CRS Reports

Huawei v. United States: The Bill of Attainder Clause and Huawei’s Lawsuit Against the United States

Mar 14, 2019

Army Corps of Engineers: Continuing Authorities Programs

Mar 13, 2019

History and Enforcement of the Voting Rights Act of 1965

Mar 12, 2019

The CREATES Act of 2019 and Lowering Drug Prices: Legal Background and Overview

Mar 12, 2019

United States European Command: Overview and Key Issues

Mar 12, 2019

Cameroon

Mar 12, 2019

Access to Broadband Networks: Net Neutrality

Mar 11, 2019

Data Flows, Online Privacy, and Trade Policy

“Cross-border data flows” refers to the movement or transfer of information between computer servers across national borders. Such data flows enable people to transmit information for online communication, track global supply chains, share research, provide cross-border services, and support technological innovation. Ensuring open cross-border data flows has been an objective of Congress in recent trade agreements and in broader U.S. international trade policy. The free flow of personal data, however, has raised security and privacy concerns. U.S. trade policy has traditionally sought to balance the need for cross-border data flows, which often include personal data, with online privacy and security. Some stakeholders, including some Members of Congress, believe that U.S. policy should better protect personal data privacy and security, and have introduced legislation to set a national policy. Other policymakers and analysts are concerned about increasing foreign barriers to U.S. digital trade, including data flows. Recent incidents of private information being shared or exposed have heightened public awareness of the risks posed to personal data stored online. Consumers’ personal online data is valued by organizations for a variety of reasons, such as analyzing marketing information and easing the efficiency of transactions. Concerns are likely to grow as the amount of online data organizations collect and the level of global data flows expand. As Congress assesses policy options, it may further explore the link between cross-border data flows, online privacy, and trade policy; the trade implications of a comprehensive data privacy policy; and the U.S. role in establishing best practices and binding trade rules that seek to balance public policy priorities. There is no globally accepted standard or definition of data privacy in the online world, and there are no comprehensive binding multilateral rules specifically about cross-border data flows and privacy. Several international organizations, including the Organisation for Economic Co-operation and Development (OECD), G-20, and Asia-Pacific Economic Cooperation (APEC) forum, have sought to develop best practice guidelines or principles related to privacy and cross-border data flows, although none are legally binding. U.S. and other recent trade agreements are establishing new enforceable trade rules and disciplines. Countries vary in their data policies and laws; some focus on limiting access to online information by restricting the flow of data beyond a country’s borders, aiming to protect domestic interests (e.g., constituents’ privacy). However, these policies can also act as protectionist measures. The EU and China, two top U.S. trading partners, have established prescriptive rules on cross-border data flows and personal data from different perspectives. The EU General Data Protection Regulation (GDPR) is driven by privacy concerns; China is focused on security. Their policies affect U.S. firms seeking to do business in those regions, as well as in other markets that emulate the EU and Chinese approaches. Unlike the EU or China, the United States does not broadly restrict cross-border data flows and has traditionally regulated privacy at a sectoral level to cover data, such as health records. U.S. trade policy has sought to balance the goals of consumer privacy, security, and open commerce. The proposed United States-Mexico-Canada Agreement (USMCA) represents the Trump Administration’s first attempt to include negotiated trade rules and disciplines on privacy, cross-border data flows, and security in a trade agreement. While the United States and other countries work to define their respective national privacy strategies, many stakeholders seek a more global approach that would allow interoperability between differing national regimes to facilitate and remove discriminatory trade barriers to cross-border data flows; this could offer an opportunity for the United States to lead the global conversation. Although Congress has examined issues surrounding online privacy and has considered multiple bills, there is not yet consensus on a comprehensive U.S. online data privacy policy. Congress may weigh in as the Administration seeks to define U.S. policy on data privacy and engages in international negotiations on cross-border data flows.

Mar 11, 2019

The U.S. Trade Deficit: An Overview

Mar 8, 2019

2018 Farm Bill Primer: What Is the Farm Bill?

Mar 8, 2019

Strategic Petroleum Reserve: Mandated Sales and Reform

The Strategic Petroleum Reserve (SPR), administered by the Department of Energy (DOE), has played a role in U.S. energy policy for over 40 years. Over that time, its primary focus has changed from its original intent as world oil market conditions have changed. Originally intended to offset the market power of cartels and prevent economic damage from oil supply disruption, it has become primarily a tool for combatting the fuel market effects of domestic natural disasters like hurricanes. Most recently, U.S. net imports of oil and petroleum products have decreased as a result of the increase in domestic oil production. Because of lower reliance on imports, some stakeholders see less need for an oil stockpile, and view the SPR more as a mechanism for providing funding for a wide variety of legislative purposes, ranging from health care, to highways, and general purpose revenues. Over this period, the SPR has expanded its potential usefulness to cover all of these purposes. As a member of the International Energy Agency (IEA) and a participant in the International Energy Program established by the IEA, the United States, as are all net-importer nations in the IEA, is required to hold the equivalent of 90 days of its net imports of oil and petroleum products as a reserve stock. As a result of relatively stable U.S. oil consumption and rapidly increasing production, and declining net imports, available oil stocks held in the SPR now are almost double the 90-day requirement. While the SPR has recently seen relatively little use in combatting oil supply disruptions caused by political and military instability, or even natural disasters, it has provided a source of funding for a variety of legislative initiatives. These mandated sales from the SPR have committed almost 260 million barrels of oil for sale by FY2027, leaving less than 400 million barrels of uncommitted oil reserves. Determining whether further reductions can be made from the reserve while maintaining its ability to carry out its designed purpose is a key energy policy question. The extreme variant of this question is whether a reserve is required at all, or whether privately held stocks, as practiced by most European countries, are adequate to meet international commitments. Legislation in the 115th Congress, H.R. 6511, sought to maintain the SPR facility and infrastructure, while reducing operating and maintenance costs, by renting unused storage capacity in the reserve to private companies and foreign nations. As of this writing, no bills have been introduced in the 116th Congress modifying the SPR.

