January 20, 2023

Thought of the Week

Revelations that President Biden, like his predecessor Donald Trump, kept unauthorized documents upon leaving office have rocked Washington and dominated the news cycle this week. Regardless of whether the two cases rise to the same level of seriousness, the revelation has been a political gift to Republicans—most voters are not paying close attention to the nuances of the two cases, and it now looks like “all politicians do it.” There is no denying that the events this week have dealt a blow to President Biden’s political fortunes at just the time his approval ratings were rising and inflation, a key concern for voters, had started slowing. Republicans will surely hammer the White House over the issue, and due to the administration’s poor handling of the matter, at least three story lines have emerged. One, Rising Democratic Frustrations—why didn’t the White House get the story out sooner; why didn’t they get the full story all out at once? Two, The Impact on 2024. Heading into this week, the White House was riding high. They beat expectations in the midterms, the Republican speakership standoff foreshadowed a year of GOP disarray, and President Biden’s poll numbers were on the way up. The outlook was rosy; things look very different now. Three, GOP Investigations are Inevitable. The chair of the House Oversight Committee, Rep. Comer (R-KY), has already released a statement hammering the White House and promising an investigation. Not to be outdone, House Judiciary Chair Jordan (R-OH) has announced his own investigation of AG Garland’s handling of the case. The developing political nightmare, which even hard-core Democrats privately concede isn’t looking good, begs the question of whether the administration could have managed events better? The short answer: of course. Crisis management experts tell us that when a catastrophe emerges, the primary objective is to define the narrative, before it can be defined by others. The White House failed in this task. In fact, the administration made a number of errors that management experts at Bernstein Crisis Management tell us to avoid. They “played ostrich,” by failing to communicate promptly and credibly. They failed to test planned key messages, and appear to only have started work once the situation became public. The White House also seems to believe that the President’s reputation will speak for itself. How many times have we heard that President Biden takes classified material “very seriously.” What’s more, the White House spokesperson has not been forthcoming during her daily press briefings, and there seems to be no effort by the administration to tell its own story. By assuming that their “truth” will eventually triumph over all others, the White House seems to have disregarded the very real concept that perception can be as damaging, if not more so, than reality.     

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

AEI Believes the Fed Can Stop a Recession in 2023. Budget and monetary policy mistakes in 2021 contributed to last year’s multi-decade high inflation; today, budget and monetary policy mistakes may lead to an unnecessary recession. In 2021, an over-expansive budget and monetary policy led to economic overheating. The American Rescue Plan added $1.9 trillion in public spending to the previous year’s $3 trillion policy response to the Covid-induced recession. The result: an increase in public spending equivalent to 20% of GDP, the largest peacetime budget stimulus on record. For its part, the Fed contributed to economic overheating by keeping interest rates near zero for too long and allowing the money supply to increase 40% over a two-year period, despite signs of economic recovery. As a result, the labor market tightened and inflation surged to 9%. Fast forward to today and we have clear signs the economy is slowing due to the fastest rise in interest rates in forty years. Headline inflation has responded by falling to 6.5%.  Truth be told, with mortgage rates more than doubling from 3% to 6.5%, the housing market is already in recession. In fact, the overall economy is probably now in contractionary territory. At the same time, the yield curve, the most reliable of recession predictors, is deeply inverted with short-term bonds exceeding long-term yields by a wide margin. Inflation is slowing rapidly towards the Fed’s 2% inflation target. Not only are home, used car, and gasoline prices falling, but core consumer prices have been increasing at just 4%. It is against this backdrop of a slowing economy that Speaker McCarthy is threatening a debt ceiling fight. Such a battle could shake wobbly financial markets by raising the prospect of a debt default, and could further weaken the economy through public spending cuts at a time when the economy is heading toward recession. Regretfully, the Fed remains adamant in raising interest rates and keeping them high through at least the end of this year. Never mind that the economy is already slowing and that the full effects of last year’s aggressive monetary tightening are still to make themselves felt; never mind that inflation is showing clear signs of dropping quickly; and never mind that wage inflation is slowing in response to cooling in the labor market. Although there is little that can be done to avoid a debt ceiling fight in today’s politically polarized environment, the Fed could avoid the risk of monetary policy overkill by taking its foot off the policy brakes. A good place to start would be next week’s FOMC policy meeting.

