THIS WEEK IN WASHINGTON
July 15, 2022
Welcome to the Georgia edition of This Week in Washington. Thank you for your interest in politics and policy from the Peach State to the Potomac.
 
Congress returned to Washington this week. At the top of Senate Democrats’ to-do list is building a consensus on a slimmed-down Build Back Better bill against the backdrop of a spiking inflation rate and signs of a slowing economy.
 
In Heard on the Hill, Steve Gordon describes some of the major items that are being discussed for inclusion in this plan. He also talks about why Senate Democrats are revisiting a slimmed down version of this bill and why it could get even slimmer, and closes with some economic odds and ends.
 
Congressman Erik Paulsen was Chairman of the Congressional Joint Economic Committee as well as a member of the House Ways and Means Committee. Erik left last Friday for a trip overseas, but before he left he wrote a wonderful article entitled “Inflation and a Slowing Economy – What to do About Both.” He describes how inflation got loose, how it will impact consumers, and how the additional cost to the federal government of interest on the debt is going to dwarf major programs. Congressman Paulsen also suggested steps that would help to get our economy going again, and others that would do more damage. This week, the Bureau of Labor and Statistics released June’s inflation rate, which increased from 8.58% in May to 9.1%, a 41-year high. The impact of the new inflation rate will cause the Fed Fund rate, consumer interest rates, and debt payments by the federal government to be even higher than Erik discusses in his article.
 
Jesse Weathington gives us the latest in Georgia with his Gold Dome Report. Ramona Lessen monitored the July 12th Senate Banking, Housing, and Urban Affairs Committee hearing on Advancing Public Transit under the Bipartisan Infrastructure Act, and we’ve included her report in this edition. And, be sure to check out the Infographs on current hot topics. 
 
Our colleague Erik Paulsen recently interviewed Lisa B. Nelson, the Chief Executive Officer of the American Legislative Exchange Council, for our newest episode of Total Spectrum Spotlight. ALEC is the largest non-partisan membership organization for state legislators and private sector representatives. In Spotlight, Lisa Nelson is introduced by Arizona’s Senate President Karen Fann, who also serves as ALEC’s current Chair. It’s certainly true that what happens in state legislatures is more vital than ever, so we think this interview is both timely and important. Be on the lookout for it when Total Spectrum Spotlight hits your inboxes early next week.
 
We will be back in two weeks for the next issue of This Week in Washington.
 
As always… stay safe, healthy, AND sane.

Todd Smith
Chairman, Georgia Group

Jesse Weathington
Director, Georgia Group
Partner and
Georgia Group Chairman

Partner and
Georgia Group Director

Partner

Partner
INFOGRAPHS
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Covid-19 hospitalizations up 24 percent since last month
Heard on the Hill
By Steve Gordon, Total Spectrum Managing Partner

It is hard to separate legislation and politics in any election year, but it is particularly difficult this year.

Democrats control Washington, D.C. The majority party takes the bows when things go well and take the hits when things go sideways. It’s been a tough 18 months for the President and the Democratic majorities in the Senate and the House.

They came into office last January with a small majority in the House and a 50-50 Senate, but the President’s agenda looked like they had received a mandate at the polls. The Administration and Democratic Congressional leaders hit the floor running by negotiating and then passing a major bipartisan infrastructure bill. Momentum then slowed as they tried and failed throughout the rest of 2021 to get 50 Senate Democrats on board the large and inclusive Build Back Better Plan.

The President’s numbers have been sliding since the Afghanistan evacuation. Off-year elections are rarely good for the party that controls the White House. Add in that Democrats are having trouble moving their Congressional agenda along with the twin problems of inflation and a slowing economy, and it’s clear why Democrats want to get a significant legislative bill announced in July.

Pollsters say that voter’s views become voter’s beliefs after Labor Day. Congress will leave in about three weeks for their annual August recess through Labor Day, so these next few weeks are extremely important.

Majority Leader Schumer has COVID, but he is negotiating over the phone with Senator Joe Manchin (D-WV) on a slimmed down $1 trillion Build Back Better package that could be passed by Senate Democrats under the Budget Committee’s authority that runs out on September 30th. There are a number of things that are being discussed as part of this reconciliation package, including:

  • A provision that would limit the cost of prescription drugs for Medicare patients. The Senate Parliamentarian is currently reviewing this provision to determine whether it is appropriate for a budget reconciliation bill.
  • Some tax provisions. There has been discussion about a global minimum tax and of taxing pass-through income from small business owners with LLCs who make $400,000 individually/$500,000 as a couple.
  • Enhanced subsidies for Obamacare enrollees. The current subsidies run out at the end of the year, so this looks like a political must-do for the Democratic base.
  • Environmental and energy provisions. There are some discussions of tax credits for electric cars. Senator Manchin likes the idea of ramping up the production of fossil fuels, which would help reduce the price of fuel at the gas pump.