Mar 8, 2019

WaterSense® Program: Congressional Authorization

Mar 8, 2019

Foreign Agents Registration Act (FARA): An Overview

Mar 7, 2019

The February 2019 Trump-Kim Hanoi Summit

Overview On February 27 and 28, President Donald Trump and North Korean leader Kim Jong-un met in Hanoi to discuss North Korea’s nuclear and missile programs, as well as the establishment of a new relationship between the two countries. The two leaders had held one prior summit, in Singapore, in June 2018. The Hanoi summit ended earlier than scheduled, with the cancelation of both a lunch and a ceremony to sign a joint statement. President Trump and U.S. officials said that the two leaders parted amicably, and that they expected dialogue would resume at a later date. An article in North Korea’s state-run media also presented the summit in a positive light and mentioned that the two leaders agreed to “continue productive dialogues.” South Korean President Moon Jae-in offered to help the United States and North Korea narrow their differences. The United States and North Korea (Democratic People’s Republic of Korea, DPRK) each attributed the summit’s breakdown to their inability to resolve differences over the scope and sequencing of concessions, specifically DPRK denuclearization measures in exchange for sanctions relief. North Korea’s Nuclear and Missile Programs Several issues stymied a summit agreement on next steps for denuclearization. Denuclearization Definition: The two sides do not appear to have an understanding on the definition of complete denuclearization, a goal Kim Jong-un has committed to in several settings. Fissile Material Production Facilities: In a post-summit press conference, North Korean officials said they had offered to shut down fissile material production facilities, which can be used to make plutonium or highly enriched uranium (HEU), at the Yongbyon nuclear complex. However, this step would not necessarily have ended North Korea’s ability to produce all nuclear weapons material. U.S. intelligence community reports have said there are additional uranium enrichment plants outside of Yongbyon. Before the summit, U.S. negotiator Stephen Biegun said that disclosure of enrichment sites other than Yongbyon was to be a key part of negotiations. President Trump in his post-summit remarks referred to a lack of agreement on North Korea’s disclosing a second uranium enrichment plant. Declaration: Another possible sticking point is whether and when North Korea will declare all of its nuclear weapons related stocks (plutonium, HEU, and warheads) and related facilities (including those outside of Yongbyon). Inspections: In his press conference following the summit, DPRK Foreign Minister Ri Yong Ho said that North Korea had proposed that technical inspectors from the United States come to Yongbyon to monitor the shuttering of fissile material production facilities there. The U.S. response is unknown. Missiles: It is unclear whether the DPRK’s ballistic missile program was discussed in Hanoi. Sanctions The two sides appeared to be far apart on the issue of sanctions relief. President Trump stated that North Korea demanded the removal of sanctions “in their entirety.” DPRK Foreign Minister Ri claimed that they had only asked for relief from United Nations Security Council (UNSC) sanctions imposed since 2016 that target North Korea’s export of coal, iron, and other minerals; imports of petroleum; and other sectoral industries. This sanctions relief would leave in place only sanctions that restrict imports of arms, dual-use items, and luxury goods. The 2016-2017 sanctions are considered the most likely to isolate North Korea’s economy if fully enforced. In the period between the Singapore and Hanoi summits, Biegun suggested that sanctions relief could be implemented as an incremental incentive and reward as North Korea, also incrementally, moves toward verifiable denuclearization. Relieving sanctions could keep all parties engaged, provide momentum for the diplomatic process, and help build trust between Pyongyang and Seoul, which would like to implement a range of inter-Korean projects but cannot under the current sanctions regime. Some critics of this approach contend that easing sanctions in the 2016-2017 UNSC resolutions would, in essence, end the multilateral sanctions regime that may have been central to bringing North Korea to the negotiating table. Some Members of Congress, after the Hanoi summit, called on the Trump Administration to resume using the legislative tools already in place to strengthen and broaden sanctions to include, for example, banks in China that conduct business for North Korea. For example, in the North Korea Sanctions and Policy Enhancement Act of 2016 (P.L. 114-122), Congress provided a statement of the goals to be achieved before relieving the pressures of sanctions, including an end to North Korea’s currency counterfeiting, money laundering, compliance with all U.N. Security Council requirements, return of abductees of foreign nations, and improved conditions in DPRK political prison camps. U.S. and U.N. sanctions are imposed on North Korea to address a broad range of behavior; comprehensive sanctions relief in response to denuclearization could be seen to diminish the importance of the other rationales for sanctions. Other Issues Missile and nuclear testing. According Secretary of State Mike Pompeo, Kim promised to maintain the moratorium on nuclear and missile tests that North Korea has had in place since late November 2017. Satellite imagery reveals that in recent weeks North Korea has started restoring structures at its Sohae missile and satellite launch site. Peace declaration and liaison offices. The United States and North Korea were expected to issue in Hanoi a declaration formally ending the Korean War and to announce the exchange of diplomatic liaison offices. After the summit, a senior State Department official involved in the negotiations said “... our view is that all these pieces [including denuclearization] fit together and ... have to move in parallel.” U.S.-South Korea military exercises. On March 2, the United States and South Korea announced a permanent halt to large-scale U.S.-South Korean military exercises and their replacement with smaller exercises. President Trump cited the exercises’ cost as the reason for their cessation. Prior to Trump’s original suspension of the exercises after the Singapore summit, U.S. defense officials often said that the annual large-scale exercises were critical to maintaining military readiness. According to the commander of U.S. forces in South Korea, over the past year North Korea has continued to hold its own military exercises “on a scale consistent with recent years.”

Mar 6, 2019

China Primer: Uyghurs

Mar 6, 2019

U.S.-Mexico Security Cooperation: From the Mérida Initiative to the Bicentennial Framework

Mar 6, 2019

Overview of the 2018 Farm Bill Energy Title Programs

Mar 6, 2019

Reauthorizing Highway and Transit Funding Programs

Mar 6, 2019

UPDATE: Will the FTC Need to Rethink its Enforcement Playbook? Third Circuit Considers FTC’s Ability to Sue Based on Past Conduct

