Welcome. Thank you for joining us for this edition of the Modlin Global Analysis. I'm glad to be joined by Dan Modlin, and we were talking recently about how it would be helpful to do a post-debt ceiling negotiation wrap-up and explore what has transpired the last few days. As well as the ramifications and the content of those policies, so we will dive in both into the content as well as the politics involved.
Dan
This Kevin has certainly been an interesting last few days and something that has been rather fascinating to watch. Several people who listened to last week's podcast on the debt crisis that we posted pointed out that you seem to be pretty much right on the money on several things that came about. So I think it might be good for us to talk a little bit about some of the things we discussed that we might see happen. That actually did come to pass.
Kevin
So part of this goes to the point that I tried to emphasize is in politics, sometimes listening to language is not a good leading indicator. Of how policies will develop. So it's common for political actors to have disdain or say, even inflammatory things about their rivals, and then other people in the echo chamber reinforce those points, or even, say, wackier things. These are not strong indicators of anything. In the policy-making process, it's better to see what are the must-pass pieces of legislation, and again, from a Washington standpoint, what is must pass is not necessarily the things that individuals or groups think are most important, but what is the state find most important. And for a state money making money, spending bills and related item are the issues that are always going to be top of the list, so whether this be appropriations bills or tax bills or these related items, that is always part of the function of a state and was necessary. And then you start looking at the components of the negotiations and you think what is palatable to all people? Not what is the preference or what is desired by all people, though probably everyone in the room wanted to raise the debt ceiling. All of the other components we're trying to fill a space out for what is palatable. So for example, we're sending money from COVID-19 funds. It's very common for Congress to rescind spending for money from crises or other major events that has not been spent. And there's a lot of reasons for that. One is they're reasserting their authority over the spending, but also because it's open money that hasn't been spent. It's like families, budget for travel that they didn't spend entirely in one area that they decided to use that money and some other space. So Congress has this same mindset, and this was used basically to quote unquote, reduce the deficit through that, so that was seen as a way of leveling down the numbers for this coming fiscal year.
Dan
Let's talk about some of the key provisions that are in the bill that passed. As you look at the bill, what were the major things people in the general public need to know that were in that bill?
Kevin
Right. So there's a lot of the policy components and again this has to do with each side feeling its space to reach a palatable compromise, given what was an impermissible for each side. But what was became permissible for them. So they're our work requirement. Changes for individuals that are seeking food stamps program from 50 to now 54, but there are also some adjustments on that that gave more flexibility. Individuals that are veterans or homeless or have a history of being in the child welfare system. It is also has a cap on spending for this year and a 1% increase from this coming fiscal year into the next. The year as well as a reduction in domestic spending, but a a slight increase in defense spending in line with what the President proposed in his budget. It also changes some permitting rules that are interesting that will allow more energy projects and to go forward, it seems, or at least have a somewhat more streamlined process for evaluating those environmental rules. And of course, it raises the debt ceiling through January of 2025, which seemed desirable for both sides.
Dan
Now in our discussions regarding the debt we try to avoid getting into the partisanship too much and just try to stick to the basic information and to understand what's going on. One of the more interesting aspects of this, I think, to some people was that in the House? There were actually more Democrats who voted for the bill than Republicans, even though it was largely seen as a victory for Speaker McCarthy to get that bill over the line.
Kevin
Right. So both parties have factions that are not pleased with the bill and they weighed their sentiments on that through their vote and as well as the symbolism. So Democrats had, when you listen to the speeches being made throughout the day. They were wholeheartedly very disappointed with the compromise, but they found the palatable to support and a lot of this is interesting. The committee vote in the Rules Committee one by 7 to 6, which is usually they have larger margins, carry the bill on Rules. The vote on whether or not to consider the measure also had a more narrow margin than what ended being the case for the final passage of the bill, so this may be a way for these members to signal both their displeasure and how they'll explain that displeasure to their constituencies, but how they were. Overall satisfied to move on from the debt ceiling so members of Congress sometimes cast votes where they are divided on aspects, but find some way to explain it on that. A lot of that has to do again with just where the regular factions are within the group and some of your or far right, and you're more far left. Members ended up voting against the bill this time.
