Washington Insider -- Thursday

The Sequester, Yet Again

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Members of Congress Cite China's Yuan Devaluation in TPP Discussions

Several U.S. lawmakers have cited the need for provisions in the prospective Trans-Pacific Partnership (TPP) agreement to guard against currency manipulation following China's devaluation of the yuan by 1.9% against the dollar earlier this week.

Sen. Sherrod Brown, D-Ohio, a member of the Finance Committee, and Rep. Sander Levin, D-Mich., ranking member on the Ways and Means Committee, said in separate statements that the prospect of China eventually joining the TPP highlights the need for provisions prohibiting currency manipulation in the pact. Reports have surfaced about a so-called "side agreement" that would set up a committee to meet annually to review exchange rate practices.

Officials in the executive branch of both Democratic and Republican administrations have in the past warned against the inclusion of currency manipulation provisions in trade agreements. Among other things, they have pointed out that such provisions could hamstring the Federal Reserve's role as guardian of U.S. monetary policy. However, China's action this week has given the issue renewed emphasis and can be expected to set the stage for discussions regarding TPP when Congress returns from its summer recess in September.


EPA's McCarthy Confident Clean Power Plan Will Survive Court Challenges

Environmental Protection Agency Administrator Gina McCarthy says she is confident that the agency's carbon dioxide standards will be upheld in the courts and would be difficult for future administrations to reverse. Speaking earlier this week at an event in Washington, McCarthy said that the agency's Clean Power Plan is "quite legally solid," although she acknowledged that the legality of the regulation likely would be debated "endlessly" over the next few years.

EPA's Clean Power Plan is projected to reduce carbon dioxide emissions from the U.S. power sector by 32% below 2005 levels by 2030. The plan already was the subject of an early lawsuit that ultimately was dismissed by the U.S. Court of Appeals for the D.C. Circuit because the rule at the time was not yet final. States and utilities that oppose the rule have asked the D.C. Circuit to rehear those challenges now that the rule has been signed.

The Clean Power Plan requires states to file at least an initial submission by Sept. 6, 2016, meaning that by the time a new presidential administration takes over in 2017, there will be a "significant number" of state plans outlining how states will move to comply with the rule. The expectation is that the process will be so far along that turning back would not be a palatable option for the new administration or the states that have completed their environmental plans.


Washington Insider: The Sequester, Yet Again

Every member of Congress and most of the public is well aware that funding for the government runs out at the end of September, and that new appropriations authority is necessary to prevent a shutdown. Thus, in the midst of many issues and concerns facing Congress, the one that creates the most anxiety is whether the extreme polarization will permit a budget deal, and how long — and how many false starts — will that involve.

Both the House and Senate have Appropriations committees (as well as 12 subcommittees that each work on one of the 12 annual regular bills) that have been busy for much of the year, so the appropriations process is well under way. However, the government is still under the shadow of the sequestration process that was approved in a 2013 budget deal that applied limits to 2014 and 2015 spending. It also provides a framework for similar restraints for several future years.

As a result, the upcoming budget process likely faces at least two kinds of fights. The first predictably will be over so-called budget policy riders that take advantage of the fact that appropriations bills are actual laws. Their "must-pass" priority makes then natural targets for attempts to add amendments that contain controversial policy requirements. This frequently leads to bitter fights only indirectly related to federal spending.

The second expected fight likely will be focused on the sequester effort itself. Already, a new Congressional Budget Office study has been completed that concludes that completely lifting sequestration spending caps could create perhaps 1.4 million jobs over the next two years. The study came at the request of Sen. Bernie Sanders, I-Vt., the ranking member on the Senate Budget Committee and a presidential primary candidate, so it will certainly become political fodder.

The CBO analysis focuses on the macroeconomic effects of completely eliminating the budget cuts, which could return in full force this fall. If they are not imposed, government spending could increase in certain areas and would be expected to increase in economic output and employment, the CBO said.

"Fully eliminating the reductions would allow for an increase in appropriations of $90 billion in 2016 and $91 billion in 2017," CBO Director Keith Hall wrote to Sanders. If Congress reverses the limits in fiscal 2016, for example, it could result in the full-time employment of as few as 200,000 more people or as many as 800,000 more people. If the same were done for fiscal 2017, it could similarly add as few as 100,000 jobs or as many as 600,000 jobs.

The CBO said sequestration relief also could boost the gross domestic product by as much as 0.6% in 2016 and as much as 0.4% in 2017.

Director Hall explained that estimates of the increase in economic output and employment reflect evaluations of offsetting forces, including both increased aggregate demand and tightened monetary policy to reflect a strengthening economy, which would have a dampening effect. In the long-term, however, Hall argued that increased spending would lead to increases in federal deficits and lower output and income.

Sanders emphasized the shorter-term aspect of the analysis and said that it proves that "arbitrary sequestration caps have never made any sense." He characterized the CBO's findings as job losses in the next two years if sequestration caps are maintained.

"If Congress does not act to end sequestration, we're looking at the loss of as many as 1.4 million jobs over the next two years," he said, focusing on the top of the range estimated by CBO. Sanders called for an end to sequestration before the cuts take effect again on Oct. 1.

"We must end sequestration now ahead of the end of the fiscal year and prevent a budget showdown that will help nobody," he said. "It makes no sense to head towards a crisis when we have a clear path towards a better solution."

In fact, there are many critics of the automatic budget limiting process and frequent suggestions that while reversing sequestration entirely is unlikely, changes may well be in prospect. For example, President Obama has asked Congress to increase spending next year for the Pentagon by $38 billion and spending for domestic programs by $37 billion.

Before leaving for the August recess last week, Senate Majority Leader Mitch McConnell, R, Ky., told reporters that Republicans would hold budget talks with Democrats at some point in the fall. Democrats have been demanding that GOP leaders hold a "budget summit" for months.

Still, the approaching budget debates are seen as highly volatile flashpoints on a wide range of economic and political topics. In addition, they are widely expected to be extended at least through the fall, Washington Insider believes.

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