Mar 6, 2019

PEPFAR Stewardship and Oversight Act: Expiring Authorities

Mar 6, 2019

U.S.-UK Trade Relations

Mar 5, 2019

Section 199A Deduction for Pass-Through Business Income: An Overview

Mar 5, 2019

Congress Faces Calls to Extend Funding for Special Diabetes Programs

Under the Balanced Budget Act of 1997 (P.L. 105-33), Congress amended the Public Health Service Act (PHSA) to create two special diabetes programs. The first—the Special Diabetes Program for Type I Diabetes (PHSA §330B; U.S.C. 42 §254c-2) provides funding for the National Institutes of Health (NIH) to award grants to study type I diabetes. The second—the Special Diabetes Program for Indians (PHSA §330C; U.S.C. 42 §254c-3)—provides funding to the Indian Health Service (IHS) to award grants for activities related to preventing and treating diabetes for American Indians and Alaska Natives who receive services at IHS-funded facilities. This Insight describes both programs and their funding histories. An estimated 9.4% of the U.S. population has diabetes (type 1 and type 2), and diabetes was the seventh leading cause of death in 2016. Diabetes disproportionately affects certain subpopulations, especially American Indians and Alaska Natives, who have the highest prevalence among racial/ethnic groups. The special diabetes programs are aimed at two subpopulations of those with diabetes: people with type 1 diabetes and American Indians and Alaska Natives. Program Funding Since enactment, both programs have received direct (i.e., mandatory) appropriations. Both NIH and IHS generally receive their funding through annual discretionary appropriations. For both agencies, the special diabetes programs represent one of the only direct (i.e., mandatory) budget authorities. The amount directly appropriated to both programs has increased over time. Initially, they were each funded at $30 million in FY1998. This amount increased to $150 million annually for each program beginning in FY2004. Most recently, funding was extended in Section 50902 of the Bipartisan Budget Act of 2018 (P.L. 115-123), which provided each with $150 million for each of FY2018 and FY2019. Under current law, no new funding for these programs will be available after September 30, 2019; however, previously appropriated funds are available until expended. The NIH Program Type 1 diabetes is an autoimmune disease, where a person’s pancreas cannot create insulin—the hormone that regulates blood sugar levels. People with type 1 diabetes must take daily insulin and monitor their blood sugar levels. Even with proper management, people with type 1 diabetes face increased risk of serious complications such as cardiovascular disease, renal disease, and diabetic coma. In 2015, about 5% of the estimated 23.1 million people with diabetes had type 1 diabetes. Unlike type 2 diabetes which is often linked to lifestyle factors and is more commonly diagnosed in adults, type 1 diabetes is more commonly diagnosed in children and adolescents and has no known cause. The Special Diabetes Program for Type 1 Diabetes provides funds to NIH’s National Institute of Diabetes and Digestive and Kidney Diseases (NIDDK) for research into the prevention and cure of type 1 diabetes. The program is the only disease-specific direct funding authority for NIH. NIDDK collaborates with other NIH institutions and the Centers for Disease Control and Prevention (CDC) to implement the program. In total, NIH spent $1.17 billion on diabetes research (both type 1 and type 2) in FY2018 (most recent data available). The Special Diabetes Program for Type 1 Diabetes represented about 13% of total funding on all NIH diabetes research activities. Notably, NIH does not categorize its research funding for diabetes by type (1 or 2). Therefore, the percentage of total type 1 diabetes research funding that the Special Program for Type 1 Diabetes accounts for cannot be determined by CRS. In its FY2019 Congressional Budget Justification, NIDDK specifies how the $150 million appropriated in FY2019 is allocated among six scientific goals, including one related to preventing and reversing the disease and another on developing pancreatic cell replacement therapies. NIDDK reports that the funding has helped researchers identify genes and environmental factors linked with type 1 diabetes, improve blood tests to assess risk of developing the disease, and support clinical trials on therapeutics to prevent and treat the disease. A 2011 program evaluation stated that it “has catalyzed and synergized the efforts of a wide range of NIH and HHS components to combat type 1 diabetes and complications, making it a model trans-NIH and trans-HHS program.” The IHS Program American Indians and Alaska Natives have high rates of diabetes. Prior to the inception of the Special Diabetes Program for Indians (SDPI), these rates had been increasing over time. The SDPI program was enacted to reduce both new cases of diabetes and the rates of complications among the IHS’s diabetic population. Although diabetes rates among the IHS service population remain high, they have not increased since 2011, which some advocates and the IHS attribute to the program. SDPI provides grants to fund more than 300 programs administered by Indian Tribes and Tribal Organizations that undertake evidence based-community programs to prevent and treat diabetes. It supports activities such as nutrition and exercise counseling that seek to prevent diabetes and activities to monitor diabetes related complications, such as foot and eye screening. The program also provides support for IHS’s diabetes surveillance efforts. IHS funds health services, but the needs for services generally exceed available funding. For example, IHS data indicate that it denied or deferred referrals for more than 92,000 services in FY2016. As part of IHS’s strategy to manage resources, it focuses on prevention of common conditions among its service population, including diabetes. IHS’s prevention efforts may complement SDPI programs, as both can be used to support wellness and nutrition programs. Policy Considerations Congress may face a number of policy questions with regard to the two diabetes programs. These include the following: Should program funding be extended? Can some or all of program activities be undertaken using the NIH and IHS discretionary appropriations? Do the activities funded under these program supplement or duplicate other agency activities? Are there advantages or drawbacks to disease-specific funding authorities? If program funding is extended, is the program’s current funding level appropriate? As noted above, funding for these programs has not increased since FY2004. During this time period, the cost of research has increased, as has the size of the IHS service population and the cost of medical care.

Mar 5, 2019

Guatemalan President's Dispute with the U.N. Commission Against Impunity (CICIG)

Mar 5, 2019

The State and Local Role in Election Administration: Duties and Structures

The administration of elections in the United States is highly decentralized. Elections are primarily administered by thousands of state and local systems rather than a single, unified national system. States and localities share responsibility for most election administration duties. Exactly how responsibilities are assigned at the state and local levels varies both between and within states, but there are some general patterns in the distribution of duties. States typically have primary responsibility for making decisions about the rules of elections (policymaking). Localities typically have primary responsibility for conducting elections in accordance with those rules (implementation). Localities, with varying contributions from states, typically also have primary responsibility for paying for the activities and resources required to conduct elections (funding). The structures of the state and local systems that conduct elections also vary between and within states. Common variations include differences related to the leadership of the system, the relationship between local election officials and the state, and the population size and density of the jurisdiction the system serves. The leadership of a state or local election system may be elected or appointed, and both the leaders and the methods used to select them may be partisan, bipartisan, or nonpartisan. State officials may have more or less direct influence over local election officials, and the extent of their influence may be affected by other structural features of the state’s election systems, such as the methods used to select local officials. Finally, larger election jurisdictions have different administrative advantages and challenges than smaller ones, and more urban jurisdictions have different advantages and challenges than more rural ones. These differences between jurisdictions may be reflected in structural features of the election systems that serve them, such as how the systems allocate resources and where they find specialized expertise. Understanding the duties and structures of state and local election systems may be relevant to Congress for at least two reasons. First, the way state and local election systems work can affect how well federal action on election administration serves its intended purposes. The effectiveness of federal action depends in part on how it is implemented. How it is implemented can depend, in turn, on how the state and local election systems that implement it work. Second, Congress can make or incentivize changes to the way state and local election systems work. Congress has a number of policy tools it can use to affect the administration of federal elections. The use of these tools can—either intentionally or unintentionally—affect the state and local election systems that administer federal elections.

