February 23, 2024

Thought of the Week:

Cascatelli? Quattrotini? Vesuvio? Have you walked into your favorite Italian restaurant lately and not recognized the pasta(s) on the menu? I grew up in an Italian household, and until recently, thought I had a handle on the various long strand, short-cut, filled, and soup pastas out there. I was wrong. A quick Internet search reveals that there are literally hundreds of different shapes and sizes of pasta; one site claims that when different cultures are considered there are easily over 1000 different pasta types. Be honest, do you even know the differences between four of the most common long strand pastas—spaghetti, linguine, fettuccine, and bucatini? Spaghetti, the most widely known and utilized long pasta, translates to small strings, and is long, thin, solid, and cylindrical. Linguine, translated as small tongues, is like spaghetti but flat. Fettuccine is a ribbon-like pasta broader than linguine, but not as wide as pappardelle. Bucatini, often mistaken for spaghetti, is thicker with a hole running through the entire length of the strand. Ok, so maybe you knew your pastas, but do you know the differences between White Swans, Black Swans, and Gray Swans? Not the birds, but the different types of corporate risk. A white swan is a highly predictable, easily anticipated event whose size and/or importance can be estimated; think, a recession. A black swan is an extremely negative, exceedingly difficult to predict event that after the fact often appears less random than it was. Black swans result in severe and widespread consequences; 9/11, Brexit, the Coronavirus pandemic are examples. Gray swans are low probability events that carry a major impact if they were to happen. Because of their low threat level, companies often ignore Gray Swans or provide inadequate resources for their occurrence. Among the Gray Swans a group of Government Relations executives came up with at a recent Conference Board meeting were:

  • Geopolitical: NATO disintegration; North Korea accident; Ukraine spillover; China takes Taiwan.
  • Energy: China halts rare earth exports; major ice shelf collapse.
  • Economic: U.S. debt ceiling breach; dumping of U.S. Treasuries by China or Japan.
  • Social: new pandemic; major terrorist act; civilian uprising after an election.
  • Political: EU disintegration; violent suppression in Hong Kong.
  • Technological: cyber-attack; U.S. chip war expansion; 3D printing goes household.

To help companies prepare for a Gray Swan event, the Conference Board has developed a Gray Swan Tool. The tool identifies as series of events across categories like the above, describes their impact and assesses their threat level; and recommends a response—Ignore, Watch, Prepare, or Mobilize. For more information on or assistance in accessing the tool, please contact the Washington office.

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

Eurasia Group Sees AI’s Impact on National Security as Key Focus for Governments in 2024. The White House is leading an interagency process, supported by defense and intelligence community officials, to assess how AI can advance American national security objectives across a range of tactics and capabilities. U.S. partners in the Five Eyes intelligence alliance have ramped up engagement with private sector stakeholders to mitigate AI-enabled threats from foreign adversaries, including the potential use of AI to disrupt cybersecurity, destabilize critical infrastructure, and develop chemical, biological, radioactive, and nuclear (CBRN) weapons. While technology firms and investors already face heightened scrutiny because of the elevated importance of dual-use AI and other critical technologies, increased engagement and collaboration with policymakers will create new opportunities as governments seek to offset the technological capabilities of foreign adversaries.

Observatory Group Outlines Congressional Shutdown Prospects. If it feels like déjà vu all over again, that’s because it is. With the March 1 and March 8 deadlines fast approaching, Congress is back on track in risking a government shutdown. In fact, there is a better than even chance that Congress will miss the first deadline and cause at least a short-term partial government shutdown. While House Speaker Johnson remains the most powerful man in the debate, House and Senate negotiators have been working on a series of bills to meet the top-line agreement worked out by the Speaker and Senate Majority Leader Schumer in January. If Johnson would bring the bills to a floor vote, they would likely pass with wide bi-partisan majorities. However, since the top-line agreement was made, the right wing of the House Republican conference has threatened Johnson with a motion to oust him as Speaker if he strikes another deal with Democrats to avoid a government shutdown. Moreover, the Republican majority in the House has shrunk since Johnson’s January 8 deal with Schumer. Johnson can spare just two Republicans to pass a GOP-only spending package. As a result, with GOP factions and enough Republicans willing to reject any spending package, a GOP-only spending package is a near impossibility. So, when Congress returns next week, Johnson will have little time and a decision to make. Does he allow for a partial government shutdown starting March 1, or does he cut a deal with Democrats for a stopgap funding bill(s) that would continue to fund the government? It’s clear there is no consensus on this question and that’s why there is a better than 50% chance for a partial government shutdown. If there is a partial government shutdown on March 1, it would provide a political gift to President Biden heading into his March 7 State of the Union speech.