But at week’s end, Senate Democrats seem to be working toward a reconciliation bill that is a small (maybe even very small) package. Senator Manchin continues to say publicly that he will oppose anything that will be inflationary, and there is every reason to believe that this week’s spike in the inflation rate will influence his thinking.

Senate Democrats also must take into consideration what can get through the House of Representatives. Some House Democrats from high tax states want the tax code to allow for the deductibility of state and local taxes, and both moderate Democrats and Republicans in the Problem Solvers group are opposing increasing any taxes.

These concerns are creating signals that Senate Democrats could end up with even a more slimmed-down package than was thought possible only days ago. The reconciliation package could only include capping the cost of prescriptions for Medicare beneficiaries and enhanced subsidies for Obamacare enrollees. I even think there is a slim possibility that the final reconciliation package would just include one of these two options. Senator Elizabeth Warren (D-MA) was quoted on Thursday as saying “Reconciliation will be whatever we can get 50 votes on and there’s no mistaking that.”

Senator McConnell said on the Senate floor this week that Republicans would consider delaying their support for the China Competitiveness bill – the U.S. Innovation and Competitiveness Act – if Democrats try another budget reconciliation. But there is now some interest on both sides of the aisle to limiting the bill to giving about $50 billion to US chipmakers.

Democrats feel pressure to show their base that they can fight for their priorities. It was never going to be easy for Democrats to unify around a slimmed down Build Back Better. We’ll soon see and how the highest rate of inflation in 41 years and approaching midterms ultimately impacts on this reconciliation process. 

The Administration wants to announce a bill before Congress leaves Washington for their August recess.

Odds and Ends
 
The National Federation of Independent Business released this week their NFIB Small Business Optimism Index. As expected, the index decreased to 89.5 percent in June compared to 93.1 percent in May. This is the lowest reading since January 2013 and seems to reflect pessimism about short-term expectations of business conditions. NFIB’s Chief Economist Bill Dunkelberg said, “Declines in the net percentage expecting better business conditions have always preceded downturns in economic activity.”

And finally, current numbers provided to me in June of this year show that only 34,000 Californians end up paying 70% of the state’s personal income taxes.
Gold Dome Report
by Jesse Weathington, Partner and Georgia Group Director

This week finds the Peach State smack in the middle of the political doldrums; primaries are settled, tickets are filled, and public attention is focused on wringing the last weeks out of summer before school begins anew.

The big news this week concerns the money race. Fundraising reports were due June 30 and so we are treated to a snapshot of the competitors finances as they head towards the fall. Democrats have done exceptionally well this cycle, particularly Senator Rev. Raphael Warnock and Stacey Abrams, both prolific fundraisers. Down-ticket, Democratic nominees for AG and SoS Jen Jordan and Bee Ngyuen outraised their incumbent Republican opponents Chris Carr and Brad Raffensperger as well.  

  • Brian Kemp: $6.8M, $7M COH
  • Stacey Abrams: $22 M, $18.5M COH
  • Raphael Warnock: $17.2 M, $22.2 M COH
  • Herschel Walker: $6.2 M, $7M COH
  • Democratic Leadership Committees: $18.8 M
  • GOP Leadership Committees: $8.7M

The Georgia Chapter of the AARP recently commissioned a poll that describes an interesting factor that could affect top-ticket races: a sizable chunk of ticket-splitting voters. The beneficiaries of this, should it bear out, are Governor Brian Kemp and Senator Warnock, both of whom are leading their competitors. The poll put Kemp ahead by seven points and Warnock up by three, although the margin of error is 4.4%. The most interesting facet of this is that Kemp and Warnock are also polling consistently higher than their partners on the top of the ticket, Abrams and Walker. Walker’s campaign has been dogged recently by a series of missteps and bizarre statements by the candidate, but it remains to be seen if those are blips or the start of a downward trend. While both gubernatorial candidates are locking up their bases, Kemp is leading among independents and Abrams’ favorability rating is slightly underwater.
Inflation and a Slowing Economy: What to do about Both
BY Congressman Erik Paulsen, Total Spectrum Strategic Consultant

Editor’s Note: Congressman Paulsen wrote this article last week for This Week in Washington, prior to the announcement on Wednesday of the latest Consumer Price Index. Last month’s inflation rate was 8.58%, and most observers expected that Wednesday’s report would be as high as 8.8%. The federal government announced Wednesday morning that the inflation rate for June was in fact 9.1%.

Congressman’s Paulsen based his article on last month’s inflation rate of 8.58%. Wednesday’s announcement of a 9.1% rate inflation rate means that his assumptions and calculations about the projected Fed fund rate and consumer interest rates are probably understated. It also means that Congressman Paulsen’s calculations regarding the debt payments that will be made by the federal government to cover our debt are assuredly understated.