Mar 4, 2019

BB&T and SunTrust: The Latest Proposed Merger in a Long-Term Trend of Banking Industry Consolidation

On February 9, 2019, BB&T and SunTrust—the 16th- and 17th-largest U.S. banks by asset size, respectively—announced they intend to merge, which would create the 8th-largest U.S. bank. This proposed merger illustrates a transformative 35-year trend of banking industry consolidation. Banks are becoming fewer, and industry assets are increasingly concentrated in large banks. Observers have warned that this trend could leave certain markets traditionally served by small banks underserved or unserved. In addition, large, complex banks—or “too big to fail” (TBTF) banks—potentially create market distortions and threaten systemic stability. This Insight examines industry consolidation in general and the proposed BB&T-SunTrust merger specifically. For a detailed examination of related policy issues, see CRS Report R45518, Banking Policy Issues in the 116th Congress. Industry Consolidation The number of institutions insured by the Federal Deposit Insurance Corporation (FDIC) fell from a peak of 18,083 in 1986 to 5,406 in 2018. Banks with less than $1 billion in assets fell from 17,514 to 4,631, and the share of industry assets held by them fell from 37% to 7%. Meanwhile, the number of banks with more than $10 billion in assets rose from 38 to 137, and the share of assets held by those banks increased from 28% to 84%. The decline occurred mainly through three methods: mergers, failures, and lack of new banks. Bank mergers, which averaged almost 396 per year from 1990 to 2018, are the largest factor in this decline, although mergers have slowed since the 2007-2009 financial crisis (see Figure 1). Figure 1. Mergers of FDIC-Insured Depository Institutions / Source: FDIC. Bank failures played a large role in this decline during and after financial crises (over 1,000 depositories failed following the savings and loans crisis, and over 500 failed following the 2007-2009 crisis). Failures have declined as economic conditions have improved, but the number of new banks has been extraordinarily small in recent years. On average, 152 new banks formed annually between 1990 and 2007; in 2018, 8 new banks formed. Certain analysts attribute the lack of new banks to slow economic growth and low interest rates. Critics of new bank regulations argue that regulatory burden inhibits new bank formation. Merger Motivations Banking operations in general may be subject to increasing economies of scale—meaning banks become more profitable as they get bigger—perhaps due to the growing role of information technology. If this is the case, banks could be merging to become more profitable through greater efficiency. Some observers argue that banks experience economies of scale specifically in regulation compliance, meaning compliance costs may increase more slowly than revenues as bank size increases. Based on this argument, critics of new regulations assert regulatory burden is driving smaller banks to merge into larger institutions. However, the role regulatory burden plays in bank consolidation is a matter of debate, in part because empirically measuring economies of scale in compliance is difficult. Mergers also could occur for reasons other than scale. For example, a bank that is struggling financially may look to merge with a stronger bank to stay in business. Alternatively, a larger bank may buy a small bank that has been outperforming its peers to add the successful portfolio to its own. Other regulatory factors also could be driving consolidation. Through much of the 20th century, federal and state laws restricted banks’ ability to open new branches and operate across state lines. States substantially relaxed these restrictions in the late 1980s, and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 did so at the federal level. As a result, it became easier for banks to consolidate and spread operations to other markets. BB&T-SunTrust Merger BB&T has nearly $226 billion in total assets ($219 billion at its main depository) and 1,884 U.S. depository branch offices across 15 mostly southeastern states and the District of Columbia (DC). SunTrust has nearly $216 billion in total assets ($210 billion at its main depository) and 1,254 U.S. branches across 10 mostly southeastern states and DC. The two organizations have characteristics that observers identify with “regional” banks—an unofficial bank classification. Both have a large amount of assets, mostly attributable to a single depository subsidiary, but are not nearly as large as the very largest U.S. banks. Both also have a relatively high concentration in loan making and deposit taking and a less-than-national geographic footprint. Regional bank advocates argue these characteristics make such banks similar to “community” banks and dissimilar to risky, complex TBTF banks. Thus, they argue, certain regulations aimed at TBTF banks should be applied based on criteria that regional banks would not meet. Opponents of this position, citing the size of the banks’ exposures and the amount of available resources for compliance, assert it is appropriate to subject the banks to stringent regulation. Given that, if the merger is approved, the new entity can reasonably be expected to have about $442 billion in total assets and continue to operate primarily as a lender and deposit taker, the merger may stir this ongoing debate. Both banks are individually approaching the $250 billion asset threshold at which banks become subject to stricter advanced approaches capital requirements. Some research suggests that banks approaching such thresholds are motivated to merge, because they would prefer entering a more stringent regulatory regime with cost savings from a big jump in economies of scale to incrementally crossing the line. Arguably, this “in-for-a-penny-in-for-a-pound” strategy could be a factor in the proposed BB&T-SunTrust merger. The $250 billion asset threshold will—once regulators implement Section 401 of P.L. 115-174—also be the criterion that automatically subjects banks to enhanced prudential regulation (EPR). BB&T and SunTrust currently are subject to EPR based on the original $50 billion threshold that Section 401 raises to $250 billion. Thus, depending on the timing of the implementation and the merger, the two banks may not technically cross into a new EPR regime. However, the in-for-a-penny-in-for-a-pound logic still may hold, because without a merger, even post-Section 401 implementation, each bank would be incrementally approaching a threshold that would trigger more stringent regulation.

Mar 4, 2019

Changes to House Rules Affecting the Congressional Budget Process Included in H.Res. 6 (116th Congress)

