Another spending deadline, but that's not the real problem

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There was much backslapping within Republican ranks just before Christmas, when the big tax cut (with a dash of reform) was enacted into law without a single Democratic vote. What a finish, congratulations to all concerned!

The spending levels for fiscal year 2018 still hadn’t been set, over two months after the FY 2018 began on October 1, but time had run out to deal with that issue before the holidays so another short-term continuing resolution was enacted that would keep the government operating until January 19. The year in review, SAFE newsletter
Winter 2017.

Senators and a vanguard of House leaders were back in town last week. There were bipartisan talks (Reps. Paul Ryan & Nancy Pelosi; Sens. Mitch McConnell & Chuck Schumer) with members of the White House staff, which would supposedly begin setting the stage for a spending deal. Judging from the reporting, however, a quick and neat resolution of the various sticking points was likely to prove elusive.

“We had a positive and productive meeting and all parties have agreed to continue discussing a path forward to quickly resolve all of the issues ahead of us,” said Mr. Schumer and Mrs. Pelosi in a joint statement. Their goal was apparently to signal confidence that they would have the upper hand in the negotiations, which they needed to be true lest the sole Democratic deliverable in a mid-term election year should become its resistance to the Trump administration. White House warns Democrats not to “hold the government hostage,” Stephen Dinan & Dave Boyer, Washington Times,
1/3/18.

A substantially different message was communicated by a
January 3 statement of the White House and Republican leaders.

Today, the Republicans and Democrats in Congress shared their priorities for a bipartisan spending agreement. The American people deserve a government that funds our great military, protects our borders, and leads to a more prosperous future for all. It is important that we achieve a two-year agreement that funds our troops and provides for our national security and other critical functions of the Federal government. It also remains important that members of Congress do not hold funding for our troops hostage for immigration policy. We’ve been clear about these budget priorities from the beginning and hope that further discussions will lead to an agreement soon.

Starting on Friday, the president et al. hosted the Republican congressional leadership (including Reps. Paul Ryan & Kevin McCarthy; Sens. Mitch McConnell & John Cornyn) at Camp David to discuss GOP legislative strategy for the year. Sen. John Cornyn: Camp David meeting will focus on policy agenda with bipartisanship in mind, Sally Persons, Washington Times,
1/5/18.

There was a mini press conference in a hangar at Camp David on Saturday, with the president doing most of the talking. The impression was conveyed that the Republican camp was united as never before and determined to do even bigger things in 2018 than had been accomplished in the first year. Trump, GOP leaders at Camp David set ambitious 2018 agenda, S.A. Miller, Washington Times,
1/6/18.

What did the press corps ask about? No surprise, the focus was on a “tell all” book about life in the White House in the early days while Steve Bannon as the president’s chief political strategist and Chief of Staff Reince Priebus were contending for dominance that would eventually elude both of them. And having previously “tweeted” some thoughts on this subject, the president was now asked to elaborate. Trump blames “Sloppy Steve” for Michael Wolff’s book, calls it “work of fiction,” S.A. Miller, Washington Times,
1/6/18.

The president remarked on the book when asked why he felt it was necessary to have posted a message on Twitter defending his intellect. “I went from VERY successful businessman, to top T.V. Star … to President of the United States (on my first try),” Mr. Trump tweeted earlier in the day, referring to his “Apprentice” TV show and his real-estate empire. “I think that would qualify as not smart, but genius….and a very stable genius at that!” He said that he wanted to counter the charges in the book, which described him as acting like a baby and lacking basic knowledge of government and current affairs.

Today, the main body of House members will return to Washington and the legislative deliberations of Congress will resume. That leaves ten days to at long last reach a spending deal, lest there be a government shutdown (shudder) for which neither side would be anxious to claim responsibility.

So what are the key issues and what’s the likely outcome? Here’s our take.

A. Deficit reduction – The federal deficit came in at $666B for FY 2017, the highest shortfall since FY 2013. Don’t expect any improvement in FY 2018 because it’s not likely to happen, and here’s why.

The big tax cut will mean less tax revenue, which may eventually be offset by faster economic growth but such a result would take years to achieve.

Defense spending is being boosted in light of deepening security threats and the adverse results of previous military funding cuts, and there are no credible plans to curtail wasteful government spending in other areas.

