The Cozen Lens

• After feeling like they lost out in House Speaker Kevin McCarthy’s (R-CA) debt limit deal with President Biden, the House GOP’s right flank aims for major cuts in FY24 government funding. This stance raises the risk of a government shutdown but also empowers the more bipartisan Senate in the appropriations process.
• As one of only a handful of “must-pass” bills this year, the National Defense Authorization Act is a magnet for riders that address both partisan culture war issues and substantive bipartisan policies.
• US and China’s recent re-engagement is capturing headlines, but a closer examination reveals a more fragile relationship than the latest platitudes convey.

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What is a GOP "Win" on FY24 Spending?

What’s the Real Deadline? Contrary to many expectations, the major deadline to watch in FY24 appropriations is April 30, not January 1.

• The Fiscal Responsibility Act (FRA), the product of House Speaker Kevin McCarthy (R-CA) and President Biden’s negotiations over the debt ceiling, provides an incentive for Congress to enact appropriations legislation under divided government. If lawmakers have not passed FY24 appropriations by January 1, 2024, then an automatic continuing resolution (CR) with one percent spending cuts from FY23 levels across-the-board is generated. Per the text of the FRA, this 99 percent CR would not take effect though until April 30th, 2024 or 15 days after appropriations legislation is enacted, whichever comes first.
• Such a CR would be seen as a problem by Democrats who don’t want to cut social spending as well as GOP defense hawks loath to see the Pentagon get a budget cut. This cut would only be seen as a win by the vocal but small group of fiscal conservatives comprising the House Freedom Caucus.
• The delay until the end of April gives Congress time to work out the details of appropriations below the topline figures. However, there remains a risk of one or more government shutdowns between September 30th and April 30, and it’s not yet clear when lawmakers may seek to craft a funding deal.

House Republicans. The right flank of the House GOP is exerting influence over the appropriations process in the lower chamber.

• This year, House Republicans are marking up bills that spend about $119 billion less than the spending caps included in the debt limit deal. These funding levels are a concession to hardline conservatives who have called for enacting FY24 appropriations at FY22 levels.
• Last week, the House Appropriations Committee introduced the final three of the 12 annual government-funding bills. Each includes major cuts that will give heartburn to not only Democrats but also moderate Republicans in Biden-won districts. The Labor, Health and Human Services, Education appropriations bill would cut funding for the Department of Education by $12 billion, the Department of Health and Human Services by $14 billion, and the Department of Labor by $4 billion (30 percent of the agency’s total budget). The Commerce-Justice-Science appropriations bill would cut the Department of Justice’s budget by $2 billion and the FBI’s by $1 billion. The Transportation-Housing and Urban Development appropriations bill would cut funding for the Department of Transportation by $7 billion and would give the Department of Housing and Urban Development $2 billion less than Biden’s funding request.
• Hardline conservatives are spoiling for a fight. The debt limit standoff failed to deliver the results they wanted, so they’re prepared to force a government shutdown. For McCarthy, this does not have the existential stakes of a default, so there is little political cost. A shutdown rarely lasts more than a month, there is little demonstrable impact on most people’s lives as government employees historically get back pay with interest, and no one will lose an election based on a shutdown in an off-election year. The most noticeable impact is the closure of National Parks and longer-term projects would face delays, such as those funded by the Infrastructure Investment and Jobs Act and the CHIPS Act. It’s an open question whether Biden would be able to leverage the bully pulpit to take the political opportunity to blame the GOP for a potential shutdown.

The Path Forward. With the House pursuing a more partisan appropriations process, all eyes are now on the Senate.

• When united, the House GOP can achieve incremental wins, such as the debt limit deal with President Biden. Internal fighting within the GOP, as the major funding cuts pushed by hardliners are liable to provoke, gives power to Democrats and the Senate. House and Senate Republicans are not necessarily aligned on FY24 appropriations. Senator Susan Collins (R-ME), the top Republican on the Senate Appropriations Committee, is committed to a standard bipartisan process. “I'm just going to work in a bipartisan way in the Senate to try to figure out a path forward. It's difficult to predict what's going to happen over on the House side, so we're just going to proceed as planned,” she said to reporters last month.
• The Senate is marking up its appropriations bills up to the funding levels in the FRA. The Senate Appropriations Committee so far has passed four of the 12 bills unanimously and one by a vote of 28-1. The House’s appropriations bills with their large cuts are virtually certain to be dead on arrival in the Senate, which will likely take the lead in negotiating a final appropriations deal that can ultimately be imposed on the House and pass both chambers.
• An omnibus package is anathema for hardline conservatives, so House Republicans can likely include no more than two or three appropriations bills in a “minibus”. The greater number of smaller appropriations vehicles raises more scrutiny by Members that will reduce the opportunity for policy riders. To meet the requirements of the FRA, all 12 appropriations bills must be passed to avoid the CR at 99 percent of FY23 spending, a high bar for lawmakers.

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Hitching a Ride on the NDAA

An Old Tradition. . . One of the most important tools in a lawmaker’s set is understanding how to use “must-pass” legislation to get what you want.

• The National Defense Authorization Act (NDAA) is one of the longest-running rituals in DC. Congress has successfully passed the bill authorizing defense spending every year since 1961. Because of its importance to national security, the NDAA has a special status as one of the only bills that reliably gets passed every year with strong bipartisan approval.
• These special characteristics have made the NDAA very useful to lawmakers. Provisions uncontroversial and minor enough to not warrant using floor time are often tacked onto the vehicle as it passes through Congress.