On January 3, 2019, the House adopted Title I of H.Res. 6, the standing rules for the House of Representatives for the 116th Congress. In addition to the standing rules, H.Res. 6 included a separate order related to the consideration of appropriations bills. This report provides information on changes to both the standing rules and separate orders that might affect the consideration of budgetary legislation in the House of Representatives. These include the following: Deleting language in Rule X added in the 115th Congress providing for committees to include a review of authorizations for programs or agencies within their jurisdiction in their oversight plans. Deleting language in Rule XIII, previously adopted in the 114th and 115th Congresses, requiring that any budgetary estimates provided by the Congressional Budget Office (CBO) include, to the extent practicable, a macroeconomic impact analysis (often referred to as “dynamic scoring”) as well as a requirement that any estimate provided to CBO by the Joint Committee on Taxation also include a macroeconomic impact analysis. Deleting language added to Rule XXI in the 104th Congress requiring the vote of a three-fifths majority to approve a federal income tax rate increase as well as a requirement in Rule XX to automatically order the yeas and nays for a vote of the House on such measures. Establishing new language as Rule XXVIII providing for certain measures concerning the debt limit to automatically be engrossed and deemed to have been passed by the House. This measure would suspend the debt limit through the end of the budget year in the concurrent resolution on the budget (but not through the period covered by any outyears beyond the budget year). The engrossed measure would then be transmitted to the Senate for further action. This rule is similar to language that was previously part of House rules from the 96th-107th Congresses (known as the “Gephardt Rule”). Reestablishing a PAYGO requirement in the House, which had previously been in effect during the 110th and 111th Congresses. This PAYGO rule (Rule XXI, clause 10) replaces the CUTGO rule that was a part of Rule XXI between the 112th and 115th Congresses. The new rule prohibits the consideration of direct spending or revenue legislation that is projected to increase or cause a deficit in either of two time periods: (1) the period consisting of the current fiscal year, the budget year, and the four ensuing fiscal years following the budget year or (2) the 11-year period consisting of the current year, the budget year, and the ensuing nine fiscal years following the budget year. The rule applies to any bill, joint resolution, amendment, motion, or conference report that affects direct spending or revenues. H.Res. 6 also included a separate order establishing a limit on advance appropriations, defined as applying to funding provided in FY2019 appropriations acts that are to become available in any fiscal year following FY2019. In addition, several separate orders from previous congresses are not included in H.Res. 6 for the 116th Congress. These include language prohibiting House consideration of measures estimated by CBO as causing a net increase in spending in excess of $5 billion in any of the four 10-year periods beginning with the fiscal year 10 years after the current fiscal year, two points of order that previously supplemented the point of order in Section 302(f) of the Congressional Budget Act of 1974 as a means for enforcing 302(b) suballocations, language requiring that appropriations bills include a spending reduction account, and language allowing certain legislative amendments in appropriations bills (known as the “Holman Rule”).

Mar 4, 2019

The First Step Act of 2018: An Overview

On December 21, 2018, President Trump signed into law the First Step Act of 2018 (P.L. 115-391). The act was the culmination of several years of congressional debate about what Congress might do to reduce the size of the federal prison population while also creating mechanisms to maintain public safety. This report provides an overview of the provisions of the act. The act has three major components: (1) correctional reform via the establishment of a risk and needs assessment system at the Bureau of Prisons (BOP), (2) sentencing reform via changes to penalties for some federal offenses, and (3) the reauthorization of the Second Chance Act of 2007 (P.L. 110-199). The act also contains a series of other criminal justice-related provisions. The First Step Act requires the Department of Justice (DOJ) to develop a risk and needs assessment system to be used by BOP to assess the recidivism risk of all federal prisoners and to place prisoners in programs and productive activities to reduce this risk. Prisoners who successfully complete recidivism reduction programming and productive activities can earn additional time credits that will allow them to be placed in prerelease custody (i.e., home confinement or a Residential Reentry Center) earlier than they were previously allowed. The act prohibits prisoners convicted of any one of dozens of offenses from earning additional time credits, though these prisoners can earn other benefits, such as additional visitation time, for successfully completing recidivism reduction programming. Offenses that make prisoners ineligible to earn additional time credits can generally be categorized as violent, terrorism, espionage, human trafficking, sex and sexual exploitation, repeat felon in possession of firearm, certain fraud, or high-level drug offenses. The act makes changes to the penalties for some federal offenses. The act modified mandatory minimum prison sentences for some drug traffickers with prior drug convictions by increasing the threshold for prior convictions that count toward triggering higher mandatory minimums for repeat offenders, reducing the 20-year mandatory minimum (applicable where the offender has one prior qualifying conviction) to a 15-year mandatory minimum, and reducing a life-in-prison mandatory minimum (applicable where the offender has two or more prior qualifying convictions) to a 25-year mandatory minimum. The act made the provisions of the Fair Sentencing Act of 2010 (P.L. 111-220) retroactive so that currently incarcerated offenders who received longer sentences for possession of crack cocaine than they would have received if sentenced for possession of the same amount of powder cocaine before the enactment of the Fair Sentencing Act can submit a petition in federal court to have their sentences reduced. The act also expands the safety valve provision, which allows courts to sentence low-level, nonviolent drug offenders with minor criminal histories to less than the required mandatory minimum for an offense. Finally, the act eliminated the stacking provision, which allowed prosecutors to charge offenders with a second and subsequent use of a firearm in furtherance of a drug trafficking or violent offense in the same criminal incident, which, if the offender is convicted, carries a 25-year mandatory minimum. Now, the mandatory minimum will only apply when the offender has a prior conviction for use of a firearm in furtherance of a drug trafficking or violent crime from a previous criminal prosecution. The First Step Act contains the Second Chance Reauthorization Act of 2018. This act reauthorizes appropriations for and expands the scope of some grant programs that were initially authorized under the Second Chance Act of 2007 (P.L. 110-199). The reauthorized programs include the Adult and Juvenile State and Local Offender Demonstration Program, Grants for Family-Based Substance Abuse Treatment, Careers Training Demonstration Grants, the Offender Reentry Substance Abuse and Criminal Justice Collaboration Program, and the Community-Based Mentoring and Transitional Service Grants to Nonprofit Organizations Program. The act also reauthorized and modified a pilot program that allows BOP to place certain elderly and terminally ill prisoners on home confinement to serve the remainder of their sentences. Finally, the First Step Act includes a series of other criminal justice-related provisions. These provisions include a prohibition on the use of restraints on pregnant inmates in the custody of BOP and the U.S. Marshals Service; a change to the way good time credit is calculated so prisoners can earn 54 days of good time credits for each year of imposed sentence rather than for each year of time served; a requirement for BOP to provide a way for employees to safely store firearms on BOP grounds; a requirement for BOP to try to place prisoners within 500 driving miles of their primary residences; authority for the Federal Prison Industries to sell products to public entities for use in correctional facilities, disaster relief, or emergency response, to the District of Columbia government, and to nonprofit organizations; a prohibition against the use of solitary confinement for juvenile delinquents in federal custody; and a requirement that BOP aid prisoners with obtaining identification before they are released.

