August 4, 2023

Thought of the Week:

In 4th grade I was lucky enough to get Mr. Liu. Mr. Liu was every child’s favorite teacher at Flower Valley Elementary, and he was best loved for his history class. To this day, I still remember my painted globe project tracing Magellan’s circumnavigation of the globe, my “Now and Then” poster board contrasting colonial life with life in 1976, and my report on the California Gold Rush. Unlike other teachers who sequestered themselves in the Teacher’s Lounge, Mr. Liu ate lunch in the cafeteria with the kids and went outside for recess—playing kickball, basketball, dodgeball, and softball with the students. He possessed a signature basketball move where he faked the shot, kept the ball between his legs, only to drive around any player who went for the fake. Mr. Liu always said his favorite subject was recess, which in today’s hyper-partisan environment may be the same thing you hear from many members of Congress. The common assumption that Congress skips town at the end of summer because of Washington’s heat and humidity is a myth. For at least the past half-century, the August recess has served as both a welcome deadline and a needed respite from legislative work for lawmakers, staffers, and others who live and breathe by the congressional calendar. But the timing of the break has more to do with happenstance than 90-degree weather. While July is actually D.C.’s hottest month on average, as far back as the early 20th century, it was rare for Congress to stay in Washington into August. Prior to the adoption of the 20th Amendment in 1933, the congressional calendar was very different from what we see today (that amendment moved the beginning and ending of the terms of the president and vice president from March 4 to January 20, and of members of Congress from March 4 to January 3). At that time, being a congressman was more of a part-time gig, and the federal fiscal year ended on June 30, allowing members to return home for summer. By the 1960s, the trend had shifted from part-time to nonstop politics. In an effort to balance policy and politics with some semblance of family life, the Senate first held hearings on instituting an annual break in 1961. After nine years of debate, The Legislative Reorganization Act of 1970 was passed requiring a recess, and Capitol Hill has emptied out every August since. Even though everyone talks about the “August recess,” Congress hasn’t technically recessed for the month since 2016. The Constitution’s Adjournments Clause forbids either chamber from adjourning for more than three days without the other’s consent, which has led to the practice of scheduling extended recesses through concurrent resolutions. The reason such a practice is necessary is because while the Senate is away, the president can make appointments without the Senate’s advice and consent. To defend against this practice, Senate Majority Leader Reid, during the George W. Bush presidency, hit upon the tactic of preventing recess appointments without losing recess by holding pro forma sessions. Instead of adjourning for the entire month, the Senate repeatedly adjourns for three days, sending a lone senator to gavel in and out without conducting any real business before adjourning for another three days. The Obama administration challenged the practice before the Supreme Court in 2014 but lost in a unanimous decision.  

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

Eurasia Group Believes Investigations Will Weigh on Both Leading Presidential Candidates. Both President Biden and former president Trump face investigations into allegations of illegal activities; the twin investigations into the presidential frontrunners are a new feature of American politics and will be a prominent theme in the 2024 election. The former president’s trials will not affect his dominant status in the Republican primary but will diminish his appeal in the general election and fuel Republican attacks on federal law enforcement. A guilty verdict in any of the cases against him would significantly hurt his presidential campaign, but he is unlikely to receive a prison sentence before the election even if convicted, creating an opportunity for a second Trump administration to drop any federal charges if he wins. At the same time, House Republicans will likely move forward with an impeachment inquiry against President Biden. While the effort will not result in the president’s removal from office, it will keep questions about his role in his son Hunter’s business dealings in the headlines, undermining his reelection chances, as even unfounded allegations could encourage on-the-fence voters to stay home or opt for a third-party candidate. 

Institute of International Finance (IIF) Sees the End of the U.S. Inflation Shock. The IIF has had a relatively dovish take on U.S. inflation since the middle of last year, when their inflation metrics showed price increases becoming less broad-based, which was consistent with the view that supply shocks drove inflation, not overheating demand. The main test to their view came early this year when inflation picked up sharply. At the time, they argued that the inflation pick-up was due to “start-of-year price resets,” which subsequent inflation data have broadly shown to be an accurate assessment. Therefore, the pace of underlying inflation has been more modest than even the Fed expected. Eventual realization of this dynamic will open the door to faster and larger rate cuts than are currently priced in by markets.

