majority Leader Eric Cantor (R-VA) revealed some details of VP Joe Biden's plan to cut $2 trillion. Health care would lose about $340 billion. Reducing the debt would save $300 billlion. The Biden plan included several hundred billion dollars of new revenues from sources such as owners of private jets, hedge-fund managers and large oil companies. Cantor said the new tax revenues were a nonstarter. Comment: This would add up to about the $2.4 trillion of the debt-ceiling increase; it would not meet the S&P $4 trillion standard.

3. Cantor’s $2.4 Trillion Cuts.Cantor proposed $2.4 trillion worth of spending cuts without revenue increases. The President responded that these cuts are too deep, and would affect middle-class programs - student loans, Veterans’ benefits, Medicare and Medicaid – and that the cuts should be offset at least in part by higher taxes on wealthy individuals. Comment: Focusing only on the spending side does not meet the test of fairness.

4. White House: Proposed $1.5+ Trillion Cuts. President Obama has proposed cuts of $1.5-$1.7 trillion. Cantor says this would not be enough. Comment: Even if these cuts were matched by $700-$900 billion in new taxes to get to the $2.4 trillion of the debt increase, the total is below the S&P standard.

5. Cantor’s Stepwise Debt Increases. Rep. Cantor has suggested votes that would increase the debt ceiling in steps, with each step allowing Republicans to call again for more spending cuts. President Obama is opposed, saying that he wants to deal with the long-term deficit problem now. Comment: The President is operating on the sound principle that painful adjustments are best made as part of a package that shows fairness in the bearing of sacrifices.

6. The “Balanced Budget” Amendment.  In the background, House conservatives are seeking to tie an increase in the debt ceiling to the passage of a constitutional amendment requiring Congress to balance the budget. Another proposal is a cap on federal spending as a share of GDP. Comment: Would such an amendment be ratified by two-thirds of the states? Unlikely. It would make Keynesian counter-cyclical fiscal policies more difficult, limiting the ability of future fiscal policymakers to respond to a recession or depression. (But on the plus side it might end the practice of financing wars with new debt.)

7. The McConnell Three-Step Option. Senate Minority Leader Mitch McConnell (R-KY) proposes allowing President Obama to raise the debt ceiling in three steps ($700 billion, $900 billion and $900 billion) between now and the end of 2012. Even if the Senate joins the House in voting against the debt-ceiling hikes, the President could veto their opposing legislation and go ahead. Comment: This would put the onus on the President but would also get past the deadline – it’s a better alternative than defaulting on debt payments, but does not address the long-term deficit concerns of the rating agencies.

8. The Hybrid Obama-McConnell. President Obama would be given the authority to raise the debt ceiling in return for the President’s commitment to the level of cuts that he proposed as a starting point. Then a base-closing-type commission would come up with additional deficit-reduction plans by the end of 2011 for an up-or-down vote. Comment: A well-thought-through package like this might conceivably be enough for the rating agencies, at least for this year.