Mar 4, 2019

Internal Revenue Service Appropriations, FY2019

Mar 4, 2019

The Power Marketing Administrations: Background and Current Issues

The federal government, through the Department of Energy, operates four regional power marketing administrations (PMAs), created by statute: the Bonneville Power Administration (BPA), the Southeastern Power Administration (SEPA), the Southwestern Power Administration (SWPA), and the Western Area Power Administration (WAPA). Each PMA operates in a distinct geographic area. Congressional interest in the PMAs has included diverse issues such as rate setting, cost and compliance associated with the Endangered Species Act (ESA; P.L. 93-205; 16 U.S.C. §§1531 et seq.), and questions of privatization of these federal agencies. In general, the PMAs came into being because of the government’s need to dispose of electric power produced by dams constructed largely for irrigation, flood control, or other purposes, and to achieve small community and farm electrification—that is, providing service to customers whom it would not have been profitable for a private utility to serve. With minor exceptions, these agencies market the electric power produced by federal dams constructed, owned, and operated by the U.S. Army Corps of Engineers (Corps) and the Bureau of Reclamation (BOR). By statute, PMAs must give preference to public utility districts and cooperatives (e.g., “preference customers”), and sell their power at cost-based rates set at the lowest possible rate consistent with sound business principles. The Federal Energy Regulatory Commission regulates PMA rates to ensure that they are set high enough to repay the U.S. Treasury for the portion of federal facility costs allocated to hydropower beneficiaries. With energy and capacity markets changing in the western United States (especially with the growing need to integrate increasing amounts of variable renewable sources), and the development of the Energy Imbalance Market in the West, BPA and WAPA may have to adapt their plans with regard to generation needs and how transmission systems are developed. In 2018, the Trump Administration proposed to sell the transmission assets (lines, towers, substations, and/or rights of way) owned and operated by the federal Power Marketing Administrations. The proposal suggested that “eliminating or reducing” the federal government’s role in owning and operating transmission assets, and increasing the private sector’s role, would “encourage a more efficient allocation of economic resources and mitigate unnecessary risk to taxpayers.” The resulting PMA entities would then contract with other utilities to provide transmission services for the delivery of federal power, similar to what SEPA does currently. Reportedly, the proposed sale of PMA assets was dropped after opposition to the plan emerged from stakeholders. Under Section 208 of the Urgent Supplemental Appropriations Act, 1986 (P.L. 99-349), the executive branch is prohibited from spending funds to study or draft proposals to transfer from federal control any portion of the assets of the PMAs unless specifically authorized by Congress. Environmental, fishing, and tribal advocates have sued the federal government over concerns that operating rules for hydropower dams on the Columbia and Snake Rivers (i.e., the National Marine Fisheries Service Biological Opinion) are inadequate to ensure survival of species threatened or endangered under the ESA. In 2016, a federal judge overturned a previous management plan for the dams, finding that it would not be sufficient to protect salmon runs, and ordered a new management plan that could include removing the dams. However, in 2018, President Trump issued a Presidential Memorandum accelerating the process for a new management plan, requiring the biological opinion to be ready by 2020. Since FY2011, power revenues associated with the PMAs have been classified as discretionary offsetting receipts (i.e., receipts that are available for spending by the PMAs), thus the agencies are sometimes noted as having a “net-zero” spending authority. Only the capital expenses of WAPA and SWPA require appropriations from Congress.

Mar 1, 2019

Definition of National Emergency under the National Emergencies Act

Mar 1, 2019

Management of the Colorado River: Water Allocations, Drought, and the Federal Role

Mar 1, 2019

Caribbean Basin Security Initiative

Mar 1, 2019

2019 Tax Filing Season (2018 Tax Year): The State and Local Tax Deduction

Mar 1, 2019

Suspension of the Rules: House Practice in the 114th Congress (2015-2016)

Suspension of the rules is the most commonly used procedure to call up measures on the floor of the House of Representatives. As the name suggests, the procedure allows the House to suspend its standing and statutory rules in order to consider broadly supported legislation in an expedited manner. More specifically, the House temporarily sets aside its rules that govern the raising and consideration of measures and assumes a new set of constraints particular to the suspension procedure. The suspension of the rules procedure has several parliamentary advantages: (1) it allows nonprivileged measures to be raised on the House floor without the need for a special rule, (2) it enables the consideration of measures that would otherwise be subject to a point of order, and (3) it streamlines floor action by limiting debate and prohibiting floor amendments. Given these features, as well as the required two-thirds supermajority vote for passage, suspension motions are generally used to process less controversial legislation. In the 114th Congress (2015-2016), measures considered under suspension made up 62% of the bills and resolutions that received floor action in the House (743 out of 1,200 measures). The majority of suspension measures were House bills (83%), followed by Senate bills (11%) and House resolutions (4%). The measures covered a variety of policy areas but most often addressed government operations, such as the designation of federal facilities or amending administrative policies. Most measures that are considered in the House under the suspension procedure are sponsored by a House or Senate majority party member. However, suspension is the most common House procedure used to consider minority-party-sponsored legislation regardless of whether the legislation originated in the House or Senate. In 2015 and 2016, minority-party members sponsored 31% of suspension measures, compared to 9% of legislation subject to different procedures, including privileged business (17 measures), unanimous consent (21 measures), and under the terms of a special rule (one Senate bill). Most suspension measures are referred to at least one House committee before their consideration on the floor. The House Committee on Oversight and Government Reform (now called the Committee on Oversight and Reform) was the committee of primary jurisdiction for the plurality of suspension measures considered in the 114th Congress. Additional committees—such as Energy and Commerce, Homeland Security, Natural Resources, Foreign Affairs, and Veterans’ Affairs—also served as the primary committee for a large number of suspension measures. Suspension motions are debatable for up to 40 minutes. In most cases, only a fraction of that debate time is actually used. In the 114th Congress, the average amount of time spent considering a motion to suspend the rules was 13 minutes and 10 seconds. The House adopted nearly every suspension motion considered in 2015 and 2016. Approval by the House, however, did not guarantee final approval in the 114th Congress. The Senate passed or agreed to 40% of the bills, joint resolutions, and concurrent resolutions initially considered in the House under suspension of the rules, and 276 measures were signed into law. This report briefly describes the suspension of the rules procedure, which is defined in House Rule XV, and provides an analysis of measures considered under this procedure during the 114th Congress. Figures and one table display statistics on the use of the procedure, including the prevalence and form of suspension measures, sponsorship of measures by party, committee consideration, length of debate, voting, resolution of differences between the chambers, and the final status of legislation. In addition, an Appendix illustrates trends in the use of the suspension procedure from the 110th to the 114th Congress (2007-2016).

