Major Budget Deal Comes Into Focus; New Fed Nominee
Author: Greg Valliere
May 22, 2019
MIRACLE IN MAY? Congressional budget brawls have become so dysfunctional — usually just before Christmas — that leaders are determined to pass major legislation in the next several days. This is a big deal, with big implications:
First, it appears that both parties are close to agreement on lifting so-called budget caps, which — if not changed — would impose huge cuts on defense in fiscal 2020 ($71 billion) and domestic spending ($55 billion). Lawmakers are still arguing over details, but more spending, not less, for both seems inevitable in what may be a two-year deal.
Second, the threat of a long government shutdown in late fall would be eliminated by the deal. Republicans were badly bruised by last winter’s shutdown, and they don’t want a repeat.
Third, there’s a decent chance that an increase in the federal debt ceiling would be included in this package, eliminating the threat of a government debt default crisis in October. Some lawmakers want this in a separate bill, but including it in a budget compromise is on the table.
THERE’S A POTENTIAL SNAG: Even more spending, in the face of an annual deficit of close to $1 trillion, will infuriate GOP deficit hawks in the House, and they could rebel (so could Donald Trump, for that matter). But they want a huge defense spending increase, and may be forced to swallow the domestic spending hikes.
WITH DEFENSE OUTLAYS SOARING toward $750 billion annually in the next year or two, there eventually will be a movement to slow this trend, but we don’t see it now. A budget deal is coming — Mitch McConnell and Nancy Pelosi are determined to get it done — and the big macro trend continues to be more fiscal stimulus, more spending on defense, infrastructure, space, border security, you name it.
MODERN MONETARY THEORY — which seemingly dismisses the threat posed by deficits when interest rates are low and demand for Treasuries is strong — is a very seductive concept in a city as profligate as Washington. Sure, there could be consequences in the next decade, but most of the policymakers who are spending furiously will be at the beach by then; others will have to clean up the mess.
NEW FED NOMINEE: The White House is floating a trial balloon for a Fed governorship — conservative economist Judy Shelton, a strong Trump supporter who has been critical of Fed policies. Shelton’s controversial views on issues such as the gold standard will get a thorough airing by Congress during the vetting process, but we think she would win confirmation.
AFTER THE TRAIN WRECKS with Herman Cain and Stephen Moore, “at least she’s not a misogynist,” a Fed source quipped to us yesterday. Shelton is an outspoken gadfly who might shake up the Fed a little, and maybe that’s a good thing. Lawmakers are looking for an easy vote after the two train wrecks, and we think Shelton would win near-unanimous support from Republicans, with backing from a handful of Democrats.
HIGHLY RECOMMENDED READING: We don’t always agree with New York Times columnist Thomas Friedman, but we strongly recommend his column this morning. Beijing’s behavior has been so egregious that “it took a human wrecking ball like Trump to get China’s attention,” he wrote. This underscores an under-appreciated angle — many U.S. liberals want to crack down on the Chinese; Trump has surprising bipartisan support on this issue.
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