The House Republican Conference is in retreat to central Virginia through the weekend to gather itself and devise a plan to move forward in the 113th Congress. Notably, Rep. Paul Ryan (R-WI) addressed the conference today stressing the significance of the debt ceiling as a negotiating tool while reminding the more precocious Members of the conference about the consequences of treating it as a casual matter.

 

The upshot from this retreat is that the intent is to devise a robust proposal that reforms entitlements (chained CPI for Social Security and Medicare eligibility age), specifies spending cuts and identifies revenue sources (closing loopholes and limiting deductions for higher income earners).

All of this cannot happen in two months. Therefore along with this proposal would be a short-term increase in the debt ceiling (six months, as three months is inadequate to expect action out of the Senate) to hammer out an agreement with the White House. House Republicans seem finally to be taking President Obama at his word that he will not negotiate under threat of default so this proposal is an attempt to find negotiating leverage using the debt ceiling without bearing responsibility for a default. However, this is the exactly the scenario the President doesn’t want and the White House will bristle at its introduction.

Within the House there is a desire to return to regular order rather than bake-n-vote deals fashioned by a handful of leaders (e.g. the Fiscal Cliff negotiation that resulted in the American Taxpayer Relief Act of 2012). Members want committee hearings and input; which really means many rank and file GOPers do not trust their leadership but also rightly want to do their jobs. Another reason for a six month repreive on the debt ceiling.

 

What the GOP House retreat yields is yet to be seen. As of now it appears Speaker Boehner (R-OH) and Minority Leader Cantor (R-VA) want to bring order to their conference after having to pass the Fiscal Cliff bill and Hurricane Sandy relief with less than a majority of the majority. Passing bills with less than a majority of the majority makes for more minority influence than would make any House Speaker comfortable. The next two months are do or die time for Speaker Boehner if he wants to retain his leadership into the second session of the 113th, which candidly is a shame but is the reality for a conservative considered to be moderate by many of his newest conference colleagues.

 

Defense:

Among the defense issues that will get notice in this new Congress will be (other than the immediate sequestration) Foreign Military Sales. The last four years the average FMS has been two and a half times what it was in the previous decade ($30 billion v. $12 billion). This growth is reflective of the Defense Department’s strategy of pivot (to Asia) and partnership (largely everywhere else). This is obviously very good for the US defense sector as FMS reached over $60 billion in 2012.

Energy:
On the Senate side expect the Committee on Energy and Natural Resources to run smoothly as Sen. Ron Wyden (R-OR) and Senator Lisa Murkowski (D-AK) have constructed a productive working relationship. If sequestration does go into effect the Department of Energy will see an eight percent budget reduction, which will trigger a fight between Republicans and Democrats over clean energy research. Watch for conflict over production and investment tax credits for the renewable energy sector.

This is a small slice of what to look for in both of these sectors; more tomorrow on these and others.

American Airlines today prevails in a labor certification election among Passenger Service Agents seeking to join the Communication Workers of America. The final vote was 3052 to 2902. AA may now continue to exact labor cost cutting measures as it proceeds through bankruptcy and an eventual merger with US Airways.

The tone for the 113th House was set on the opening day when Speaker John Boehner (R-OH) narrowly retained his leadership position due to 12 Republicans either abstaining or voting for somebody else. This portends a tough year for Boehner who may not last until December 2013 as House Speaker, and a tougher year for compromise.

 

The tone for the 113th Senate will be set when the chamber returns from recess next week when Senate rules reform (specifically, Rule 22, filibuster reform) is considered. The Levin-McCain bipartisan reform package would limit debate on the motion to proceed (thus the calendar would speed up slightly) and allows two guaranteed minority amendments. This is a great deal for Republicans because it allows them to offer amendments to bills where often they were precluded due to majority leader prerogative. If Majority Leader Harry Reid (D-NV) spurns that proposal for Senate Resolution 4 (which makes the motion to proceed non-debatable and enforces a talking filibuster, among other reforms) it will only pass via the constitutional option (less that the 67 votes required by Senate Rule V). To do so will infuriate Republicans and set a nasty tone for this Senate. That said S. Res. 4 is the better reform package but resisted by Republicans because it does not resolve the issue of the minority being able to offer amendments.

 

House Republicans and the White House have dug in their heels over the debt ceiling. There is little apprehension among House Republicans over shutting down the federal government; been there done that and will do it again (between November 1995 and January 1996 federal government employees were furloughed and non-essential service suspended for 28 days). The odds for any kind of agreement going into March is less likely than a Fiscal Cliff grand bargain was heading into the end of 2012.