Feb 28, 2019

Enforcing U.S. Trade Laws: Section 301 and China

Feb 28, 2019

U.S.-Japan Trade Agreements and Negotiations

Feb 28, 2019

Declarations under the National Emergencies Act, Part 1: Declarations Currently in Effect

Feb 28, 2019

The Federal Land Management Agencies

Feb 27, 2019

Farm Bill Primer: Energy Title

Feb 27, 2019

Defense Primer: Electronic Warfare

Feb 26, 2019

Federal Records: Types and Treatments

Feb 26, 2019

Disaster Housing Assistance: Homeland Security Issues in the 116th Congress

/ After the President issues an emergency or major disaster declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act, 42 U.S.C. §§5121 et seq.), the Federal Emergency Management Agency (FEMA) may provide various temporary housing assistance programs to meet disaster survivors’ needs. However, limitations on these programs may make it difficult to transition disaster survivors into permanent housing. This Insight provides an overview of the primary housing assistance programs available under the Stafford Act, and potential considerations for Congress. Transitional Sheltering Assistance FEMA-provided housing assistance may include short-term, emergency sheltering accommodations under Section 403 of the Stafford Act (42 U.S.C. §5170b), including the Transitional Sheltering Assistance (TSA) program, which received significant attention as it was coming to an end for disaster survivors of Hurricane Maria from Puerto Rico. This transition process highlighted challenges to helping individuals and families obtain interim and permanent housing following a disaster. TSA is intended to provide short-term hotel/motel accommodations to individuals and families who are unable to return to their pre-disaster primary residence because a declared disaster rendered it uninhabitable or inaccessible. The initial period of TSA assistance is 5-14 days, and it can be extended in 14-day intervals for up to 6 months from the date of the disaster declaration. However, some Hurricane Maria disaster survivors from Puerto Rico remained in the TSA program for nearly one year due to extensions of the program (including by court order). Hurricane Maria is not the only incident that has received multiple TSA program extensions; disaster survivors of Hurricanes Harvey, Irma, and Sandy also received extensions for nearly a year. Research suggests that housing-instable individuals and families may have an “increased risk of adverse mental health outcomes,” which may reveal a drawback to using an emergency sheltering solution, such as TSA, to house individuals and families in hotels/motels for extended periods of time. Individuals and Households Program Interim housing needs may be better met through FEMA’s Individuals and Households Program (IHP) under Section 408 of the Stafford Act (42 U.S.C. §5174). Financial (e.g., assistance to reimburse temporary lodging expenses and rent alternate housing accommodations) and/or direct (e.g., multi-family lease and repair and manufactured housing units (MHUs)) assistance may be available to eligible individuals and households who, as a result of a disaster, have uninsured or under-insured necessary expenses and serious needs that cannot be met through other means or forms of assistance. IHP assistance is intended to be temporary, and is generally limited to a period of 18 months from the date of the declaration, but may be extended by FEMA. Although IHP provides various assistance options, eligibility and programmatic limitations exist on their receipt and use. For example, disaster survivors whose primary residence is determined to be habitable or who have access to adequate rent-free housing may be ineligible to receive assistance, even if they are unable to return for other reasons (e.g., lack of employment). Challenges to providing financial assistance, such as rental assistance, may include lack of available, affordable housing stock. Additionally, regulations and policies may not permit FEMA to immediately adjust rental payment rates to reflect the location where a disaster survivor has relocated. So even if housing stock is available, the difference in cost may result in the inability of some eligible applicants to secure a housing unit. Challenges to providing direct assistance, such as MHUs, may include restrictions on the placement of MHUs. Additionally, FEMA’s direct lease assistance program is usually only offered if rental resources are scarce, and the area where direct lease assistance is available may be limited. Further, following a catastrophic incident additional challenges include the need to restore infrastructure, community services, and employment opportunities, which may impact where disaster survivors decide to locate following a disaster. This decision may impact the benefits for which they may be eligible. Disaster Housing Assistance Program Following Hurricanes Katrina and Rita, Ike and Gustav, and Sandy, FEMA executed Interagency Agreements with the U.S. Department of Housing and Urban Development (HUD) to administer the Disaster Housing Assistance Program (DHAP) in order to provide rental assistance and case management services. Although DHAP fell under Section 408 of the Stafford Act and was funded through the Disaster Relief Fund, it was not subject to some of the limitations of the IHP, and it may have allowed families to receive more assistance for longer periods of time than they may have received under IHP. Despite being identified as a promising interim housing strategy and potential solution to the challenge of meeting long-term housing needs in the National Disaster Housing Strategy, FEMA has not implemented DHAP following more recent disasters. Most recently, in response to the Governor of Puerto Rico’s request to authorize DHAP, FEMA stated DHAP would not be implemented, because FEMA and HUD “offered multiple housing solutions that are better able to meet the current housing needs of impacted survivors.” FEMA also noted that the Office of Inspector General (OIG) had raised concerns about DHAP’s cost effectiveness; the OIG recommended that, before FEMA activates DHAP again, it “[c]onduct a cost-benefit analysis.... ” Potential Considerations for Congress FEMA provides temporary housing assistance to meet short-term and interim disaster housing needs; however, clearly defining the use of these programs and identifying a process to assist some disaster survivors with attaining permanent housing may be needed to comprehensively address disaster housing needs throughout all phases of recovery. Congress may request an evaluation of FEMA’s capacity to adequately and cost-effectively meet the needs of disaster survivors. Congress may also evaluate the roles of government and private/nonprofit entities in providing disaster housing assistance; require FEMA to collaborate with disaster housing partners to identify and outline short, interim, and long-term disaster housing solutions; and require an update to the National Disaster Housing Strategy to reflect the roles and responsibilities of housing partners, current practices and solutions, and the findings of any such evaluations. Congress may also pursue legislative solutions, including by consolidating, eliminating, or revising existing authorities and programs, or creating new programs that address unmet needs.

Feb 26, 2019

Medicaid Disproportionate Share Hospital (DSH) Reductions

Feb 26, 2019

Iran: Efforts to Preserve Economic Benefits of the Nuclear Deal

Feb 26, 2019

Redirecting Army Corps of Engineers Civil Works Resources During National Emergencies