A series of natural disasters in 2017 spawned a slew of disaster relief spending proposals that enjoy strong bipartisan support; this will add over $100B to the current deficit. Some of this funding was previously approved, and some $89B is tied up in a disaster relief bill that is slated for approval as part of the spending deal for FY 2018. Hurricane relief bill tied to Jan. 19 government funding deal, Kevin Diaz & Mike Ward, chron.com,
1/4/18.

As the economy strengthens, the Federal Reserve is gradually boosting interest rates to more normal levels. As a result, the cost to taxpayers of carrying government debt of over $20 trillion will steadily rise.

Speaker Paul Ryan has suggested following up the tax bill by tackling entitlement reforms, which over time could offset the tax revenue loss and then some. House Majority Leader Mitch McConnell doesn’t intend to tackle entitlement reform without bipartisan support (nonexistent), however, and the president has shown more enthusiasm for pushing a $1 trillion infrastructure program, which would boost the deficit instead of reducing it. Paul Ryan wants to tackle entitlements, healthcare, and welfare in 2018, Philip Klein, Washington Examiner,
12/22/17.

Far from making a start on deficit reduction, knowledgeable observers foresee that current policies will keep pushing up the deficit unless and until there is a fiscal crisis. Although the tax bill has contributed to this outlook, the basic problem is seen as the disinclination of either party to rein in spending. Trillion-dollar deficit déjà vu, Veronique de Rugy, townhall.com,
1/4/18.

Like the average Democrat, the average Republican views federal spending as an opportunity to buy votes for re-election. With talk that the Democrats could win back control of one or both houses of Congress, the temptation for Republicans to get playful with Uncle Sam's credit card will be even stronger. Just look at the GOP's open desire to (once again) blow past spending constraints to lard up the Pentagon's defense contractor-friendly budget. Democrats will gladly go along, as long as non-defense spending gets to bust the spending caps, as well. That's a trade that too many Republicans will be happy to make.

B. Budget caps – Democrats have accepted the Republican demand for a big boost in defense spending, which has been duly reflected in a defense policy bill that has already been enacted into law and would boost the defense budget by more than the Trump administration initially requested. The applicable budget caps remain in effect, however, so the indicated increase in defense funding remains inaccessible for now.

Any increase in defense spending should be matched by an equal increase in nondefense spending, according to Democratic negotiators, and so long as 60 votes are needed to pass any spending bills in the Senate (as a result of the Senate filibuster rule) they have the leverage to get their way.

Realistically, however, Republicans have made a strong case that the defense budget needs to be increased while there is no credibly demonstrated need to increase spending for nondefense programs. Indeed, if there is any area in which solid spending reductions could be made quickly, it is in nondefense programs. Pluses and minuses: assessing the president’s budget proposal,
6/5/17.

Here’s how Senate Majority Leader Mitch McConnell made the point recently. Mitch McConnell sets up clash with Democrats on military spending, Susan Ferrechio, Washington Examiner,
1/3/18.

We need to set aside the arbitrary notion that new defense spending be matched equally by new non-defense spending. There is no reason why funding for our national security and our service members should be limited by an arbitrary political formula that bears no relationship to actual need.

The response from Senate Minority Whip Dick Durbin (D-IL) was dismissive. “It has to be decided by 60 votes. Do the math.”

If necessary, Republicans should serve notice that only 51 votes are required to approve Senate spending bills – not a majority – and that they would “go nuclear” to abolish the Senate filibuster rule before permitting a government shutdown over this issue. GOP irresolution could lead to a government shutdown,
8/28/17.

C. DACA - Another bone of contention is the legislative replacement for the Deferred Action on Childhood Arrivals (DACA) program. Republicans have committed to support such legislation so long as improvements in border security are included, but they say the deadline for action is March and this issue need not be resolved as part of the spending deal. For their part, Democrats have been insisting on a comprehensive solution, including a path to citizenship for the “dreamers,” and they want it right now. White House warns Democrats not to “hold the government hostage,” op. cit.

Democrats are under intense pressure to make sure any bill grants permanent legal status to Dreamers. Their failure to secure a Dreamer agreement in December earned them fierce condemnation from immigrant-rights activists and liberal pressure groups. Democrats want a “clean” Dream Act, which could grant a full long-term pathway to citizenship to nearly 2 million illegal immigrants who came to the U.S. as children.

Initially, the key to a DACA deal was seen as the willingness of the administration to dial back its border security demands, e.g., accept relatively inconsequential funding as a down-payment on a border wall, “e.g., several hundred miles worth” over a period of time longer than the next 2 or 3 years. Immigration plan depends on Trump willingness to compromise, Laura Litvan & Shannon Pettypiece, bloomberg.com,
1/4/18.