Bloomberg Government Says Republicans have Readied Investigatory Efforts of Their Own Since Retaking the House. Conservatives who railed against Democratic investigations into former President Trump are set to examine various aspects of the Biden administration. With the House finalizing committee assignments, expect investigations to kick off in the coming weeks. Investigations will focus on Hunter Biden’s foreign business relationships; President Biden’s mishandling of classified documents; DHS Secretary Mayorkas’ border policies; the Covid-19 pandemic; the U.S. withdrawal from Afghanistan; the politicization/weaponization of the federal government; social media practices; ESG investing policies; and tax, climate, and healthcare rules under the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Bill (BIF). The investigations will be run by the House Oversight and Judiciary Committees, and may result in efforts to impeach White House officials, or even the president himself, although impeachment efforts will fail in the Senate. While satisfying conservatives’ demands for action, the investigations will not result in any policy changes. Much like with former President Trump, the investigations will be primarily political theater, driving multiple negative news cycles, and leaving administration allies playing defense.

Eurasia Group Sees a Tighter than Expected Debt Timeline Putting Pressure on Lawmakers to Find a Solution. In a letter to lawmakers, Treasury Secretary Yellen stated that the U.S. would reach its borrowing limit on January 19 and begin using extraordinary measures to avoid defaulting on the debt. According to Yellen, the date the government will default on the debt (the X date) is unlikely to hit before early June. Early June is a tighter timeline than analysts originally expected. Reaching a bipartisan solution will be difficult given a divided government and likely efforts by Republicans to try to extract policy concessions in exchange for a hike. The base case is a drawn-out debt limit showdown. If House Republicans rally around a series of near-term spending cuts, other unrelated policies, and a debt ceiling increase, the Democrat-controlled Senate will reject the legislation and wait for either a negotiation with President Biden or a compromise bill that reforms spending over the longer term. Any compromise is likely to be rejected by the House until the last minute. Markets should be on alert for the possibility of multiple X-dates. If there is no solution in June, and extraordinary measures run out early, lawmakers could pass a short-term debt limit suspension for three to six months, potentially aligning the X-date with the September 30th FY24 funding deadline, which may encourage suspending the limit again until December.


The Debt Limit: Welcome to the Next Six Months of a Washington Political Analyst’s Life. According to Punchbowl News, it’s clear that one of the defining political fights of 2023 will be the battle over raising the debt limit. While Speaker McCarthy (R-CA) wants to cut a deal to raise the borrowing cap in return for spending cuts, the White House and Hill Democrats refuse to talk until the cap is raised. If anyone tells you they’re confident how this ends up, they’re lying. Current estimates suggest that it is unlikely that the X date will arrive as early as the first half of June; in fact, if Treasury is able to stay in business without a debt ceiling fix until June 15, it would probably not face a new deadline until mid-July at the earliest. However, if there isn’t a deal between Congress and the White House by late May or early June, weeks before a technical default, financial markets will start to worry. As a backup, Republicans are drafting a “payment prioritization plan” to cover roughly 80% of federal programs in the case of a default. Beyond obvious political headaches, debt prioritization poses other complications. First, because government computers automatically make millions of payments every day, the plan is technically unworkable. Second, prioritization is unlikely to protect the U.S. credit rating, which saw downgrades amid previous fiscal standoffs. Third, even conservative economists warn that prioritization would not sidestep economic consequences such as a stock-market sell-off and job losses.

In Other Words

“My Corvette is in a locked garage, OK? So it’s not like they’re sitting out on the street,” President Biden defending his storage of classified documents in his Delaware garage.

“It was—and is‚ a corrupt circle-jerk,” Former New York Times Editor Jill Abramson about the Davos World Economic Forum.

Did You Know

2000 was the first year Martin Luther King Jr. Day was observed by all 50 states.

Graph of the Week

The 2023 Edelman Trust Barometer—People Trust Business More than Government. According to Edelman’s new Trust Barometer, the people of the world trust business more than government, media, and nonprofits. The annual survey said business was the “only institution seen as competent and ethical.” The study, timed to kick off with the opening of the World Economic Forum, found that 62% said they trusted business, compared to 59% for NGOs, 51% for government, and 50% for media. While Japan was one of the three least-trusting countries for each institution, in the U.S., 26%  of Republicans trust government, compared to 61% of Democrats.

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