Why you should watch the US Congress instead of the FOMC after the holidays Jung In-seol’s Washington Now

Hello. In-Seol Jeong is a Washington correspondent for the Korea Economic Daily. ‘Hankyung Global Now’ YouTube shows ‘Jung In-seol’s Washington Now’. Washington Now is a corner to learn about the power people and the Washington Inner Circle that influence the US stock market.

Today, let’s take a look at the US Congress, which will have a bigger impact on US stocks than ever before. The time when Washington prices have a major impact on the New York Stock Exchange is during the election season or wartime situations such as the Afghanistan crisis.

It’s not like that now, but Washington is paying attention from New York. Because it determines inflation, interest rates on U.S. Treasuries, and the profitability of U.S. businesses. In addition, Congress has the power to decide whether or not the US government will fail or not.

Congress decides all three variables that shake the US stock market

Let’s take a closer look. Congress makes three major decisions.

First, we decide whether to pass an infrastructure bill worth more than 5000 trillion won with our own money.
Second, we determine the width and timing of the increase.
The third is the most important. Determines whether the U.S. government will increase its debt ceiling.

It’s not easy to finish one issue normally, but this time you have to finish all three. However, the US Congress is structurally indecisive. The process is too complicated to do anything. And if you change a little in the middle, you often have to start all over again. However, it can be very time consuming as you have to do all three.

But I don’t have much time. He said he would hold a plenary meeting on the 27th to finalize most of the contents, including the infrastructure bill. Will you be able to complete all three homework assignments in a short amount of time?

More than 5000 trillion won in infrastructure bill pending

First, let’s take a look at the infrastructure bill worth over 5,000 trillion won. Exactly 4.7 trillion dollars. This is further divided into $1.2 trillion of physical infrastructure and $3.5 trillion of human infrastructure.

Physical infrastructure is building bridges and drilling roads. President Joe Biden used to call it the ‘American Jobs Plan’. As it is a traditional social overhead capital (SOC), Republicans are also actively in favor of it. Of course, there is no disagreement about this, as they have to come up with a budget for their constituencies somehow.

The problem is the $3.5 trillion human infrastructure plan. Investing in health care education, etc. It’s a typical welfare budget. President Biden called it the American Family Plan. The Jobs Plan and the Family Plan focus on the most important work and family in America, but there are strong oppositions when it comes to family-related content.

First of all, Republicans are against the union. And even within the Democrats, centrists believe that it should be reduced. Conversely, hard-working Democrats argue that the scale needs to be increased further.

Why the US Congress is indecisive

The situation is more complicated. When the $3.5 trillion human infrastructure plan seemed difficult to pass, the Democrats came up with an alternative. He said he would pass a combined budget of $1.2 trillion and $3.5 trillion. For Democrats, $3.5 trillion is more important, but Republicans only support $1.2 trillion, so we changed it to a package strategy that combines the two.

There is another variable. The United States is a bicameral system of the Senate and House of Representatives. Certain bills must pass both the House of Representatives and the Senate to become effective. The spirit of consensus is so important that if the House of Representatives makes minor amendments to the bill, it will have to be passed again in the Senate.

There are two major differences between the structure of the Senate and the House of Representatives. First of all, it is a filibuster (obstructing legal proceedings). The US House of Representatives does not recognize filibusters, but the Senate does. If the filibuster was applied, the bill would be impossible to pass.

Cards that can beat the filibuster

If you want to be banned as a filibuster in the Senate, you must have at least 60 out of 100 seats. Now, the Senate is 50-50, with Democrats and Republicans tied. There are cards that can dodge filibusters like the phoenix.

That’s the budget right. In bills to which the budget adjustment power is applied, only a majority is required. Budget adjustment rights were applied to this infrastructure bill. Senate Democrats and Republicans are tied 50-50. In a 50-50 tie, Senate chairman, Democrat Vice President Kamala Harris, takes the casting boat.

However, even if the budget adjustment power is invoked, there are many times when it becomes useless. Democrats, who are called centrist and non-partisan in the Senate, say the $3.5 trillion budget is too much. Representatives include Democratic Senator Joe Manchin and Senator Kirsten Cinema. These two became the first line of deterrence for the infrastructure bill.

So, the $4.7 trillion is likely to drop. In particular, if the human infrastructure budget of $3.5 trillion is drastically reduced, or if that doesn’t happen, only $1.2 trillion of the physical infrastructure budget may pass.

Tax hikes weaken and Treasury yields rise

When making a large budget, the most important thing is financial resources. $4.7 trillion doesn’t fall from the sky, so it has to come from somewhere.

In the United States, the government’s financing plan is largely divided into two categories. Collecting taxes or issuing government bonds. So now the evidence debate begins. Rich and large corporation taxation. President Biden’s initial plan was to raise the corporate tax rate from 21% to 28% and the capital gains tax rate, such as stock capital gains tax, from 20% to 39.6%. Also, the maximum general income tax rate was raised from 37% to 39.6%. At this rate, a little more government bond issuance could raise 4.7 trillion dollars.

However, the intensity of the tax increase has weakened since it came to Parliament. The corporate tax rate was set at 25% or 26.5% instead of 28%. The capital gains tax rate should also be set at 25% instead of 39.6%.

The lower the tax rate, the lower the tax share. Eventually, the share of government bond issuance will increase. This will slightly improve corporate profitability, but increase the issuance of Treasury bonds and increase the likelihood of higher U.S. Treasury yields.

US default or credit rating downgrade

In the end, if less money comes out of the pockets of individuals to secure the infrastructure budget, more money must come out of the government pockets. However, the U.S. government is not a firefighter. So US Treasury Secretary Janet Yellen has warned that the US could default next month if Congress does not increase its debt ceiling.

There are many interpretations that this is harsh, but in any case, the U.S. has set a limit on the issuance of government bonds and a limit on debt. Especially during the Democratic administration, it has increased a lot every time. Before the Obama administration, it was 14.3 trillion dollars, but in 2019, it was 22 trillion dollars. In 2019, the Trump administration postponed the application of the debt limit. Again, there is a way for Congress to raise the debt limit or suspend enforcement.

The current US debt is already $23.4 trillion. Yellen said the country’s credit rating could be downgraded if it did not raise the current debt limit from $22 trillion to $28.5 trillion.

Let’s take a look and see if this statement is serious or real.

Washington = Correspondent Jeong In-seol surisuri@hankyung.com