Are you confused about the political outlook in Washington?
Yeah? Well, that’s ok because believe me, everyone in Washington is confused too.
At a certain level, it’s nice to see Donald Trump deviating from what we might call “Steve Bannon’s Four-Year Plan To Destroy Western Democracy,” but then again, a series of hilarious policy flip-flops has left many observers wondering if maybe the President has simply decided to adopt the standard politician playbook in an effort to resurrect his plunging approval ratings.
As it turns out, it’s better for one’s poll numbers to just go ahead and break batshit-crazy campaign promises than to persist in pushing an agenda that’s impossible to implement.
But while going full-establishment-politician-retard may be a short-term boon for poll numbers, it creates its own set of issues. More simply: instead of being confronted with the difficulties inherent in trying to live up to the “maverick” image Trump cultivated on the campaign trail, he’s now dealing with and in some ways perpetuating the same old gridlock and partisan bickering against which he railed last year.
Well in the interest of simplifying things and boiling the confusion down to a handy set of bullet point questions, Goldman is out on Wednesday with a primer on what you should be asking. You can find excerpts below.
Q: How much of a risk is a government shutdown at the end of next week?
A: There is a risk of a partial federal shutdown, but we believe the risk is fairly low next week, rising slightly if the debate is pushed into May, and rising further still later this year. Congressional appropriations expire April 28, and Congress will need to reach an agreement on a new spending bill by that time to avoid a partial shutdown of the federal government. Even if all Republicans support the bill passage is not guaranteed, since it is likely to need 60 votes in the Senate, or at least 8 Democrats in light of the 52-seat Republican majority. In the House, the bill is likely to need some Democratic support as well, since some fiscal conservatives are likely to vote against it.
In our view, there is only a one in four chance of a shutdown on April 29, because it appears likely that if an agreement is not in place by that time, Congress will pass a “clean” short-term extension that avoids controversial issues. The cumulative probability of a shutdown by May is somewhat higher in our view—around one in three—since lawmakers might eventually demand a longer extension through the end of the fiscal year, which would require resolution of any controversial items.
Thus far, Republican leaders appear to be trying to keep controversial items out of the bill, in the hope of avoiding a shutdown. New funding for President Trump’s proposed border wall or provisions that would strip federal funding for so-called “sanctuary cities” have been raised as possibilities but at this point seem unlikely to be included. A recent push by congressional Democrats to include funding for the cost-sharing subsidies under the Affordable Care Act (ACA) poses greater risk; if Democrats insist on its inclusion, it could be difficult to secure broad Republican support. Our expectation is that the White House might need to commit to not unilaterally withdraw funding for these subsidies, reversing President Trump’s recent suggestion he might do so.
The risk of a government shutdown appears more serious at the end of the fiscal year (September 30), for two reasons. First, it is likely to intersect with the debt limit, which we expect to become a constraint on Treasury borrowing by October. Second, at that point Congress will need to make more significant decisions regarding spending levels. While congressional Republicans and the White House might be willing to accept lower defense spending and higher domestic spending than they would like for the remainder of the current fiscal year, they are much less likely to accept spending bills for the fiscal year that starts October 1 unless they increase defense spending and reduce non-defense spending, and fund some of the President’s other initiatives such as increased border enforcement.
Q:What have the last few weeks demonstrated regarding theTrump Administration’s trade policy?
President Trump has continued to emphasize reciprocity, but has downplayed the notion that foreign policy and trade policy should be delinked. Coming into the year, there appeared to be two driving principles behind the Trump Administration’s trade policy: reciprocity and a separation of strategic from economic interests in foreign policy. Reciprocity continues to be a core principle of the President’s trade agenda, judging from recent comments in support of a “reciprocal tax” on imports, which would apparently apply the same tariff on a particular good from a particular country as that country applies on the US good.
