US: Looking Beyond SOTU

Published on January 21, 2015

President Obama’s State of the Union address last night has been heralded by fellow democrats as one of his best speeches in recent years. The takeaways from his “the crisis has passed” theme are debatable, and his tax proposals have no chance of ever becoming law, but it was nevertheless a great catchphrase to getting a new narrative going for the last two years of his presidency.

Putting political spin aside, here are some key points to be watching for in the next month or so on Capitol Hill, where we still believe the FY2016 budget will provide a further fiscal tailwind to the US recovery (see SGH 12/8/14, “US: A Modest 2015 Fiscal Tailwind”):

*** The more important event to setting the legislative agenda was not last night but will come the week after next when the Bipartisan Congressional leadership meets with the President at the White House. The key will be whether the President’s headline budget proposal of $325 billion in tax breaks for the middle class, financed through a higher capital gains tax and the “fees” on the large financial institutions, is offered and accepted as an opening bid to the negotiations to come on must-pass legislation such as homeland security appropriations, increased infrastructure spending, or the FY17 budget. ***

*** As much as the political battle-lines are being pitched as between the Republican Congress and the Obama Administration, this year’s key legislation will be driven more by whether the GOP leadership can shepherd its extreme right faction in the House (or out-number their defections with Democratic votes) towards bills that can pass in a much more moderate Senate. The GOP’s success on that front will be quickly put to the test in the first “must pass” bill due to come up, extending the funding for the Department of Homeland Security before its February 27 deadline. ***

*** We are optimistic the DHS bill will pass for the same reason we remain fairly optimistic on the likelihood of more moderate, bi-partisan legislation — including a FY2016 budget and debt ceiling increase — being passed through the year: namely, that Senate Majority Leader Mitch McConnell and House Speaker John Boehner have mapped out a strategy to neutralize the threat of revolts from their extreme right in the House on whatever legislation can pass the Senate with a filibuster-proof 60 votes that is likely to include between six to sixteen Democratic votes. ***

“The New Republican Congress”

Newly minted Republican Senator Joni Ernst of Iowa glowed in her debut GOP rebuttal remarks to the SOTU last night about the “new Republican Congress you just elected” and how it will “make Washington focus on your concerns again.” It was easier for her to assert there is a new Republican Congress since she was only elected in November, but the risk remains her boast of a new GOP may still prove as likely as President Obama’s tax increases.

The GOP’s difficulties are in fact only marginally lower than they were in the years since 2010 when House Speaker John Boehner repeatedly struggled to push bills through his rebellious House Conference. That nothing has changed all that much came just a day into the new Congressional session when Boehner barely won re-election as House Speaker after an unexpected 25 GOP House members voted against him or abstained.

Indeed, it turns out it was largely his support from the new conference members the GOP picked up in the Northeast and other blue states last November that the Speakership vote was not forced into a humiliating second round.

The failed rebellion by 25 House Republican members against the Speaker’s re-election was not about Boehner’s fate as much as it was a rehearsal for future assaults against what the right-wing insurgents see as “treasonous compromises” — but which by definition, will be necessary to pass anything in the Senate, where the Republicans are still short of a 60 vote majority.

Along those lines of feared compromises, the House passed without Democratic votes a hardline immigration bill that was then attached to the Department of Homeland Security spending bill that was carved out of last year’s “Cromnibus” budget deal and short dated into a Continuing Resolution until February 27.

Tossing aside the GOP leadership’s promise of a return to “regular order,” the bet by the Republican House right is that attaching the immigration bill to the must pass DHS bill will maximize their political leverage to get back at President Obama’s hated executive order late last year liberalizing some aspects of immigration law.

The White House, of course, would have no problem vetoing the bill since it would only put a glaring spotlight on the persistent divisions within a GOP and showcase the assertion it can’t be trusted to govern; and that is assuming the House immigration bill would ever pass the Senate, which it won’t, since Democratic votes will be needed to get it to a filibuster-proof 60 votes.

Shutting down the federal department most responsible for dealing with terror threats by failing to pass its appropriations bill would not exactly be a big vote winner, and the Republican Hill leadership has no intention of letting that happen.

A McConnell-Boehner Agreement

The reason, however, that we remain optimistic on the likelihood of more moderate, bi-partisan legislation this year — including a FY2016 budget and debt ceiling increase — is the game plan ironed out by Senate Majority Leader Mitch McConnell and House Speaker John Boehner behind the scenes at the Hershey retreat that they believe will ensure both pro-growth fiscal policies and legislation that positions the party for the 2016 presidential elections.

In essence, the two veterans agreed that if McConnell — who came up through appropriations and at heart is a deal-maker, witness his vehicle to pass a debt ceiling increase by voting no — can pull together 60 votes on Senate legislation, Boehner will push it through the House by turning to Democratic votes if he has to get to the necessary 218 votes.

In order for the immigration bill to remain attached to the DHS spending bill, Majority Leader McConnell will need anywhere between a minimum of six and probably as many as sixteen Democratic votes to pass it. And to do so obviously, the immigration bill will be stripped of many of its clauses most strongly advocated by the party’s far right dissidents in the House or its much smaller Senate right-wing faction led by Texas Senator Ted Cruz.

In other words, to pass any essential legislation in the Senate, considerable leverage will by default go to more moderate “deal-makers” on both sides of the aisle drafting bi-partisan bills that can clear the filibuster proof 60 votes. And with a bi-partisan bill coming back to the House after amendments are passed in the Senate version, it will, or should, enable Boehner to turn to any needed moderate Democratic votes to neutralize the threats from his rebellious right wing.

Boehner’s strategy, in that sense, is not to punish the conservative rebels who voted against him as Speaker but to learn to work without them; by bypassing them, the pressure within this faction will likely cause some to make their way back to the House GOP mainstream.

While House Republican dissidents love to throw around the so-called “Hastert Rule” (legislation should not be brought to the House floor unless it is supported by a “majority of the Majority”), it is likely Boehner will find it difficult to pull together 218 Republican votes on must-pass bills like extending the DHS appropriations through October 1. But on that, our sense is that the Speaker will not hesitate to seek the necessary Democratic votes, assuming of course McConnell has passed back to him a bi-partisan supported DHS bill, with or without the attached immigration bill. 

So we do think the DHS bill will clear the House floor on its rebound from the Senate, and this final version is unlikely to be vetoed by the President. And while getting there will have its days of drama, we do think it will provide a template for passing some of the high macro impact legislation later this year, be it a FY2016 budget that further boosts federal spending modestly higher, or the debt ceiling increase.

And that, in turn, will carry far more critical implications to the shape of the legislation to come than anything President Obama included in his State of the Union speech last night.

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