March 17, 2023

Thought of the Week

Last week, the White House released President Biden’s fiscal year 2024 budget proposal (FY 2024 budget proposal), outlining the administration’s priorities over the coming decade. Although the president’s budget proposes an estimated $3 trillion in deficit reduction from baseline estimates through 2033, largely by way of increasing taxes on corporations and individuals making more than $400,000 per year, it projects that the nation’s debt would still grow from 98% of Gross Domestic Product (GDP) at the end of this year to 110% by the end of 2033. In fact, it forecasts that nominal debt would grow by $19 trillion, from $24.6 trillion today to $43.6 trillion by 2033. In response to requests from several Democratic Senators, yesterday, the Congressional Budget Office (CBO) released its own budget analysis estimating the level of spending cuts that would be necessary to balance the budget without tax increases under several different scenarios. Their conclusion: if the Trump tax cuts are extended (a realistic assumption) and there are no cuts to Social Security, Medicare, veteran spending, or defense, all other non-interest spending would have to be cut by 100% to balance the budget by 2033. Under a far different set of assumptions, including that the notion that the Trump tax cuts expire and reductions in spending are applied across the board to all non-interest spending, overall spending would have to be cut by 29% to balance the budget by 2033. Because no such cuts of this scale are politically viable, the point of the CBO’s analysis was to demonstrate how unrealistic Republicans’ most extreme ambitions are in terms of debt limit negotiations, which have yet to begin in earnest. Now, the Committee for a Responsible Federal Budget has devised a quiz that allows you to play Congressional budget negotiator. By answering a series of questions you’ll find out how the President’s plan lines up with your own budgeting priorities. Take this Budget Personality Quiz to find out whether you qualify as a Big Spender, Futurist, Caretaker, or Minimalist. I took the quiz and was labeled a Minimalist. A Minimalist being someone who “believes the federal government should not be too involved in daily life or the economy, but knows the government has traditional roles to play, including ensuring that people have a monthly income from the government in their twilight years. Minimalists tend to believe that states should be responsible for K-12 education, and that private companies can innovate more efficiently than the government. The Minimalist also believes the national debt should be kept under control.”

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

“A bailout or not a bailout…that is the political question,” asks the Eurasia Group. With federal regulators taking steps to backstop the commercial banking sector, the aggressive and creative use of existing authorities will allow lawmakers in Washington to look for political and policy opportunities in the interventions. The primary sentiment among lawmakers is likely to be relief that the Federal Reserve stepped in to stop bank runs before this became an issue for Congress to deal with. But the activities over last weekend also gave others a chance to push preferred narratives; while Florida Governor DeSantis blamed a “woke” bank run amuck, progressive Democrats pointed the finger at the Trump-era tailoring of bank capital requirements. Despite this, the nature of the intervention means that shareholders, bondholders, and management are being punished while it is very unlikely any taxpayer money will be put at risk, giving the interventions legitimacy and durability. Federal regulators have ample political space to conduct further interventions should market troubles continue, and Republicans remain supportive of the Fed increasing rates to control inflation despite the market turbulence.  

Eurasia Group Continues…While the crisis engulfing Credit Suisse is different in nature to the Silicon Valley Bank (SVB) failure, both highlight how rapidly rising interest rates and tightening liquidity conditions can have significant economic, financial, and political implications. Among the key points analysts make: (1) there is broad political support for regulators taking the lead to backstop the U.S. financial system, allowing the Fed the room to respond to further market disruptions; (2) there will likely be stronger future regulations for banks, including mid-sized banks; (3) although passing new legislation will be difficult, focus will be on the broad authority of the Fed and other regulators to address shortfalls revealed by the crisis. A Fed review of the SVB failure, due 1 May, will be an important signpost. The Fed will likely continue its rate-hiking path next week, given that the risk of an imminent banking crisis or system failure is low. While financial conditions have tightened significantly, the center of the FOMC still believes further tightening is required, although uncertainty could be a reason for waiting.  

