US Fiscal: The Politics of Unemployment Insurance

Published on January 10, 2014

Going to the well again of offsetting spending this year by promising not to spend the same amount on Medicare ten years from now was a political non-starter as soon as it was offered as a means to move the unemployment insurance bill to a Senate floor vote.

S1485, whether the $6.4 billion 90 day version or the $28 billion full-year version, may still be done since it is a must pass bill to Democrats and Republicans are still willing to bargain for something in return. Some in the Senate are still hoping to attach it, with or without a fiscal offset, to the Omnibus bill or to the three day Continuing Resolution being drafted in the House to give the Senate and House appropriators a bit more time to wrap up the Omnibus bill beyond the expiration of the current CR next Wednesday.

But its eventual passage is actually still quite daunting, and not for any of the reason being cited in media reports.

*** The issue is not really the Republican-demanded “payfor” or even the obvious obstacles in a defiant Republican-controlled House. The issue is how each side, and Senate Majority Leader Reid in particular, is setting up a fight over the bill as a contentious November election issue in the high stakes battle for control of the Senate. ***

*** In particular, Majority Leader Harry Reid may use the debate over the UI legislation to drive a wedge between Tea Party and mainstream Republicans, and to further portray the GOP as so obstructionist it “necessitates” a widening of the nuclear option beyond its new standard of 51 votes to confirm executive appointments to removing the filibuster threat from the UI legislation, and with the further threat to apply simple majority rule to all legislation. ***

*** Even if the UI is successfully passed, its 90 day expiration back-dated to January 1 may invariably mean its further extension is likely to become entangled in the political fight over an increase in the federal debt ceiling in March. ***

The power politics on the Hill may also make life more difficult for the Federal Reserve, in adding considerable noise to the labor market data over the next few months. That, in turn, will complicate making its decisions over the pace of the taper in its bond purchases and how hard to press on its lower for longer rates guidance at its mid-March meeting.

The Omnibus and the UI Bills

Amid the political brawl over the unemployment insurance, Senate and House appropriators have been working feverishly to finish the $1 trillion Omnibus bill before the current Continuing Resolution expires next Wednesday.

The Omnibus comprises all 12 of the annual spending bills for the FY2014 budget, and will keep the government funded until October 1. Eight of the bills are completed, but the remaining four spending bills, several hundred pages and counting, are said to be the most contentious.

At one point, Senate Appropriations Chairwoman Barbara Mikulski was promising the Omnibus bill could be finished as early as this week. There is no chance of that, however, and the House side is already drafting a bill to extend the CR for three days. Congress goes on another recess a week from Friday, so anything beyond a few days would mean holding Congress over the weekend, which they hate to do. And in any case, a CR extension of more than a few days could open the door to more amendments or attachments that could complicate the efforts to avoid another government shutdown.

Neither side wants another shutdown showdown, the Republicans least of all. But Majority Leader Harry Reid and the Senate Democrats are very much on the political offensive as Senate Republicans fall into some disarray, due at least in part to Minority Leader Mitch McConnell’s distractions over his own re-election. There is some speculation on the Hill that there remains a low odds possibility the GOP could stumble into an “accidental” shutdown, or at least face a flurry of headlines warning of its prospect, which would nearly be just as damaging.

Against that backdrop of the race to finish the Omnibus bill, many centrist Senators working on a compromise UI bill that includes some sort of fiscal offsets are hoping they could move the UI bill quickly enough that it could be attached to the Omnibus bill as the fastest and easiest way to get the bipartisan UI bill into law.

S.1485, jointly sponsored by Republican Dean Heller and Democrat Jack Reed from the high unemployment states of Nevada and Rhode Island respectively, would cost all of $6.4 billion, and would extend unemployment payments to the long term unemployed to April 1 once backdated to January 1.  Six Republican senators voted for cloture to clear the first procedural hurdle on Tuesday. But it must still win at least the same level of Republican support to clear the way to a Senate floor vote with any chance of passage. It then must make its way through the House, where there is near-zero passion to even take up the bill, much less pass it.

Majority Leader Reid suggested passing the current version of the bill for the 90 days without the offsets, and then using the three months to work out how to finance its extension to a full fiscal year. On its surface, it seems reasonable enough, and Democrats like it because it maintains the precedent of passing emergency unemployment payments without fiscal offsets.

For the same reason, however, Republicans are rejecting the proposal, seeing it more as a political device to split their own ranks and make it all that much more difficult to ever work the offsets in the rollover come April.

For their part, Republican Senators Ron Portman and Susan Collins are still working with a handful of their Democratic counterparts to work out a range of payfors to cover the 90 day $6.4 billion tab that might keep the UI bill alive in the Senate, which if passed, could conceivably put pressure on the House to take it up as well.

As we said, it could happen, and one way or another, an extension of the unemployment insurance will probably pass. But the price to be paid is not budgetary but political: the procedural issues, deadline pressures, and offsets are in fact being driven by the larger political positioning being played out behind the scenes in the run up to the November 2014 elections and control of the Senate.

