Cozen Currents: Process Trumps Substance on the Debt Limit

January 24, 2023

“When listening to the histrionics surrounding the latest debt limit showdown, it’s important to take a deep breath and remember that as with most things in DC, process tends to trump substance.”
— Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

  • After reaching the $31.4 trillion debt limit last week, the clock is ticking to find a path forward and avoid a default. But raising the debt limit today has become a broader partisan fight, which may require creative maneuvers to bypass the political impasse.
  • While many of the side deals Kevin McCarthy (R-CA) cut with several members of his conference who balked at supporting his speakership have not been publicly acknowledged, they are nevertheless becoming apparent and could hamper his effectiveness as speaker. Republicans are aiming to restrict the consideration of economic, social, and governance (ESG) factors in investment decisions. Under a divided government, this push is likely to find greater success in the states, but the House GOP is poised to use its new majority to press the issue.

Political and Procedural Dynamics of the Debt Limit

What the Debt Limit Fight is Really About. No one has clean hands when it comes to the rising federal debt, but that doesn’t stop politicians and voters from wanting a more fiscally responsible path forward.

  • Neither party is truly serious about fiscal reforms. The debt-to-GDP ratio is the highest it has been since WWII. Since 2000 when there was a budget surplus, debt increased by $13 trillion under Republican Presidents Bush and Trump and another $13 trillion under Democratic Presidents Obama and Biden. Today, Republicans aren’t willing to raise taxes, Democrats aren’t willing to change entitlements, and neither party is willing to cut defense spending.
  • Voters also aren’t serious about fiscal reforms. A majority of Americans worry about federal spending and the budget deficit but oppose the medicine required (tax hikes, spending cuts).
  • The debt limit itself has no bearing on the deficit. Tax and spending decisions are a separate congressional matter. Still, there have been many instances where fiscal reforms were attached to an increase in the debt limit.

Current Dynamics of the Debt Limit. Today’s debt limit fight is more a political fight than a policy one.

  • Republicans view the debt limit as leverage to fight against the perceived excesses of Democratic government. They want to enact some sort of “fiscal reforms.” The challenge for House Speaker Kevin McCarthy (R-CA) is finding a negotiating position that can unite the House Freedom Caucus hardliners with the 18 Republicans representing Biden-won districts.
  • Democrats view this as a chance to fight back against perceived Republican extremism. Biden learned after the 2011 debt limit crisis not to negotiate over the full faith and credit of the United States. Getting Senate Republicans to cave in 2021 and the better than expected 2022 midterms only bolster Democratic leaders to remain firm in not negotiating with Republicans at the outset.
  • Moderates on both sides are looking to flex their muscles between the warring parties. With slim majorities, bipartisan “gangs” have produced results on pandemic relief, infrastructure, gun control, and marriage equality legislation. They will try to broker a deal this year on the debt limit.

Choose Your Own Debt Limit Adventure. The X date when the Treasury can no longer pay all of its obligations is estimated to be sometime after early June. There are multiple options for Congress and the White House to act on the debt limit between now and then.

  • The most politically elegant but legislatively complicated option is to raise the debt limit without House Republican leadership via a discharge petition. The maneuver requires a simple 218 majority of votes to bypass GOP control of the House floor but takes several months to implement. Yet it would provide McCarthy an out from being blamed and ousted by hardliners.
  • The most politically complicated but legislatively elegant option is for the two parties to negotiate. Whether it’s a bipartisan committee on entitlement reforms, a balanced budget amendment vote, and/or limited cuts to discretionary spending, both sides need to convince their political bases that any negotiated outcome is a win for them and a loss for the other party.
  • The Biden administration has ruled out taking unilateral action on the debt limit (for now). Treasury Secretary Janet Yellen has dismissed ideas like issuing a high-valued platinum coin or prioritizing debt payments. But executive action is preferable to default and could become a failsafe if needed.

What Happens When McCarthy’s Backroom Deals Spill into the Open?

A Governing Headache. In order to secure the speakership, House Speaker Kevin McCarthy (R-CA) was forced to make a number of backroom deals, some of which are now the worst kept secrets in DC.

  • While it will not be publicly admitted or ever released, it is widely believed that Republicans do have a three-page document, which specifies several concessions McCarthy made to holdout members of his conference to get elected speaker.
  • Making backroom deals isn’t uncommon. Former Speaker Nancy Pelosi (D-CA) in 2018 promised a handful of Democratic holdouts to limit her speakership tenure to four years. The difference is that Pelosi’s concessions did not appear to impact her power as speaker, while McCarthy’s initial moves make him appear beholden to his concessions.
  • Establishment Republicans have been going along to get along, but these backroom deals could exacerbate the interpersonal tensions among House Republicans and leave McCarthy without 218 votes on the floor for several legislative priorities.

Musical Chairs. One of the areas in which the influence of these deals has already been seen is in the announcement of key committee assignments by the House Republican Steering Committee.