Feb 26, 2019

Venezuela: Overview of U.S. Sanctions Policy

Feb 25, 2019

Digital Services Taxes (DSTs): Policy and Economic Analysis

Several countries, primarily in Europe, and the European Commission have proposed or adopted taxes on revenue earned by multinational corporations (MNCs) in certain “digital economy” sectors from activities linked to the user-based activity of their residents. These proposals have generally been labeled as “digital services taxes” (DSTs). For example, beginning in 2019, Spain is imposing a DST of 3% on online advertising, online marketplaces, and data transfer service (i.e., revenue from sales of user activities) within Spain. Only firms with 750 million in worldwide revenue and 3 million in revenues with users in Spain are to be subject to the tax. In 2020, the UK plans to implement a 3% DST that would apply only to businesses whose revenues exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually. The UK labels its DST as an “interim” solution until international tax rules are modified to allow countries to tax the profits of foreign MNCs if they have a substantial enough “digital presence” based on local users. The member states of the European Commission are also actively considering such a rule. These policies are being considered and enacted against a backdrop of ongoing, multilateral negotiations among members and nonmembers of the Organization for Economic Cooperation and Development (OECD). These negotiations, prompted by discussions of the digital economy, could result in significant changes for the international tax system. Proponents of DSTs argue that digital firms are “undertaxed.” This sentiment is driven in part by some high-profile tech companies that reduced the taxes they paid by assigning ownership of their income-producing intangible assets (e.g., patents, marketing, and trade secrets) to affiliate corporations in low-tax jurisdictions. Proponents of DSTs also argue that the countries imposing tax should be entitled to a share of profits earned by digital MNCs because of the “value” to these business models made by participation of their residents through their content, reviews, purchases, and other contributions. Critics of DSTs argue that the taxes target income or profits that would not otherwise be subject to taxation under generally accepted income tax principles. U.S. critics, in particular, see DSTs as an attempt to target U.S. tech companies, especially as minimum thresholds are high enough that only the largest digital MNCs (such as Google, Facebook, and Amazon) will be subject to these specific taxes. DSTs are structured as a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. A tax on corporate profits taxes the return to investment in the corporate sector. Corporate profit is equal to total revenue minus total cost. In contrast, DSTs are “turnover taxes” that apply to the revenue generated from taxable activities regardless of costs incurred by a firm. Additionally, international tax rules do not allow countries to tax an MNC’s cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to be allocated a share of that MNC’s profits to tax. Under these rules and their underlying principles, the fact that a country’s residents purchase digital services from an MNC is not a justification to tax the MNC’s profits. DSTs are likely to have the economic effect of an excise tax on intermediate services. The economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions. As a result, economic theory and the general body of empirical research on excise taxes predict that DSTs are likely to increase prices in affected markets, decrease quantity supplied, and reduce investment in these sectors. Compared to a corporate profits tax—which, on balance, tends to be borne by higher-income shareholders—DSTs are expected to be more regressive forms of raising revenue, as they affect a broad range of consumer goods and services. Certain design features of DSTs could also create inequitable treatment between firms and increase administrative complexity. For example, minimum revenue thresholds could be set such that primarily large, foreign (and primarily U.S.) corporations are subject to tax. Requirements to identify the location of users could also introduce significant costs on businesses. This report traces the emergence of DSTs from multilateral tax negotiations in recent years, addresses various purported policy justifications of DSTs, provides an economic analysis of their effects, and raises several issues for Congress.

Feb 25, 2019

Low Interest Rates, Part 1: Economic and Fiscal Implications

Feb 25, 2019

Low Interest Rates, Part 2: Implications for the Federal Reserve

Interest rates have been unusually low by historical standards since the 2007-2009 financial crisis. This Insight discusses the implications for monetary policy, and it frames this discussion in terms of the neutral interest rate. It is the sequel to a previous Insight, Low Interest Rates, Part 1. For background on monetary policy, see CRS Report RL30354, Monetary Policy and the Federal Reserve: Current Policy and Conditions, by Marc Labonte. The Neutral Interest Rate The neutral interest rate (sometimes called r*) is conceptual and not directly observed—it is the idea that at any given time there is some level for the federal funds rate that will neither stimulate nor hold back economic activity. The Federal Reserve (Fed) implements monetary policy by targeting the federal funds rate. The Fed raises or lowers the federal funds rate in an attempt to properly balance the tradeoff between its statutorily mandated goals—full employment and stable price inflation. Economists judge monetary policy to be contractionary or stimulative based on whether the actual federal funds rate is above or below, respectively, the neutral rate. As shown in Figure 1, monetary policy was contractionary for most of the 1980s because the federal funds rate was above the estimated neutral rate. Since the crisis, monetary policy has been stimulative because the federal funds rate has been below the estimated neutral rate. Figure 1. Real Neutral Rate and Federal Funds Rate 1961-2018 / Source: New York Fed; St. Louis Fed, FRED database. Note: Rates are adjusted for inflation using Consumer Price Index. Since the crisis, the federal funds rate (as well as long-term rates) has been very low by historical standards; it was nearly zero from 2008 to 2015. Before the crisis, many economists assumed that the real (inflation-adjusted) neutral rate was about 2% and fairly constant over time; at the prevailing inflation rate of 2%, that would translate to a neutral rate of about 4%. If the actual federal funds rate is consistently below the neutral rate—in other words, if monetary policy is persistently stimulative—at full employment, inflation would be expected to rise. Yet the actual federal funds rate has now been below 4% since 2008 without any noticeable sustained increase in inflation, even as the economy has returned to full employment. This outcome implies that the neutral rate must have fallen. According to the estimate shown in Figure 1, the real neutral rate has fallen by more than a percentage point since 2008. Implications for Monetary Policy The decline in the neutral rate has implications for monetary policy. It means that any given federal funds rate is less stimulative or more contractionary than it would have been before the neutral rate fell. As a result, a simple historical comparison of prevailing federal funds rates before and after the crisis would give the misleading impression that monetary policy since the crisis has been more stimulative than it actually was. (Also, inflation has been lower since the crisis than it was in earlier decades, so the difference in real rates is smaller than the difference in actual rates.) Although the neutral rate is a useful concept for framing monetary policy decisions, uncertainty about its true value points to the difficulty of basing policy on a variable that cannot be directly observed. Current policy illustrates why that is the case. Fed Chairman Jerome Powell stated in January that “our policy rate is now in the range of the [Fed’s] estimates of neutral.” If the Fed is correct, the Fed faces some risk that the economy will overheat and inflation will rise with a neutral monetary policy at full employment. But if the Fed has incorrectly estimated that the neutral rate has fallen more than it has, then monetary policy is still stimulative and the risk of inflation rising is greater. In light of this uncertainty, the neutral rate could be de-emphasized in policymaking, but without it, policy decisions may become less forward-looking, which could lead to worse outcomes because of lags between policy changes and economic outcomes. De-emphasizing the neutral rate would also be problematic for those advocating that the Fed rely on policy rules, as the neutral rate is a key variable in standard policy rules (such as the “Taylor rule”). H.R. 10, which passed the House in the 115th Congress, is an example of legislation that would have required the Fed to compare its monetary policy decisions to a policy rule. A lower neutral rate also has implications for the Fed’s ability to use monetary stimulus to fight the next economic downturn. Because the neutral rate is low and the inflation rate is low, the federal funds rate is currently closer to the “zero lower bound” than it has been in previous expansions. That means the Fed has limited ability to use conventional monetary stimulus to respond to a future downturn because interest rates cannot be cut (significantly) below zero. As a result, the Fed is more likely to need to use unconventional monetary stimulus, such as “quantitative easing,” to combat a future downturn.

Feb 25, 2019