Progressive Policy Institute Asks/Answers: How Did the Trump-era Metals Tariffs Work Out? With tariffs in place, did the U.S. end up producing more steel or aluminum [it didn’t]? In turn, did the tariffs damage metal-users like auto companies or machinery makers [they did]? During the first week of March 2018, the Trump administration imposed 25% tariffs on imported steel and 10% tariffs on imported aluminum on top of pre-existing tariffs. The legal basis was a little-used trade clause—Section 232—that authorizes presidents to indefinitely “adjust” imports on grounds of national security. The Trump Commerce Department limited imports on the grounds that the metals have security implications and rising imports had cut output. While the resulting tariffs have largely remained in place, what has happened since? Fundamental economic theory suggested a four-phase chain of events: (1) tariffs would raise prices on the relevant imported good; (2) U.S. buyers would shift purchases to local suppliers—imports fall and domestic shares rise; (3) as “consuming” industries pay more, they lose competitiveness with imports at home and export competition abroad, risking production and employment losses; and (4) respond by using less. At the time of the tariff’s introduction, the Commerce Department admitted that phase 4 was possible, but said it wouldn’t materialize because GDP growth and higher federal spending on metal-using products would offset higher prices. They argued that capacity utilization would rise, and U.S. mills/smelters would grow more stable and profitable. The administration predicted that by enabling U.S. steel producers to operate at an 80% capacity utilization rate, the U.S. would produce more metal. Actual data appears to match the economic fundamentals better than White House predictions. Phase 1: trade figures show that imports dropped close to goal, and the decline has lasted. Phases 2 and 3: the tariffs increased metal production relative to a no-tariff scenario but left the overall U.S. manufacturing sector smaller. Phase 4: annual commodity surveys show Americans using less steel and aluminum than they had before 2018. Reports show that from 2012 to 2017, the U.S. economy used an average of 100 million tons of steel and 5.23 million tons of aluminum per year; by 2023, the U.S. economy, although 10% larger, used just 93 million tons of steel and 4 million tons of aluminum, respectively 7% and 20% less than before. While imports remain close to the levels Commerce envisioned, U.S. metal production has fallen to pre-tariff levels. Nor did the Department’s prediction of higher capacity utilization prove realistic. The Federal Reserve reports a 74.2% rate in 2023, statistically equal to 2017’s 73.6%.  

“Off the Record”

What Does the House Do When Congress is in Recess? Punchbowl News reports that the House Republican leadership has been holed up at the luxury Mandarin Oriental in Miami for its annual Elected Leadership Committee (ELC) retreat. The ELC is the kitchen cabinet for the top House Republican—Speaker Johnson—and his leadership. This year, Johnson included committee chairs and representatives from different factions within the GOP in the event. A few themes from the closed-door retreat:

  • Government spending: Congress faces two deadlines—March 1 and March 8. To date, the House and Senate haven’t passed any FY2024 spending bills, although appropriators are scrambling to come up with packages before the deadlines. The House Freedom Caucus is pressing Johnson and GOP appropriators not to give in to Democrats and the Senate, and they want the Speaker to risk a shutdown if necessary. Three options exist: a short-term funding bill; a yearlong CR that would cut spending 1% beginning April 1; or a bipartisan compromise package, which is expected to emerge in the coming days.
  • Johnson’s leadership. On several occasions, lawmakers told Johnson that they’re hoping he becomes a more vocal leader and not a neutral referee. An adage that gets brought up in the House Republican Conference is that despite how often people pine for member-driven leadership, Republicans want to be led, so they can then complain about what direction they’re being led in.
  • Ukraine. Hill (R-AR) and House Judiciary Committee Chair Jordan (R-OH) had a heated back-and-forth over Ukraine. While Hill, a member of the House Intelligence Committee, is in favor of additional U.S. funding, Jordan is a prominent skeptic. Jordan, echoing the position of many conservatives, asked what the desired outcome was, and Hill countered that Putin cannot continue his land-grab campaign without a U.S. response. The clash represents the two poles in the House Republican Conference when it comes to sending more money to Kyiv.
  • Dumping on McCarthy. Good (R-VA), chair of the House Freedom Caucus, said the country was better off without Kevin McCarthy as speaker. The House has had quite a bit of drama since GOP hardliners and Democrats voted to oust McCarthy, but Good has publicly and privately shown no remorse.

The general takeaway from nearly every attendee was that Speaker Johnson did not present a vision, but rather lectured his colleagues. One source compared his performance to a political science professor.

In Other Words

“It is a form of Navalny. It is a form of communism or fascism,” former president Trump, in a Fox News town hall, on the $355 million civil judgment against him in New York.

Did You Know

President Biden’s great-great-grandfather, Moses J. Robinette, was pardoned by Abraham Lincoln.

Graph of the Week

Just as Americans get ready to vote in November, President Biden’s economy will be near the dividing line that typically separates winning reelection campaigns from losing ones. That’s the takeaway from research 

by Goldman Sachs. Although the U.S. economy’s post-Covid recovery has been one of the world’s strongest, pundits and White House staffers continue to wonder why Americans aren’t giving the president credit. Consider that while consumer sentiment has improved sharply in the past couple of months, the president’s approval ratings have not. When pollsters list the issues on voters’ minds, the economy is at or near the top. In fact, the single most predictive measure for election outcomes, according to Goldman Sachs, is growth in personal consumption. Last year’s numbers were strong, supported by a healthy job market and the extra savings that Americans accumulated during the pandemic. That surprised economists, who expected spending to cool in 2023; now they say it’s likely to happen this year instead. President Biden hopes they’re wrong again. With savings from the lockdown spent, pay raises will be key to household spending power. The risk? Shoppers have relied on credit, and delinquencies are now at decade highs.


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