 

Senate Republicans are acclimating to the idea to not allow an increase in the debt ceiling. Senator Ted Cruz (R-TX) is advocating this tactic to force the US Treasury to live within its means; prioritize expenditures (suggesting debt service be the first item paid) from revenue receipts and cut spending. Sen. Cruz is not alone in both the Senate and House Republican conferences. Congressional Republicans see a government shutdown as the pivot to balancing the budget, citing the ’95-’96 shutdown that they suggest led to government surpluses during President Clinton’s term. Now more than ever before House Republicans and some of those in the Senate are resigned to pursue the ‘starve the beast’ objective no matter the consequences.

 

These same GOPers do not see a credit rating downgrade as a realistic corollary to a government shutdown, attempting to place the onus on President Obama to decide what obligations to pay first out of existing revenue receipts. However, that perspective was distorted today when Fitch Ratings addressed the debt ceiling debate saying, “In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline.” The potential for a downgrade of the country’s credit rating remains very real.

 

Look for continued dysfunction over the debt ceiling. The White House stated clearly it will not negotiate revenue and spending under the threat of default. After the Fiscal Cliff negotiation where Republicans miscalculated President Obama caving on taxes the WH should be taken at its word. House Republicans are kicking around the idea of raising the debt ceiling month-to-month to extract spending cuts and entitlement reforms, meaning dissentience as a way of Capitol Hill life.

 

Do not count on Speaker Boehner agreeing to any proposal that can only pass the House with less than a majority of the majority. One more vote like that and he’s done as House Speaker. House Democrats will resist the GOP hard edge approach for political reasons (reluctance to touch the third rails of Medicare and Social Security reform) and a rejection of austerity measures.

It is worth noting that Republican intentions are so determined that many congressional GOPers are getting comfortable with the defense cuts in the sequester if it means spending reduction.

 

While comprehensive tax reform is a challenge for the 113th Congress embraced by many Democrats and Republicans alike, the fact is that with multiple confirmations looming (State, Defense, CIA and Labor), the White House’s intent to pursue immigration reform, and the debate over gun control, tax reform gets kicked down the road.

First published on January 3, 2013 via email newsletter 'Fiscal Cliff Notes.'

The 113th Congress is sworn in today with Republicans in control of the House with 234 Members (Democrats have 201). Democrats control the Senate with 55 Members (two Independents will caucus with the majority).

The new House Republican Conference is blunter than their predecessors in the 112th with an enhanced threat of 2014 primary election challenges given the Fiscal Cliff vote in the waning hours of the 112th.

The Fiscal Cliff resolution was as expected, a short-term fix with some permanent characteristics on tax rates. The only political surprise was Speaker John Boehner (R-OH) allowing a vote on the Senate package without amendments and thus allowing passage without a majority of the majority. Speaker Boehner is weakened substantially but will be reelected today as Speaker and as capable of controlling his conference in the 113th as he was in the 112th; primarily due to the will and skill of Majority Leader Eric Cantor (R-VA).

The first two months of the 113th House will be rife with more of the conflict that defined the 112th. While the Fiscal Cliff deal averted immediate downside impact on the economy (the defense sector won a reprieve with the delay of sequester cuts but the cliff still looms) assume more political brinksmanship around the sequester debate that will certainly involve defense and discretionary spending levels and entitlement reform.

Senate Republicans are vocal in their readiness to use the expiring debt ceiling and sequester (March 1st) and continuing budget resolution (March 27th) as leverage to win concessions on spending and entitlements. Given the resolve of Senate GOPers to use the debt ceiling for leverage and the rowdiness of the GOP House Conference the potential for a downgrade of America’s credit rating is very real.

Senate Minority Leader Mitch McConnell (R-KY) has already voiced the need to begin the sequester and debt ceiling debate immediately. Senate Majority Leader Harry Reid (D-NV) will likely respond by adjourning for two weeks after swearing-in ceremonies today, thus extending the first day indicating that the first matter of business to be taken up by the new Senate will be rules reform (i.e. Rule 22/filibuster reform). Assume that little to nothing will be accomplished in the Senate’s first two weeks.

There’s a lot of work to be done by House Republicans currently wary to engage the White House on sequester and budget. A destabilized Speaker Boehner will be unwilling to discuss new tax revenue to accompany spending cuts, as will his Senate Republican colleagues. The next phase of the Fiscal Cliff negotiations will be more dramatic than the last.

Despite appeals to negotiate meaningful spending and entitlement reform, there isn’t likely to be any major deal heading toward March. President Obama is sticking firmly to his position that he will not negotiate on the debt ceiling and the GOP wants that to be the vehicle for more cuts. While the White House will be hard-pressed to achieve higher rates, it can insist on more revenue that the GOP is willing to do in context of comprehensive reform. A fairy tale ending is not anticipated and markets will be unsettled by continued dysfunction. 

First published on December 28, 2012 via email newsletter 'Fiscal Cliff Notes.'