Politico: Government Report Says Importers, not China, Paid Trump Administration’s Tariffs. A recently released government report rejected former President Trump’s claim that China, rather than U.S. companies, paid the cost of the additional duties his administration imposed on more than $300 billion worth of Chinese goods. According to the U.S. International Trade Commission (ITC), U.S. importers bore nearly all of the costs of the tariffs because import prices increased at the same rate as the tariffs. The findings applied to both tariffs imposed on Chinese goods under Section 301 and the “national security” tariffs imposed on steel and aluminum imports under Section 232. The ITC found that import prices for the affected goods increased by nearly 1% for each 1% increase in tariffs over the 2018-2021 period. The former president routinely claimed that China was paying the tariffs, even though most economists argued otherwise. As of last week, U.S. customs officials had collected more than $173 billion in additional duties on Chinese goods as a result of the Trump administration’s actions, with more than half of those duty collections occurring during the Biden administration. While the Biden administration has negotiated deals with the EU, UK, and Japan to replace the 232 tariffs on steel and aluminum, with less restrictive tariff-rate quotas, the original duties remain in place on several other trading partners, despite a WTO decision that Trump’s action violated global trade rules. The current White House has resisted pressure from the business community to lift the duties imposed on China, particularly in sectors like consumer goods.

“Off the Record”

According to Punchbowl News, Progressives in Congress don’t have the votes to enact additional regulations following the collapse of SVB and Signature Bank, but they have plenty of power and are ready to wield it. While there are deep divisions between Democrats about where bank regulation should go from here, progressives, led by Sen. Warren (D-MA), are pushing for the wholesale repeal of a bipartisan deregulation bill from 2018 that eased regulatory requirements for small- to mid-sized banks. Even in the Democratic Senate, that repeal effort isn’t going anywhere anytime soon because the deregulation bill had strong support from moderate Senate Democrats including Sens. Warner (VA), Tester (MT), Kaine (VA), Bennet (CO), Stabenow (MI), Peters (MI), and Manchin (WV). Several of those senators were asked whether the collapse of SVB and Signature Bank made them second-guess their support for the 2018 bill, particularly the provisions that raised the threshold for banks requiring the strictest supervision, and the answer was a resounding no. Every moderate, including Warner, Kaine, Bennet and Stabenow, said they wanted more information about the failures before considering policy changes. However, progressives don’t need moderates’ votes to shape bank policy—many of the key regulators leading the Biden administration’s banking agencies are significantly more left-leaning than they were under the Obama administration. Over the last two years, the White House has worked closely with progressives to push favored nominees through the Senate confirmation process. Case in point are Michael Barr, the Fed’s top bank regulator, and Lael Brainard, a former Fed vice chair who now leads the National Economics Council.

In Other Words

“Americans can rest assured that our banking system is safe. Your deposits are safe,” President Biden addressing the collapse of Silicon Valley Bank.

Quips from the annual white-tie Gridiron Dinner, which uncharacteristically turned serious at times:

  • “I always wanted to be the bad boy, the rebel type, the hell-raiser. You know, someone like Mitt Romney,” former Vice President Pence on his reputation.
  • “I had no right to overturn the election. And his reckless words endangered my family and everyone at the Capitol that day. And I know that history will hold Donald Trump accountable,” former Vice President Pence on his old boss.
  • “One commentator dubbed me the ‘Secretary of Shred,’ which is not exactly the nickname you want when you once worked at the Penn Biden Center,” Secretary of State Blinken commenting on his love for the electric guitar.
  • “According to the guest list, there are 600 attendees here tonight. CNN would kill for an audience like that,” Secretary of State Blinken.  

Did You Know

As former Secretary of State Pompeo (R) ponders a 2024 presidential run, seeking to become the seventh Secretary of State to win the presidency, recent history doesn’t bode well for Secretaries of State—no top diplomat has been elected to the presidency since President Buchanan just before the Civil War, and he is regarded as one of the worst U.S. presidents in history. The last few Secretaries of State to make a run for the White House have had a rough time of it. Hillary Clinton lost the electoral vote in 2016 and John Kerry, though his campaign came before his time as a diplomat, lost to George W. Bush.

Graph of the Week

The February Consumer Price Index (CPI) showed that headline inflation slowed to 0.4% month-over-month (vs. 0.5% in January), while core inflation, which excludes food and energy, rose to 0.5% month-over-month (vs. 0.4% in January). Although year-over-year inflation rates for both the headline and core indices fell, they remain elevated and far from the Fed’s 2% target.



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