Washington Update - May 22, 2023

Billy Moore    Dc2

There was a time in Washington when the polar opposites – the most conservative Republicans and most liberal Democrats – signaling their displeasure with an initiative meant it had found the sweet spot in the middle of the ideological spectrum and was destined for enactment. Back then, Congress was less polarized. 

Highly able House Republicans and White House staff are attempting to find a budget compromise that can find a House and Senate sweet spot and facilitate the avoidance of a default on U.S. bonds. The elements of a deal are evident: imposing spending caps, rescinding unspent COVID funds, speeding up energy project permits and toughening work requirements for some benefit programs. Far-right Republicans insist on deeper spending cuts than can pass the Senate and far-left Democrats oppose work requirements that seem necessary for House passage. President Joe Biden’s and Speaker Kevin McCarthy’s negotiators know the limits of what could be approved by Congress, provided there is a majority in the ideological middle.

On Friday, Republican negotiators walked out of talks, suggesting an unwillingness to compromise, and restarted them, signaling a renewed desire to solve the problem.  It could be the negotiators are signaling the difficulty of the task to their partisans, hoping to bolster their vote counts. Hopefully, no one is laying the foundation to place blame, meaning an unthinkable default is on the horizon.

In the worst case, default would initiate a global recession and massive job loss. Even a last-minute deal could shake the world’s faith in U.S. Treasury bonds as the universal risk-free financial anchor, opening the door for China to assert a growing economic role for the renminbi.

Given the consequences, the blame for failure will fall harshly on both Republicans and Democrats, giving analysts reason to believe a debt limit increase deal will emerge in the next several days.