May 27, 2022

Thought of the Week:

The rampage at an elementary school in Uvalde, Texas, that killed 19 children and two adults was a horrific and devastating attack that defies belief. I have two children of my own, and I know I would be utterly lost if I ever had to endure such an inexplicable tragedy. Because of the helplessness so many feel, I understand the desire to reach simple, black and white explanations as to “why,” as well as the need to place blame on someone or something more tangible than the country’s mental health crisis or the breakdown in the nation’s social fabric. In the political realm, the quest to pinpoint a villain usually begins and ends with “special interests,” in this particular case the National Rifle Association (NRA). The implication being, of course, that “special interests” and their lobbyists “buy” politicians or corrupt the system in order to force policies that benefit themselves at the expense of everyone else, even innocent children. Not only is this simplistic viewpoint wrong, it provides a disservice to all involved, and it misdirects us from actually doing the hard work in identifying and implementing real policy solutions. In short, it asks us to analyze the public policy arena without the actual politics involved—without competition between competing interests, without shifting alliances and coalitions, without parties and ideology, and without any sense of there being a very real policy process. It asks us to analyze transactions between politicians and special interests, as if they were independent events that can be labeled “right or wrong,” “good or evil.” In reality, politicians are not bought and sold by special interests; if they were, there would be no point in spending money to hire lobbyists. The reason the lobbying industry just had its biggest year ever is that there has been a recognition that gaining genuine political influence is hard work. It requires building a compelling case and then making that case over and over and over again through the maintenance of relationships, the building of coalitions, the drafting of legislation, political advocacy, and face-to-face lobbying. Rather than merely generating headlines by railing against legislative intransience brought about by entrenched special interests and lobbyists, legislators need to rededicate themselves to working within our legislative system. Our Madisonian system of government is not designed to be quick and efficient; rather, it is intended to be representative of the often-competing needs and desires of its citizens. These competing groups need to recognize that the other side is not the enemy; just as no one is calling for mass firearm confiscation, no one at the NRA wants to see children murdered in cold blood.

Thought Leadership—from our Associations, Think Tanks, and Consultants:

The U.S. is on Its Way to a Hard Landing Says AEI. Anyone who thinks the Federal Reserve will succeed in reducing inflation without causing a hard economic landing has not been paying attention to the financial markets. Nor have they been paying attention to the increase in mortgage rates or the rapid rise in the dollar. Until recently, the stock and bond markets boomed on the back of ultra-low interest rates and the Fed’s liquidity injections. By the end of last year, equity valuations had reached levels experienced only once in the past 100 years while interest rates were at close to historic lows. Fast forward to this year, and it’s a completely different story. The Fed has been forced to shift to a hawkish monetary stance to bring down multi-decade high inflation, which the Fed itself created, and the bottom has fallen out of the equity, bond, and crypto markets. The markets are still coming to terms with the Fed’s announcement that it will increase interest rates in 50 basis point steps rather than the normal 25 basis point increments. Markets are also getting used to the idea that they can no longer expect the central bank to ride to the rescue; indeed, the Fed is talking as if it welcomes a decline in stock valuations. Since the start of the year, the stock and bond markets have lost nearly 20% of their value while more exotic markets have lost as much as 50%. Already, $12 trillion, or 50% of GDP, in household wealth has evaporated, and it’s only a matter of time before a deep slump in consumer demand occurs as households try to rebuild savings. In fact, consumer spending could decline by as much as 2% of GDP because of the recent loss in wealth. Further clouding the prospect for a soft economic landing is the fact that inflation is outpacing wage gains, and the run-up in mortgage rates has been dramatic—the 30-year mortgage rate has spiked from 3% to 5.5%, reducing housing affordability by 25%. The growing chance of a slump in housing demand looks more and more likely to play a key role in leading the economy into recession. Not helping matters is that the dollar is at its strongest level in 20 years, with foreign investors being by higher U.S. interest rates and the safety of  Treasuries at a time of world financial uncertainty. The strong dollar has the effect of reducing U.S. export competitiveness and cheapening the price of imports, thereby increasing the trade deficit. The question now is whether the Fed is being overly aggressive in fighting inflation at a time when President Biden’s budget stimulus is fading. If the economy falls into a deep recession, inflation will be the least of the problems.