  • What has garnered the most attention is the number of prime committees to which House Freedom Caucus (HFC) members have been appointed, including those that opposed McCarthy for speaker. This includes several who will join the House Oversight Committee, which is set to play an elevated role as the House GOP looks to scrutinize the Biden administration.
  • One of the biggest committee victories that the HFC was able to secure as part of the negotiations during the speakership election was three positions on the Rules Committee. These are considered important positions given the influence the committee has over what gets – and perhaps even more importantly, what doesn’t get – a vote on the House floor.

Money, Money, Money. Among the issues that has garnered the most attention after these backroom deals is what McCarthy agreed to do with the budget and appropriations.

  • McCarthy promised to push for a budget that balances within 10 years and cut FY24 spending levels back to FY22 levels. But defense hawks are balking at any cuts to the military, populists are against any cuts to entitlements, and every Republican opposes tax increases. This leaves nondefense discretionary spending in the GOP’s crosshairs.
  • There aren’t enough “woke” Democratic priorities to balance the budget and get down to FY22 spending levels without cutting spending that has the support of some Republicans. A balanced budget in 10 years without cuts to defense, veterans’ health, or entitlements requires an 85 percent cut to everything else.
  • McCarthy promised to decentralize the appropriations process, eschewing an omnibus in favor of voting on the 12 appropriations bills individually that in total would cut spending to FY22 levels. But that far from guarantees bills get passed, especially with an open-amendment process that Democrats will use to force politically challenging votes. Meanwhile, the Senate will likely target a slight increase to FY23 levels for its proposed FY24 budget. The most likely outcome from this conflicting bicameral process would be a continuing resolution at FY23 spending levels.

Republicans Turn Up the Heat on ESG

ESG in the States. Republicans are advancing efforts to restrict economic, social, and governance (ESG) investing on the state level.

  • Last week, a group of 21 Republican state attorneys general sent a letter to proxy advisory firms Institutional Shareholder Services and Glass Lewis attacking the companies over their approach to climate goals and boardroom diversity. This effort is notable because it indicates a high degree of cooperation between GOP officeholders from different states – and not just red states.The attorneys general of New Hampshire and Virginia, both swing states, signed onto the letter.
  • Legislative sessions are getting underway in many states this month, and lawmakers in several states have pre-filed notable anti-ESG bills. In Texas, lawmakers have proposed bills to restrict financial institutions’ consideration of ESG scores and “value-based criteria” and to block state and local governments from contracting with companies that consider ESG. Lawmakers in Arkansas and South Carolina are also considering legislation to restrict financial institutions and banks from considering ESG factors. In Missouri, three bills have been introduced that would block the public sector from making contract decisions based on ESG scores.

DeSantis and ESG. Governor Ron DeSantis (R-FL) has made fighting “wokeism” a signature issue.

  • DeSantis is perhaps the most vocal Republican criticizing ESG. He has built his political reputation on culture war issues, promising in a speech after winning a second term last November that “Florida is where woke goes to die.” Last week, he announced a new front in his war on “wokeism”: a policy to block Florida’s investment fund managers’ consideration of ESG.
  • Last year, DeSantis also proposed anti-ESG legislation. The legislature is scheduled to begin its session in early March, and the ESG crackdown will be a high priority for the Florida GOP.
  • DeSantis’ latest move allows him to remain at the vanguard of the anti-ESG movement. He is attracting 2024 presidential buzz (The Washington Postranked him first on a list of potential GOP nominees) and his “anti-woke” stance is a way to outflank primary rivals. As such, the Florida governor is setting the tone for the 2024 GOP nominating contest and positioning himself ahead of another Florida resident who has already declared that he’s running: former President Trump.

House GOP on ESG. Though the GOP won’t be able to pass anti-ESG legislation at the federal level under divided government, the party can use its control of the House to spotlight the issue.

  • House Republicans are poised to target ESG this year in oversight. “We’re going to have a very fulsome agenda combating ESG, highlighting ESG for the fraud that it is,” Rep. Andy Barr (R-KY), who serves on the House Financial Services Committee, said in an Axios interview last month. Barr also said that both the Biden administration’s regulatory agenda and actions by the private sector will be subjects of scrutiny. This poses a challenging political environment for investment firms and asset managers going into 2023.
  • Biden administration regulations on ESG, including the Securities and Exchange Commission’s (SEC) rulemaking on climate disclosures and a recent Department of Labor (DOL) rule on the consideration of ESG factors by retirement plan fiduciaries, are likely to be in the crosshairs.
  • In an interview with The Hill last month, House Financial Services Committee Chair Patrick McHenry (R-NC) highlighted the SEC rulemaking as a subject for scrutiny. “This is contradictory to established law that already requires companies to disclose information if it is material to investors, he said.” Barr and Senator Mike Braun (R-IN) have introduced a measure to overturn the DOL rule. It has no chance of passing the Democratic-controlled Senate, but it’s an indication of how the party is prioritizing the issue.


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