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All Jammed Up


On January 20 (Inauguration Day), I wrote what I would consider a fairly optimistic piece on President Trump’s agenda to promote economic growth through fiscal policy. However, I warned the following:

“The one thing that President Trump doesn’t have, which you really can’t expect him to have yet, is legislative timing. When I ask myself, “What does Donald Trump really care about more, repealing the Affordable Care Act (ACA) or creating jobs with a big fiscal stimulus package?,” I believe the latter. The one thing Washington can agree upon is repealing and replacing ACA is going to be very messy, and putting it as the first legislative priority can jam up the rest of the administration’s initiatives.”

Fifty-nine days into the Trump presidency, the view I took back in January seems prescient. Currently, the tax overhaul legislative initiative, controversial itself among fellow Republicans, is blocked behind the repeal and replacement of the Affordable Care Act (ACA).

The outlook of the ACA repeal and replacement getting through both houses of Congress seems somewhat unlikely. The Republican-controlled Congress, with the blessing of the White House, decided to go at the ACA through a budget resolution that included reconciliation instructions related to the ACA. By using the legislative process known as reconciliation, the Republican-controlled Congress made it possible to limit debate on the repeal and replace bill to 20 hours, thus blocking a Democrat filibuster and hence only needing a simple majority of 51 votes to pass. However, the Republicans took a big risk by employing this strategy.

Because Congressional leaders tied their health care bill to the 2017 budget, they have a very narrow timeframe in which to pass it. If they cannot agree on legislation in 2017, they miss their chance to pass it by a simple majority in the Senate. Moreover, as President Trump recently stated, because the health care legislation is tied to the budgetary process because of the use of reconciliation, Congress cannot address tax overhaul legislation until they know what they are doing on health care.

Unfortunately for the White House, the Republican-controlled Senate has essentially declared the health care bill the House wants to pass (and there is some Republican resistance there as well) practically dead on arrival. What this means is, in my opinion, the fiscal stimulus that many in the market thought was going to supercharge economic growth isn't going to happen in 2017.

I have to admit that my “prescient” call in January really came from my study of Robert Caro’s The Years of Lyndon Johnson. In the fourth installment, “The Passage of Power,” Vice President Lyndon Johnson was finally asked by President Kennedy, after more than two years of being deliberately kept away from wielding any sort of influence on the Kennedy White House, to give his opinion on passing a Civil Rights bill. Vice President Johnson, who was widely known as perhaps the greatest legislative master in the history of the United States Senate, gave the President advice through Kennedy's top aide, Ted Sorenson.

Johnson informed Sorenson that the way southern Senate Democrats had stopped the passage of a civil rights bill for decades was by holding other important bills hostage. In the case of President Kennedy, a vital tax cut bill was held up. The senators were able to do this because civil rights advocates always put their bill up at the top of their agenda. In return, southern Senators (who controlled most of the important Senate committees) would then hold all other business in committee while they filibustered against the civil rights bill. Since pro-civil rights senators (mostly northern Democrats) never had the necessary votes to stop the filibuster (what we now call a “super majority”), they would have to give up civil rights in order to get their other legislation out of committee. Johnson advised Kennedy, “I'd move my children [the other bills] on through the line and get them down in the storm cellar and get it locked and key, and then"—and only then when the other bills were safely passed—"I'd make my attack." It should be noted that after Lyndon Johnson became president, he did the exact thing he advised President Kennedy to do, and it worked.

The situation facing the Trump administration with regard to health care isn’t as extreme as Kennedy’s civil rights challenge, but it is close. Currently, the Republicans in the Senate have a 52-48 majority.  However, there is more than one Republican senator who has said he/she would reject the current House bill. Further, with regard to the proposed tax bills that contain a “border adjustment tax” lodged behind the health care bill, there is perhaps even more opposition within the Republican Senate. Hence, it appears that the president’s legislative pro-growth agenda is being held hostage to repealing and replacing the ACA. Uncertainty over health care and tax policy will, therefore, in my opinion, hang over the economy in 2017. Speculators and investors may continue to feel that “animal spirits” are being released, but for the real economy, making plans to commit capital for the future will be clouded substantially. 

Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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