Eurasia Group: A U.S. Legislative Bust in 2022 Could Set Up a Big December. With little progress having been made on multiple legislative work-streams in Congress, many lobbyists and staffers are already looking to the one tried and true way of getting difficult things done on Capitol Hill: waiting until the last minute. As in previous years, a package of expiring tax provisions and pending tax hikes could provide the impetus for Congress to act in December on policies ranging from semiconductor subsidies to green energy tax breaks; such an effort could provide a way to complete unfinished business before a likely Republican majority takes power in 2023. The outlook will depend on the mood in both parties after the election. In an upside scenario, Democrats would be motivated to accept deals that are far short of their ambitions, while Republicans would be strategic about avoiding tax hikes and pivoting to a new policy agenda in 2023. In a downside scenario, both parties would be unwilling to make compromises, leading to little or nothing getting done.

Eurasia Group: President Biden Issues ‘Spontaneous Clarity’ on Taiwan. At a press conference during his first visit to Japan, President Biden said that the U.S. would get involved militarily to defend Taiwan if China were to invade, going far beyond the decades-old official policy of “strategic ambiguity.” As has been the case with past gaffes where the president seemingly contradicted the U.S. policy of ambiguity, the White House was quick to walk back the remarks, confirming that the comments do not indicate a formal shift in American policy. Nonetheless, the president’s remarks underscore a hardening position on Taiwan amid Russia’s invasion of Ukraine, and while the likelihood of a military crisis in the Taiwan Strait remains low and unchanged (5% probability), Chinese President Xi will likely be compelled to respond by reducing cooperation with the U.S. in certain areas and increasing economic pressure on Taiwan. President Biden’s comments are unlikely to change the outlook for the future of Section 301 tariffs; internal political roadblocks remain, and any relaxation of tariffs would only have a moderate impact on inflation. At the same time, an increasingly hawkish stance on Taiwan will further decrease trust and increasingly complicate U.S.-China relations, making any major action on tariffs this year unlikely. In Congress, where support for Taiwan runs strong, members of both parties praised Biden’s comments. Republicans have been particularly hawkish on this issue, and support for an official change towards “strategic clarity” will likely grow if they win control of Congress after the midterms and in primaries for the next presidential election. Some in the U.S. foreign policy community view these dynamics with concern, arguing that they risk convincing China that it should move sooner rather than later to retake Taiwan, given a U.S. commitment that could strengthen over time. 

In Other Words (Quote): 

“We agree with the One China policy. We signed on to it, and all the attendant agreements made from there, but the idea that it [Taiwan] can be taken by force, just taken by force, is [just not] appropriate,” President Biden during a joint news conference with Japanese Prime Minister Kishida.

Did You Know:

Charles Curtis (R-KS), who served as Herbert Hoover’s Vice President from 1929-1933, was the first person with any Native American ancestry or any other acknowledged non-European ancestry to reach either of the highest offices in the federal executive branch. He is the highest-ranking Native American who ever served in the federal government, and he is the most recent officer of the executive branch to have been born in a territory, rather than a state or federal district.

GRAPH of the Week:

A New Pattern in Congress? The typical pattern in recent Congresses has been to do very little for most of the term and save large legislative items until the end of the year. The reasons for this are twofold. First, in non-election years, deadlines tend to sharpen the minds of lawmakers, forcing compromises at the last minute. Second, in election years, legislating tends to get more difficult before the election. Political compromises can be easier later in the year, during the so called “lame duck” period post-election when one party is on their way out of power or has had their ambitions to take power quashed.

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