By contrast, the President seems to have explicitly reversed his previously stated view that economic considerations should not be subordinate to geopolitical or strategic considerations in foreign policy. For example, in its recent report to Congress on the Administration’s key principles on trade policy, the Office of the US Trade Representative, part of the White House, said that it “reject[s] the notion that the United States should, for putative geopolitical advantage, turn a blind eye to unfair trade practices.” However, President Trump appears to be making an exception for China for the moment, stating “we have tremendous trade deficits with everybody, but the big one is with China…and I told them, ‘You want to make a great deal?’ Solve the problem in North Korea. That’s worth having deficits. And that’s worth having not as good a trade deal as I would normally be able to make.”
Where does this leave trade policy overall? For now, it suggests that the Administration is still likely to pursue some incremental restrictions on certain products but that major actions are unlikely in the near term. That said, this does leave some tension between the President’s stated goal of reciprocity, which would ultimately require higher tariffs and other restrictions on imports from many countries, and his view that some strategic goals justify less favorable trade terms for the US.
Q: Is health legislation really coming back onto the legislative agenda?
We expect some type of health legislation to become law eventually, but we’re skeptical a revised health bill can become law in the near term, for three reasons. First, despite a renewed interest among Republican leaders in addressing the issue—President Trump said last week that he once again expects to address the health bill before the tax bill, if it can be passed quickly—not much has changed; the fundamental disagreements that sank the bill in late March have not been resolved.
Second, the Senate faces different political constraints than the House and would likely have an even more difficult time passing legislation similar to what the House nearly voted on in late March. Third, the health bill seems unlikely to produce much if any savings over the next ten years, and therefore probably cannot be used to meaningfully offset the cost of a tax cut; the most recent version of the House bill would have reduced the deficit by about $150bn over the next ten years, or enough to reduce the corporate tax rate by 1pp. It is true that it would have also reduced taxes by nearly $1 trillion over ten years, but this is relevant mainly if one assumes that without the health bill Congress would include that $1 trillion in tax cuts in its tax bill instead.
In our view, the House is likely to make a final attempt at passing health legislation in mid- to late May. If this is a scaled-down bill that addresses only certain less popular aspects of the Affordable Care Act (ACA), like the individual mandate, it might pass the House and Senate and become law. Alternatively, if it is similar to the American Health Care Act (AHCA) that the House was scheduled to vote on in late March, we would expect the bill to once again fail to pass.
Q:Where does all of this leave tax reform?
Not much further along than where it was a few months ago. We recently wrote that our view continues to be that tax legislation is likely to become law, but that it is more likely to be a tax cut with limited elements of reform, namely a 25% corporate rate with provisions allowing for low-tax repatriation of foreign profits, incremental base broadening, and no border adjusted tax. However, the timing does appear to be slipping once again; if the legislative focus remains on health legislation through May, a vote on tax reform at the committee level might not occur in the House until July, which could make final enactment of tax legislation before year-end challenging. At this point, we expect that enactment is more likely in Q1 2018 than Q4 2017.
Q:What do recent special elections tell us about the 2018 midterm election outlook?
Not much that is not already known. Special elections for the House of Representatives last week (April 11) and again yesterday (April 18) have resulted in a stronger Democratic showing than would normally be expected given the political leanings of the respective districts. In Kansas, the Democratic candidate trailed by only 7 points in a district that went to President Trump by 27 points last November. Preliminary results in the Georgia race show Democratic candidates winning a cumulative 49% of the vote and Republicans 51% (there were several candidates of each party in the preliminary round, with a final two-way race scheduled for June 20), slightly better than President Trump’s 1-point win there in 2016. There appears to be a loose positive relationship between the seats a party gains in special elections and that party’s results in the following midterm election, as shown in the exhibit below. The horizontal axis shows the gain or loss of seats by the president’s party, as a share of all seats that changed control as a result of special elections. The vertical axis shows the net change in seats resulting from the following midterm election (special elections following presidential election years are excluded).