. . . Faces a New Congress. In the same way that defaulting on our debt was an unthinkable possibility made thinkable, so raises the specter of not passing the NDAA this year.

• House Speaker Kevin McCarthy (R-CA) has a difficult job pacifying his far-right flank while still working to pass legislation with a reasonable chance of passage. He sufficiently assuaged their concerns to become speaker and ended up passing a bill to avoid default. However, it took 15 speakership votes and unprecedented compromises to achieve the former, while the latter resulted in a backlash that held up the House.
• The NDAA passed the House Armed Services Committee as usual, 58-1. But the Rules Committee, on which McCarthy placed three hard-right members in order to gain their support for his speakership, permitted red meat amendments to join the bill on the floor, several of which ended up passing. These included amendments preventing the military from: providing sex reassignment surgery, reimbursing travel expenses for an abortion, flying the pride flag at military bases, and continuing many diversity initiatives. The bill ended up passing on the House floor along an essentially party-line vote.
• McCarthy’s playbook for the NDAA is likely to mirror the one he will use for FY24 spending bills. Step 1: pass a symbolic, partisan bill that satisfies the far-right, demonstrates he can keep his caucus together, and puts the ball in the Senate’s court. Step 2: let the Senate Republicans carry the water for reaching a compromise with Democrats. Step 3: have a conference committee that includes token far-right House members (McCarthy is reportedly appointing Rep. Marjorie Taylor Green (R-GA) to the House HDAA conference committee) to resolve the differences between the House and Senate bills.

Bonus Goodies This Year. Before a final NDAA product emerges from a conference committee this fall, the Senate will need to pass its own version of the defense policy bill and it is planning to begin that process this week. Several policy riders of interest to the private sector are already in play.

• Two bipartisan amendments by Senator Roger Marshall (R-KS) would seek to rein in credit card fees by requiring banks to offer retailers at least two networks for handling transactions. Groups representing banks sent a letter to lawmakers urging them to prevent these amendments from ending up in the final bill. A similar push by the same members was added and then stripped out of the NDAA last year.
• Senators John Cornyn (R-TX) and Bob Casey (D-PA) are seeking to attach the Outbound Investment Transparency Act, which is their latest attempt to scrutinize US investments in Chinese companies. This current effort focuses more on disclosure instead of outright restrictions, unlike past versions of the legislation, but it is more likely to put pressure on President Biden to issue his long-anticipated executive order rather than be included in the final NDAA.
• Meanwhile, the House version of the NDAA includes some provisions that could set the stage for relaxing drug policy. One such provision would require the Department of Defense to hold pilot studies on the health effects of marijuana on veterans. A separate amendment would hold a similar study on various psychedelics.

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US and China Re-engage (Again)

Let’s Be Friends Again. Successful diplomatic trips to China by senior Biden administration officials in recent weeks have given a feeling that the bilateral relationship is starting to move in a positive direction after the surveillance balloon incident in February caused the latest freeze.

• While Treasury Secretary Janet Yellen’s and Secretary of State Antony Blinken’s visits were light on deliverables, this was to be expected. What was most important about these voyages was that the meetings went off without a hitch and a path to further conversations remained open.
• Special Presidential Envoy for Climate John Kerry is in China now as part of continuing this momentum and seeking areas of climate policy on which the two superpowers can collaborate. Commerce Secretary Gina Raimondo is expected to travel to Beijing also this year, but no dates have been set.
• For now, the goal of these contacts is to re-establish the lost diplomatic connections and create guardrails in the relationship. By doing so, the hope is that the consequences of any further incidents can be contained and there is some predictability from both administrations.

What’s Under the Rug? While the renewed engagement has generated some positive headlines, a look under the surface suggests that there is still considerable tumult between the US and China.

• One of the biggest frustrations for the White House is the lack of military-to-military engagement as part of the thawing relationship. Unlike his other Cabinet colleagues, Defense Secretary Lloyd Austin was denied the opportunity to meet with his Chinese counterpart in recent months. A sign that this could also be shifting is last week’s conversation between Assistant Secretary of Defense for Indo-Pacific Security Affairs Ely Ratner with China’s ambassador to the US, Xie Feng.
• While not a direct meeting with Ratner’s Chinese counterpart, it could be a first step in that direction. The Biden administration has put a high emphasis on resuming these defense talks, as it is the area where the consequences of an accident could be the most dangerous.

Tit-for-Tat Continues. Amidst this diplomatic revival, significant executive actions aimed at “de-risking” are still expected from the White House that could lead to Chinese retaliation.

• One that has caught serious attention in recent weeks is the finalization of the semiconductor export controls first proposed last October. The rules could be revised to cover more AI chips and further could include limits on US cloud providers leasing their services to Chinese companies. The latter has been described as a loophole in the current export controls by academic researchers.
• In addition to the semiconductor export controls, President Biden is still expected to release an executive order (EO) to restrict outbound investment. This has been anticipated for some time and could come as soon as this month. The EO’s scope has been relatively refined to only focus on advanced semiconductors, quantum computing, and some applications of AI, but continued debates over some of the details have delayed the order’s release.
• Given recent Chinese behavior, it is probable that they will retaliate against one or both of these actions. This would likely take the form of limiting purchases from additional American semiconductor producers or expanding export controls on critical minerals. The latter could be more effective in persuading the Biden administration to slow its actions due to the wider range of industries and countries it impacts.