Fintech Horror Stories - Thoughts on the Debt Ceiling Drama
We can all breathe now, but what exactly were we holding our breaths for?
If you’re like me, you’ve been bombarded nonstop with news about this debt ceiling bill that if not passed, has been predicted to send us into a new Great Depression by numerous politicians, economists, media outlets, and others. Oh, and by the way, the bill needed to be passed no later than June 1 (or wait, it was June 5). Strong words, indeed, but unfortunately the time to determine whether or not these threats were valid are now officially moot as the bill has passed both chambers of Congress and is making its way to President Biden’s desk.
This will be a shorter edition of the newsletter, since we promise to hit you with a few more upcoming editions sooner than our once a week cadence (we have some missed time to make up for) and might be slightly tangential, but since the bill has probably been the top discussion item for the last several weeks in the financial world and in markets in general, I thought it might be helpful to note some observations after having a chance to read the intimidating 102 page full text of the bill, which might be a bit beyond the headlines:
—A lot of COVID-era budget appropriations were rescinded early as the primary method to be able to claim that the government was getting hawkish on spending. The number being thrown around in the news is $136 billion in spending cuts. However, digging into the deal, it’s notable that a number of these cuts come from programs where most of the spending has already occurred, and in other cases, specifically $13.1 billion (I did the arduous work for doing the math on this one reading through the bill), the bill goes out of its way to protect these expenditures and make sure they are not rescinded.
—One interesting area that was preserved and shows a good example of the political football exercises that take place in Washington revolves around the Cost of War Toxic Exposures fund - on the surface, this is something pretty noble. It’s a fund that was created last year as part of a bill called the PACT act which included high profile campaigners like Jon Stewart fighting for veterans who had come across less than ideal conditions. It was a pretty bipartisan cause and funding was established. This year, the Biden administration tried to increase the amount appropriated for this, four times beyond what had been allocated last year, and when some questions were raised about it in the debt ceiling discussion, the usual back and forth political gamesmanship emerged. In the end, the additional funding was preserved, but with press releases where Democratic congressmen claim that they “protected veterans from Republican efforts to defund” which isn’t 100% accurate. For more on this, check out this great piece from Roll Call.
—The areas that are cut are wide ranging and across the spectrum - here are a few interesting cuts that do prove that indeed, not everyone got what they wanted out of this bill. It should be noted that all the cuts specifically called out in the bill came from cabinet-level departments, and from budget appropriations for them, not necessarily pullbacks from anything that money had already been spent on. It should also be noted that essentially all of these appropriations were created during the COVID era, which begs the real question of whether a) these appropriations should have been made in the first place or b) whether the real issue is how the allocated money has been handled since:
1) Appropriations funding that could arguably be needed during the era when COVID emerged and are still important:
—Department of Housing and Urban Development—Public and Indian Housing—Tenant-Based Rental Assistance
—Department of Housing and Urban Development—Housing Programs—Housing for Persons with Disabilities
—Department of Housing and Urban Development—Housing Programs—Housing for the Elderly
—Administration for Children and Families—Payments to States for the Child Care and Development Block Grant
—Why? - Unfortunately, due to inflation and various other factors, housing prices and rent prices have skyrocketed since COVID emerged. As a result, folks have had to take on more jobs or try to seek jobs where they get paid accordingly to the new economic realities. To make any cuts now to items budgeted towards these efforts, even if originally seeming to be extra, seems excessive and harsh.
2) Cuts to funding that seems like it was just propping up departments without ensuring any accountability or results:
—Agricultural Programs - Office of the Secretary
—Federal Highway Administration - Highway Infrastructure Program
—Small Business Administration - Disaster Loans Program Accountability
—Department of Transportation—Office of the Secretary—Salaries and Expenses
—Department of Transportation—Office of the Secretary—Essential Air Service
—Federal Communications Commission—Salaries and Expenses
—Dept of Energy - energy programs - science
—Department of Education— Departmental Management—Program Administration
—Department of State—Administration of Foreign Affairs—Diplomatic Programs
—Why? - Classic examples of governmental bloat. While Staffers and officials needs to get paid, these seem too general to justify adding money into without being a bit more specific.
3) Cuts to funding that was relevant during the early days of COVID and probably rightfully so can be wound down:
—Department of Defense—Procurement—Defense Production Act Purchases
—Department of Transportation—Federal Aviation Administration—Grants-In-Aid for Airports
—Why? - When COVID first emerged, the need was significant and government intervention came through in several ways - the Defense Production Act, a tool that had been used during the Korean War previously, was used to try and mass-produce medical supplies including PPEs and masks specifically. Air travel was also getting hammered as an industry as people stayed home. In 2023, we can safely say that these are not issues any longer. Airports are at or exceeding pre-pandemic levels, and masks (fortunately or unfortunately, depending on your views) seem to be a thing of the past.
4) Cuts that while unrelated to COVID, seem to be counterintuitive given the current situation with these topics and probably make you wonder if this was both parties’ way of trying to be able to generate some good headlines heading into election season
—Bilateral Economic Assistance—Department of State—Migration and Refugee Assistance
—Department of State—Administration of Foreign Affairs—Sudan Claims
—Bilateral Economic Assistance—Funds Appropriated to the President—Economic Support Fund
—Rural Development Programs—Rural Utilities Service—Distance Learning, Telemedicine, and Broadband Program
—Department of Justice— General Administration—Justice Information Sharing Technology
—Bilateral Economic Assistance—Funds Appropriate to the President—International Disaster Assistance
—Why? - The crisis at the border demands some kind of common sense approach. Similarly, issues in Sudan have skyrocketed since the beginning of COVID and it seems bizarre to specifically cut Sudan Claims out of the budget at a time where it would be arguable that trying to support the country is important. Also, changes in our economy and society post-COVID have ensured that no matter how much COVID has subsided, we are a more digital and remote society than we were before and rural communities shouldn’t be disadvantaged — for that matter, neither should government departments like the Justice Department which should (along with others) keep up with technological trends rather than seem archaic to anyone that has to interact with it. And lastly, with more and more natural disasters occurring at home and abroad, cutting funding for disasters in any way also seems excessive.
—Beyond the above - cuts to SNAP made a lot of headlines at rankling progressive legislators along with “mandating work requirements,” but interestingly what didn’t get a closer look in many parts was what those requirements were - specifically, the federal government plans to institute pilot programs in some states where recipients of federal aid will be studied to see how effective the aid is, and then are mandated to report back on the results. On the surface, one can argue about whether strings attached aid is ethical at all or should never be conditional and instead spending priorities like defense should be reassessed. But certainly, this is much less of a big deal than outright cuts, especially considering the pilot only will occur in five states. Hopefully the pilot will produce some interesting lessons, but given our government’s track record and the politicization of everything, I doubt that.
—A new oil pipeline is fast-tracked. Talk about unrelated pork barrel stuffing.
The last thought from here is that most of the appropriations that were rescinded, were set to expire in September 2024. Unfortunately, unless I’m reading it wrong, we can expect this battle to rear its head again after the election in 2025 with a new President and Congress. Come back in 2 years to see how this gets resolved (or not) next time!