Dan
OK, now for those of us watching all of this unfold again, it's been a rather interesting last few days, but what are some lessons maybe we can all learn from watching this develop?
Kevin
So one is again the value of parsing back the rhetoric and instead looking at what's going on. So sometimes rhetoric is not a helpful indicator. So whether that be how Biden is portrayed in the press or how McCarthy is portrayed in the press, that's not always going to tell us the direction of how things are going to go or even an analysis of individuals sometimes can be really problematic. So we know that McCarthy became Speaker through a very long series of ballots and considering the vote for speaker and a lot of people could reasonably assess that he didn't have much political capital in the House or anywhere else. But in fact he was able to get a lot of what he wanted in that package. So that is a kind of surprising outcome to a lot of people and reasonably so, but it again it helps for us to sometimes pause and instead think about the conditions in individuals are in, but also maybe not try to personalize politics too much. It's easy to personalize it because we are human and we are interested in politics at that level, but not to draw too many assumptions from that right. So just because I have an opinion of a political figure does not necessarily cause a certain outcome and political negotiations.
Dan
Kevin, in light of the experience of this debt crisis, vote and and all the political posturing that took place before it could be passed. How will all of this affect future debates? Will it have an effect on other things that are coming up?
Kevin
Yeah, there's some really important components to this. So because now the top line number for budget making has been agreed to, even if there is some grumbling about it, there's going to make the spending bills going forward this year a little easier for both. Needs to address I also think, especially with the deliberations that we saw in the Senate, that it's very likely that we will see a closer consensus being made around what the next defense spending bill comes out. There's expected to be a supplemental bill that provides funding for Ukraine, Taiwan, and frankly, there's basically a side deal being developed to include some other programs because the Senate Republicans are very unhappy with the caps. They agreed to in this package. So they're going to attach some things that they prefer and probably what this will mean is that a lot more individuals find various reasons to actually like this defense supplemental package that's developing that may have had some sticking points for your more radical members that didn't like the funding for Ukraine or wanted that to be slowed down, so that actually may create some accelerant. In this situation, we'll also see the Farm Bill on how that evolves. I think the politics of the farm bill have evolved to the point where there's the constituency that's more interested in the food stamp components, and then the others that thought that the farm components were most important and now that has created a tension. It used to be that they rode together and they created votes for each other, but now they are subtracting support from the other side. Now that this provision for the food stamps was added to the debt bill. It'll be very interesting to see how that feeds into the Farm Bill because normally those types of changes would be in there. So would people take another run at the FarmBill and add additional provisions related to what will they be? Satisfied with those changes? Or will this actually make the Farm Bill more difficult to solve? Highlight these divisions and that there's not an easy middle space to compromise on that that that's been taken off the table. I think it's also important to think about the political consequences of this. I think it probably has taken it's going to have an effect on inflation, probably a modest effect on inflation. But this coupled with Federal Reserve policy that looks like throughout the year is going to make some twenty-five point basis increases a few times this year and and probably a little bit next year. That coupled with this kind of flat budget provides a lot of predictability for markets and everybody else on where inflation is headed. That doesn't mean that inflation will return. Our recent experience before these last two years, so it's not probably going to be 2%, but it's somewhere between 3 and 4%. And I really think that that is going to be very beneficial to politicians and particularly to the Biden administration that's been taking a lot of the complaints on that front. If they're able to. Push that number down. That is a much more beneficial thing for them on the flip side, McCarthy benefits also from not having to deal with another debt ceiling vote. That's very divisive within his conference. It's very divisive among Democrats, so it's good for President Biden as well, said take this off the table and be able to address these going forward. Different pieces legislatively are affected by this, as well as political figures and what their outlook has now. At the same time, those outlooks are always subject to main change.
Dan
Well, Kevin, it's certainly been interesting to watch this all unfold and it's been. Nice to be able to use the model and global analysis podcasts to provide updated current information on this. So thank you very much for your input.
Kevin
Yeah. Thank you for your time and I enjoyed discussing this and always glad to have people's questions. You can e-mail me anytime at. Kevin@modlinglobalanalysis.com. Thank you.
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