Observatory Group Says Supreme Court Ruling will Lead to More State vs. State Economic Battles. While most observers focused on the Supreme Court’s politically charged decisions regarding affirmative action, religious liberty, and student loan forgiveness, the decision with the largest potential economic impact was National Pork Producers vs. Ross (Pork Producers). The impact of that decision could prove consequential as it is likely to encourage more states to impose constraints on industries that undermine the national marketplace. In the case, the Court upheld a decision allowing a California law to move forward. Although California accounts for just 13% of U.S. pork consumption, nearly 100% of pork is produced outside of the state, and just 4% of American pork producers meet the new California standards. Moreover, there is no practical way for the pork industry to separate pigs raised for consumers in California vs. pigs raised for non-Californians. Thus, the Court is allowing California to impose its policy preferences on the national pork marketplace. While states using policy to enact their preferences is nothing new, the Pork Producers case essentially allows California to use its market power to regulate an industry located almost wholly outside its borders. The case will serve as a roadmap for politically charged Red and Blue states to use their market power to impose their policy preferences on other states and out-of-state industries, some with large economic impacts. Although Congress can pass laws to override state policies, in this hyper-partisan environment, it is difficult to see how Congress could agree on one national standard for many of today’s hot-button political issues. As the Presidential election approaches, expect more states to follow the California model seeking to impose politically charged policy on hot-button social and cultural issues impacting the commerce of states and industries outside of their borders. 

“Off the Record”

Something for Everyone in Archer’s Testimony. Devon Archer appeared behind-closed-doors before the House Oversight Committee, and both Republicans and Democrats seized on the former Hunter Biden associate’s testimony to back up preexisting claims about Biden family business dealings. Republicans secured a major talking point when Archer confirmed then-Vice President Biden spoke with Hunter Biden’s business partners; Biden had been insistent in the past that he had “never spoken” with Hunter about his business dealings. Archer testified that he witnessed Hunter put his dad on speakerphone with business partners numerous times over a decade. Talk of an impeachment inquiry into President Biden is now growing among House Republicans. However, according to Archer’s testimony Biden never discussed business specifics during any of the calls. Democrats seized on this to argue that the president’s involvement was innocuous. Archer denied any knowledge of an unverified claim that Hunter and Joe Biden received millions of dollars in bribes from the Burisma CEO. This is notable because Archer served on the board, and if the head of Burisma was bribing the Bidens with large sums of money, one would expect a board member to be aware of the plot. An important note: Archer is a convicted felon; he and two others were convicted in June 2018 for defrauding a Native American tribe out of $60 million of bonds. Last year, Archer was sentenced to a year in prison and required to repay more than $15 million.

In Other Words

“We got to find some judge in Florida that’ll indict DeSantis quick, to close this indictment gap,” Rep. Massie (R-KY) joking how his ally, Florida Gov. DeSantis (R), can turn his presidential campaign around.

“[The January 6 attack] was fueled by lies, lies by the defendant targeted at obstructing a bedrock function of the U.S. government, the nation’s process of collecting, counting, and certifying the results of the presidential election,” Special Counsel Smith commenting on Donald Trump’s federal indictment.

Did You Know

The Committee on Foreign Investment in the United States (CFIUS) reviewed a record number of transactions in 2022 for potential national security risks. The interagency panel examined 440 transactions, clearing 58% of those within 45 days. No transaction made it all the way to President Biden’s desk for a final decision on whether to block the foreign investment or not. However, parties did withdraw their requests 88 times, either because CFIUS found a national security concern or for commercial reasons.

Graphs of the Week

Chief Executives’ Pessimism about the Economy Eases. Nearly one in five chief executive officers say they expect the economy to avoid slipping into a recession, while the majority still anticipate a shallow downturn over the next 12 to 18 months.

Fitch Downgrade Spotlights Debt Worry as Recession Fear Fades. The move by Fitch Ratings to downgrade federal government credit has put a renewed focus on the nation’s debt trajectory, just as the economy is shaking off forecasts for a looming recession. In fact, Federal Reserve Chair Powell said the Fed is no longer expecting a downturn, and economists at Bank of America also scrapped their recession forecast. Evidence of enduring strength among consumers and businesses keeps coming in with data showing companies added more jobs in July than expected. This is all in contrast to 2011, when S&P stripped the U.S. of its AAA rating. Then, the economy was emerging from the global financial crisis and unemployment was at 9%; it’s now at 3.6%. Fitch’s Rationale: weakening fiscal metrics and governance, and political wrangling over the debt ceiling. At present, twelve states have credit ratings higher than the federal government.

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