President Biden has touted progress with the economy since he took office, and some things are indeed improved. The unemployment rate is down to 3.6%, and 158.43 million Americans are employed. Budget deficits have fallen. The Congressional Budget Office (CBO) forecasts that the budget deficit will shrink dramatically, falling from $2.772 trillion in Fiscal Year (FY) 2021 to $1.036 trillion in FY2022, as a strong recovery created a surge in revenues and lower outlays.

The deficit for FY2021 did fall well below the prior year's record shortfall of $3.13 trillion, but let’s state the obvious. Trillion-dollar deficits are incredibly huge and are not sustainable.

It is also true that inflation is now at 8.58% – a 40-year high – which compares to 1.36% in 2020. President Biden says that reducing the rate of inflation is his number one priority, and he blames the high rate on a number of factors, primarily Russian President Putin’s February invasion of Ukraine. But inflation had already climbed to 7.4% in January 2022, over six points higher than when the President took office.

The Federal Reserve must also bear part of the responsibility for inflation because it continued to grow the money supply at an unprecedented rate even when the economy was growing rapidly. Economists understand that pandemic-related problems with the supply chain were also contributing factors.

But the principal factor behind the rapid increase in inflation is spending by the federal government. Four major federal laws were enacted in March and April 2020 to address the COVID pandemic. Together, these bills added at least $2.3 trillion to the deficit in FY2020 and $0.6 trillion in FY2021. At the time, the CBO acknowledged that the short-term effects of this massive spending would increase the Gross Domestic Product (GDP), but they also warned in the early months of 2020 that the four COVID relief bills would in the long run raise borrowing costs, lower economic output, and reduce national income.

Republicans and even some Democrats heard that warning. But President Biden sought, and Congress passed on a party line vote, the American Rescue Plan in March 2022 which provided $1.9 trillion in additional COVID relief spending.

As predicted, the chickens have come home to roost. Inflation is at a 40-year high, and now we must deal with the collateral damage and fix the problem.

The Federal Reserve is raising interest rates at the highest level in years to combat inflation. Since February 2020, U.S. Treasury debt has grown $7 trillion, sitting now at $24 trillion, and half the increase has been purchased by the Fed. The Federal Reserve projects that its Fed funds rate will increase to 3.4% by December, and it could get much higher.

We will all feel that increase, because it has already started to raise interest rates on consumer products like mortgages and credit cards. But the untold story is that federal interest costs on our national debt will skyrocket, and that will impact federal spending for years to come.

The total federal gross interest cost over the 12 months ending May 31 was $666 billion. But that figure will rise to $863 billion because of impending extra interest on Treasury bills and maturing notes. At that point, the interest payments on our national debt will be more than the entire defense budget ($746 billion over the last 12 months) or Medicare benefits ($700 billion over the same period). Other federal spending priorities, like education, transportation, housing, and energy, will simply be crowded out by interest payments on the debt.

Cheap interest rates allowed legislators to spend as if debt didn’t matter. But cheap interest rates are in the rearview mirror. Excessive federal spending and the national debt really do matter.

Most economists believe our economy will fall into a recession, and that’s because our GDP decreased at an annual rate of 1.6% in the first quarter of 2022. According to the Federal Reserve Bank of Atlanta, the GDP will fall an additional 1% in the second quarter of 2022, which means that the United States is on the verge of a technical recession.

American consumers fueled the economic recovery, but they are simply tapped out, their savings depleted, and the data proves it. The Federal Reserve Bank of Atlanta forecasts that private consumption and private investment in the second quarter will drop significantly.

The best way to lower inflation and create economic growth is not more spending and higher taxes, because both would exacerbate the inflationary crisis and current debt. House Ways and Means Committee Ranking Republican Kevin Brady (R-TX) recently proposed a far better path. “Right now, we need supply-side solutions on inflation. And one of them is to encourage people to invest more in those plants, equipment, and technology that will get us out of this supply chain mess and make us more productive. What we really need is a supply-side antidote to inflation, especially as the Federal Reserve begins to get a little more serious about the inflation problem that they were in denial about for so long.”
Hearing Report
By Ramona Lessen, Executive Director, Total Spectrum
 
Senate Banking, Housing and Urban Affairs Committee hearing on Advancing Public Transportation under the Bipartisan Infrastructure Law: Update from the Federal Transit Administration
Tuesday, July 12, 2022; 10:00 a.m.
 
To view a livestream of the hearing please click here.
 
Senator Sherrod Brown (D-OH), Chairman

Senator Patrick J. Toomey (R-PA), Ranking Member

Witness:
The Honorable Nuria Fernandez
Administrator
Federal Transit Administration
This e-newsletter is produced by Total Spectrum/SGA and Total Spectrum Georgia. The views expressed herein may include subjective commentary and analysis that are the views of the editors and authors alone. Information in this e-newsletter is obtained from sources believed to be reliable, but that cannot be guaranteed as independently investigated or verified. Information in this e-newsletter is not an endorsement, advertisement, recommendation, or any type of advice, political, legal, financial, or otherwise. With questions about the content of this e-newsletter, please contact Total Spectrum Georgia.