Senate Power Plays

In that sense, we see the positioning over the UI bill as the opening salvos of the political battle to gain the edge in winning control of the Senate in the November elections. It will play out in a sequence of escalating battles, in the near term over the Omnibus bill and the UI bill building up to the President’s State of the Union Address on January 28. But the inevitable push to roll over the UI bill if passed and extending the payments to April 1 may also get entwined into the politics of passing a bill to increase the federal debt ceiling at some point in March.

Republican concerns, for instance, run high that Majority Leader Reid has a larger, longer, and more far reaching political strategy underway in how he is playing out the battle to pass the UI legislation.

In fact, Republicans complain that Reid has effectively cut off the opportunity to offer any amendments, to any legislation, reducing the value of a minority Senate seat. So long as the contentious stalemate is inside the Senate, most voters won’t pay attention nor would they much care if they did.

The focus on UI and income inequality will serve to shift the media focus off the Affordable Care Act, even as its initial bugs and sign up problems are slowly overcome.

Along these lines, the constant drumbeat over the GOP’s “disregard for the poor and unemployed” will serve to accent the income inequality issue as well, all of which is meant to set up the themes of the President’s State of the Union address at the end of this month.

The UI face-off is also intended to elevate the fear factor among the more moderate and pragmatic Republicans over what a hardline on the UI may cost the party in terms of being painted into a corner as uncaring of the poor and disregarding the hot button issue of income inequality.

A 90 day UI extension will also allow for multiple votes in the election year, providing showcase votes for Democrats in closely fought races where wooing the independent vote may prove crucial. In doing so, it may help to drive a further wedge between the Tea Party ideologues in safe seats and the rest of the much larger and more mainstream Republicans who rallied to House Speaker John Boehner’s heated attack on the outside Tea Party lobbying groups.

But most of all, many Republicans suspect Reid is ultimately positioning to launch a heated and drawn out political fight over UI to justify an eventual threat to jettison the filibuster, on all Senate legislation and not just executive office appointments. To justify the dramatic move, Reid would need a high profile political issue to underpin the argument he had no choice in order to overcome the GOP “obstructionism” that is bringing the Senate legislative process to a grinding halt.

The assumption is that Reid would never threaten to do so because if the Democrats should lose the Senate, it gives even more power to a newly victorious GOP. But Reid’s calculation, and one which is privately shared by many Republican pollsters, is that the odds are much higher the Democrats will in fact keep control of the Senate, albeit reduced to perhaps no more than one or two seats.

That is even more of a reason in thinking ahead to November and beyond to neutralize the filibuster power of the minority party in the Senate. Perhaps more realistically, even if the threat is never fulfilled, just the threat to do so may translate into legislative concessions on high value bills favored by Democrats.

On the Republican side, the demand for a fiscal offset, through spending cuts elsewhere rather than new revenues naturally, is somewhat of a red herring as the amount is so small as to be almost a negligible issue in terms of fiscal balance. And it is true as the Democrats assert that the fiscal costs due to economic slowdown tend not to be offset by sending cuts elsewhere.

But what the Republicans are mostly after is a political payfor, namely, flushing out both Majority Leader Reid and especially President Obama to see what will be offered in return if they dig in their heels on making the offset their ‘ask” on the UI extension.

Debt Ceiling and Fed Spillover

This may seem a relatively small skirmish but its implication carries over into the much larger and far higher stakes of what the likely trade-off is going to be later this spring on another bill seen by the White House as “must pass” legislation: the legislation to increase the federal debt ceiling.

The deadline to increase the debt ceiling was formally set for February 14 after which Treasury will start running down its rebuilt accounts of extraordinary funds.  By most accounts, those extraordinary funds will be exhausted to dangerous cash management levels by mid March. Perhaps Treasury can make it to April 15 and the windfall of tax revenues coming in, which would stretch the true drop dead date into May or beyond. But then again, maybe not, any time after mid March may be a roll of the dice.

March also happens to be the month for primary filing deadlines in many Republican states and congressional districts. As a backdrop to the legislative stances this spring, those deadlines may serve as  a reminder that for many Republicans, it will pay to hang tough on high profile issues until after those filing deadlines are past.

And as something to keep an eye on, if the UI battle should play out beyond January and into March or later, it may also add to the headaches the Federal Open Market Committee will face when they meet for the first time in mid-March under its new chairperson, Janet Yellen.

Assuming the better looking data of the last few weeks continues through the rest of the quarter, the FOMC will need to make crucial decisions on whether to quicken the pace the tapering down of its monthly bond purchases, and to what extent to adjust its forward rates guidance in the first year rate hikes and year-end fed fund projections (see SGH 1/9/14, “Fed: The Minutes, the Morning After”).

Much of that will in turn be built around its reading into the labor market developments, but the UI may add a tremendous amount of noise to the labor data by distorting the labor participation rate and potentially pushing the headline unemployment rate down even faster than the true underlying health of the labor markets.

That could further complicate an already difficult decision on what the FOMC will do with the 6.5% unemployment threshold at the March meeting and beyond to the June meeting.

Back to list