The Senate is not built for speed so time has run out on a Fiscal Cliff deal prior to sine die of the 112th Congress. The weekend will bring attempts for a short-term fix but any deal has little chance of passing the House with a majority of the majority. Speaker John Boehner (R-OH) has clearly determined he’d rather be House Speaker in the 113th Congress than a deal-maker in the 112th and won’t allow a vote on a bill that

needs Democrats to pass.

 

The very real problem for Speaker John Boehner (R-OH) is the rooting belief that Majority Leader Eric Cantor (R-VA) is really in charge. Some House Republicans are delusional in hanging onto the idea that President Obama will try and help Boehner out by offering entitlement reform so as to avoid a Speaker Cantor. The reality is that House and Senate Republicans would rather go over the fiscal cliff and start anew than leave any income brackets out of a tax package prior to Dec. 31st.

 

A retroactive deal on tax rates will get done before the end of February 2013 with the tax threshold at $500,000, but the negotiations will start anew with Senate Republicans giddy about being able to leverage the debt ceiling for deep entitlement reform. The White House will default back to the $250,000 threshold given GOP insistence on entitlement reform. Any tax bill will have a sunset provision while the hard work of a tax code overhaul becomes central.

 

Expect a hard-line from Senate Majority Leader Mitch McConnell (R-KY) on taxes and entitlement reform, remembering he is up for re-election in ’14. The House will be more of the same from the 112th with the threat of Tea Party primary election challenges hanging over every Republican Member, inhibiting incentive to compromise.

 

Senate Rules: Moving forward there will be an instance of sunlight as indicators suggest the Senate may agree to bipartisan filibuster reform (Senate Rule 22) via a Standing Order to make the Motion to Proceed non-debatable (as it was prior to 1949), reduction of post cloture debate on nominees from 30 hours to zero, and a method for the minority to offer amendments (opening the Amendment Tree). These reforms bode well for acceleration in the Senate schedule, encouraging legislative productivity.

 

DefSec: The Chuck Hagel Secretary of Defense nomination started off bumpy but will right if he is nominated by the White House. The conditions for accepting the nomination is to proceed with defense sequester cuts, which fits Hagel’s predisposition. While Hagel will have a more jerky confirmation process than Sen. John Kerry (D-MA) to Secretary of State, he will ultimately be confirmed if nominated.

 

Assessing Accuracy: This first of these newsletters were bearish on a Fiscal Cliff deal being reached by year end (Nov. 12-16, 2012) and Speaker Boehner being able to whip his Tea Party caucus around a deal with the White House. This gloomy outlook continued through the following week, stating “one can’t get there (a deal) from here,” (Nov. 19-23). In the Dec. 3-7 edition the sense was wrong that an increase in Social Security retirement age would be offered before chained CPI was offered. That said, while there were moments of optimism as President Obama and Speaker Boehner sincerely tried, in the end there was never confidence a deal could be struck. A blockbuster deal will not happen before year end, although a Senate tax package might see the light of day with little chance of passing the House (much less seeing its floor).

First published on December 21, 2012 via email newsletter 'Fiscal Cliff Notes.'

With the Republican House Conference imploding over Speaker Boehner’s (R-OH) Plan B bill (allow taxes hikes on incomes over $1 million) the likelihood of going over the Fiscal Cliff at year end increases dramatically.

 

One scenario for averting the Fiscal Cliff before year end requires the Senate to pass a bill that can then be sent to the House for Boehner to consider scheduling for a vote. To get there involves a lot of moving parts. Senate Majority Leader Reid (D-NV) would need to devise a bill, assuming that to ask Boehner for a House vote on the Senate bill passed in July is a non-starter. The bill would likely mirror that recently proposed by President Obama (increase taxes on income over $400,000, reform Social Security using chained CPI and perhaps a few other fixes like the Medicare “doc fix” and means testing). Devising the bill will be easy. Getting a bill passed in the Senate could be improbable.

 

Reid gets this bill passed in the Senate by working with Minority Leader McConnell’s (R-KY) cooperation but not his blessing. This is where the recent death of Senator Inouye (D-HI) becomes important. A significant number of Senators are traveling to Hawaii this weekend for the Inouye funeral. As President Obama celebrates Christmas in Hawaii it offers an opportunity to invite a few key GOP Senators (e.g. the Gang of Eight; the GOP represented by Senators Chambliss (GA), Coburn (OK), Johanns (NE) and Crapo (ID)) to travel with him aboard Air Force One where a deal gets hammered out. McConnell’s cooperation means the bill is not filibustered so cloture is achieved without McConnell’s YEA vote and the bill is sent to the House for Boehner to consider. The pressure on Boehner to schedule a vote on a bipartisan bill would be enormous, causing him to cave to where the bill likely passes with Republican and Democratic support (but with less than a majority of the majority); one can hear the gnashing of gears in this scenario.