Senate Republicans angling for bipartisan immigration legislation say they’re optimistic that a deal can be struck soon, but it will come down to how much President Donald Trump is willing to compromise on his own wish list.

At a White House meeting with GOP senators Thursday, Trump said lawmakers have “a good shot” at getting legislation to his desk that he’ll sign. Still, he continued to push for several ideas that face opposition from Democrats and some Republicans, including building a wall at the U.S.-Mexico border.

The administration has now raised the ante by presenting a more specific set of demands including a request “to build about $18 billion of new fencing” on the border. Senator Dick Durbin labeled the restated demands nonstarters and served notice that a government shutdown may be brewing. Trump plays hardball: Border wall, more security must be in Dreamers bill, Stephen Dinan, Washington Times,
1/5/18.

“President Trump has said he may need a good government shutdown to get his wall. With this demand, he seems to be heading in that direction,” Mr. Durbin said. He said Democrats would consider “reasonable border security measures,” but said the list sent over by the administration Friday was “outrageous.”

Whether congressional Republicans are solidly behind the president’s demands or not, unity was asserted at the Camp David press conference. Trump, GOP leaders at Camp David set ambitious 2018 agenda,
op. cit.

[The president] stressed the need for Democrats to support immigration measures, including fixing the soon-to-expire temporary amnesty for “Dreamers” and spending $18 billion for a border wall. “I think it is something that [Democrats] would like to see happen and something that I would like to see happen,” he said of the fix for Dreamers, the illegal immigrants who were brought to the U.S. as children. He stressed that a key goal of border security would be stopping a flow of illegal drugs into the US., including opioids that have fueled an [addiction] epidemic thought the country.

No doubt it will take some give and take to arrive at a viable deal on this issue, but we don’t think the administration should settle for a token set of border security measures – as some had thought it might do. Illegal immigration has been a serious national problem for several decades, and it needs to be effectively addressed – not brushed under the carpet again.

D. Other issues – What better time could there be for the nation’s political leaders to acknowledge the obvious – that deficits and debt are spinning out of control – and propose some serious plans for dealing with the issue?

A good starting point would be to defer action on an infrastructure spending program until the fiscal implications have been clarified. In the wake of a big tax cut, with the economy already accelerating, how much stimulus does the US economy need? Notice how little apparent thought has been given to how the proposed program would be financed. White House to release $1 trillion infrastructure spending program this month, Joseph Lawler, Washington Examiner,
1/5/18.

Business groups and many Democrats favor greater government spending on roads, bridges, ports, and other infrastructure. Conservative Republicans, however, could balk at new government spending. They opposed the 2009 Obama stimulus package, parts of which were infrastructure spending. The White House has so far been silent on whether or how they will propose to pay for the new spending.

More basically, it’s none too early to start making plans to do a proper job of managing the budget for fiscal year 2019. How about a bipartisan commitment to shrink the deficit from $660B in FY 2017 (and higher in FY 2018, it’s too late to stop that) to $400B or less in FY 2019? And to prevent any backsliding, all concerned should commit to develop and enact the real budget (detailed appropriation bills) for fiscal year 2019 before the October 1, 2018 deadline.

Notice, by the way, how poorly the budget rules that Congress adopted in the 1970s have functioned in practice. It’s a good example of politicians gaming administrative rules to achieve their own ends. Republicans have reformed taxes – will they fix 1970s budget rules next? Michael Barone, Washington Examiner,
12/21/17.

The restrictions of the 1974 Budget Control Act and the cost estimates of the Congressional Budget Office it created were intended to provide clarity and restraints on presidents and Congresses. Ironically, we had mostly balanced budgets before 1974 and mostly budget deficits since.

**********FEEDBACK**********

#Another good analysis and summary. Bipartisanship is a mirage and I don't think the American public expects that to happen. They may wish for it, but don't expect it. Republicans should just charge on - Pelosi and Schumer be damned. As interest rates rise, the cost of servicing the debt can be used as argument for deficit reduction. – DE member

#After doubling the debt on their watch, will Democrats want to cut spending now? Never! – SAFE director

#It will be interesting to see how the spending negotiations work out. Some folks have told me they really got screwed over with the new tax bill. Any chance state income, property, and sales taxes can be accounted for as donations going forward? ☺ - Retired financial manager

Comment: IRS can probably see through this idea! See California’s political charity, Wall Street Journal, 1/12/18.

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