 

The scene on Thursday in the GOP conference leading to Boehner’s Plan B being pulled from the floor because there were not enough Republican votes means that the GOP House caucus is more intimidated by potential Tea Party primary election challengers than its own leadership. Returning to the castaway analogy of previous notes, what happened yesterday is akin to the final chapter of Lord of the Flies where the stranded children revert to savagery (Boehner playing the role of Ralph). The question is whether the adults, as they did in the book arrive in time to set things straight. The outlook is gloomy, particularly for Speaker Boehner who could be entering his final term in that office given the current outlook of the Fiscal Cliff negotiation and the mood of GOP conference conservatives. The complex scenario described above is the difference between a deal before Dec. 31st and going over the Fiscal Cliff.

 

If next week, while Congress is in recess, Reid is talking with both the White House and McConnell then an attempt is being made to get a deal done by the end of the year. Otherwise, both sides are prepared (and to some extent willing) to go over the Fiscal Cliff in order to redefine the context of the negotiation that will occur in the 113th Congress where Republicans have fewer Members than in the 112th, weakening the GOP’s hand but also putting the debt ceiling front and center.

 

Take Note! Sequester: Consider that the required cut of more than eight percent of the Federal Aviation Administration’s budget will entail some hard hitting realities that will cripple the US aviation industry: 2,000 air traffic controllers furloughed; 240 airport control towers closed; 9,000 security screeners and 1,600 custom officials furloughed. For airlines this will mean a reduction in services, less capacity, reduced aircraft certification and fewer flights (requiring less fuel), as well as a lag in NexGen implementation. For cargo: a loss of 2 billion pounds of freight capacity.

First published on December 14, 2012 via email newsletter 'Fiscal Cliff Notes.'

A Republican Senate staff member summed it up this week nicely when he said US House and Senate Republicans cannot see “see the end game” on the fiscal cliff negotiations. This has led to discontent within the GOP Senate caucus toward Minority Leader McConnell (R-KY) who has taken a hard line on the fiscal cliff. Some Senate GOPers feel McConnell’s drop anchor and hold on strategy didn’t work before and won’t now. As Sen. McConnell is not directly involved in fiscal cliff negotiations, that being Speaker Boehner’s (R-OH) job, Senate Republicans have largely coalesced around an approach to allow top tax rates to increase and use the debt ceiling to go after spending and entitlement cuts.

 

Democrats do not think that linking spending and entitlements to the debt ceiling is a winning strategy and are more than happy for the GOP to pursue that strategy. Clearly these negotiations will push up against the yearend deadline with Members being instructed to keep holiday plans on hold, as reported.

 

The outlook from Capitol Hill is that the White House will not budge on linking Medicare and Social Security to the fiscal cliff talks and thus Republicans will seek a ledge off the cliff and concede to President Obama’s wishes to raise the top tax rates and leave the rest for 2013. In this scenario then tax reform will be front and center with corporate taxes taking center stage, triggering a debate between a territorial v. global corporate tax code.

 

With the negotiations squarely around taxes, that leaves sequestration to kick in on January 1st. This places the Pentagon front and center at a moment when a new Defense Secretary will be nominated to replace DefSec Penetta. Former Senator Chuck Hagel (D-NE) is the likely nominee now that Sen. John Kerry (D-MA) is expected to be nominated to be Secretary of State. Hagel is a no-nonsense moderate Republicans and combat veteran with a steadfast opinion that the Department of Defense is bloated. Hagel would likely experience a smooth confirmation process but will face tough questions over his opposition to military strikes against Iran, preferring diplomacy.

 

The maximum sequestration defense cuts could total $1 trillion over ten years, roughly $500 billion more than those mandated by the Budget Control Act of 2011. Among the most effected companies are: Lockheed Martin (termination of the Joint Strike Fighter and it littoral combat ship), Boeing (terminated refueling tanker contracts) and General Dynamics (termination of its littoral combat ship and ballistic missile submarine). Also significantly affected will be companies that provide modernization of ground combat vehicles and Army helicopters.

 

Take Note! TransPacific Partnership, this issue makes for an interesting alignment between progressives and Tea Partiers. Progressives dislike it for the impact on labor organizing and the conservatives are distrustful over sovereignty issues (judicial jurisdiction). Progressives will work vociferously to derail TPP. The US Trade Representative is keen on getting this trade agreement before the 113th Congress with fast track authority. Assume TPP will be granted fast track but then undergo revision specific to certain producers. US textile and apparel manufacturers, sugar producers and fisheries will claim harm by TPP and their lobbyist will work feverishly for carve-outs.