A filibusted flush

US political gridlock

The filibuster is an important procedural device in the US Senate that makes it significantly harder to break the gridlock between Republicans and Democrats. President Trump argues that the "very outdated filibuster must go". But what is it? Why is it important? And what are the investment implications of throwing it on the Congressional scrapheap?

 

There are not many successful Hollywood films about parliamentary procedure. Such issues are normally up there with “watching paint dry” in terms of popular interest.

 

However, Frank Capra’s 1939 classic Mr Smith Goes to Washington is the exception. The eponymous hero talks to the point of collapse in the US Senate in an epic filibuster.

 

The word filibuster derives from the Dutch vrijbuiter meaning freebooter (i.e. pirate). In its modern usage, it refers to any act of obstruction in a legislative assembly.

A filibuster refers to an act of obstruction in a legislative assembly

In the US Congress, the filibuster is a procedure whereby a minority of Senators can obstruct the passage of a piece of legislation by simply refusing to end the debate.

 

In days gone by (and in the classic film), that meant literally refusing to stop talking. Senator Strum Thurmond holds the all-time record. In 1957, he spoke non-stop for 24 hours and 18 minutes in an attempt to block the Civil Rights Act. Thankfully, he failed.

 

Senators didn’t even need to stay on topic. There are historical examples of senators reading aloud from the District of Columbia phone book and Dr Seuss’s “Green Eggs and Ham”.

 

Prior to WWI, there was no mechanism to force Senators to stop talking. However, under President Wilson, a process called cloture (or closure) was introduced. Senate debate on a particular topic could be brought to an end by a supermajority of 2/3rds “of Senators present and voting”. Successful filibusterers needed to keep a sufficient number of supporters on the Senate floor at all times of day and night.

 

Successful filibusterers needed to keep a sufficient number of supporters on the Senate floor at all times of day and night

Those rules changed in 1975 to be 3/5ths “of Senators sworn”. This shifted the balance of power: a Senator tucked up in bed became a vote to continue the filibuster. Grandstanding day-long speeches still occur from time to time, but they are now a product of political peacocking rather than procedural necessity.

 

Today, most items of parliamentary business therefore require the support of 60 senators (not just the 50 needed to secure a simple majority). That presents a problem for President Trump given that the Republican party have just 52 senators: a majority, but not a supermajority.

 

In recent days, President Trump has put a new focus on the filibuster, stating that "the very outdated filibuster rule most go." The key point here is that filibuster is not sacrosanct and could be abandoned at any point by Senate leaders. The only provision in the US constitution is that “Each house may determine the rules of its proceedings”.

 

The numbers suggest that the system has become dysfunctional. From 1917-2000, there were 552 cloture votes in the US Senate. Since 2001 (i.e. the Bush/Obama/Trump years), there have been 818. The days of bipartisan dealmaking appear to be are well and truly over.

 

In response to that, the power to use the filibuster is being steadily eroded. In 2013, President Obama and Harry Reid (then the Senate majority leader) changed the rules to prohibit the use of filibusters for most Presidential executive and judicial appointments.

 

Now Trump is pushing for it to be abolished completely. This matters for investors because it would make passing legislation much easier. In particular, permanent reform of the tax code is almost currently impossible without bipartisan support.

 

Trump is pushing for the filibuster to be abolished completely

Under the current rules, the annual budget reconciliation procedure can be used to sidestep the filibuster. It is exempt because there is a strict 20 hour cap on debating time. However, it can only be used once per year and any changes have to be budget neutral beyond the ten-year horizon. That implies tax cuts have to 'sunset' after a decade. The 2001 tax cuts introduced by George W Bush are a good example. They automatically disappeared from the statute book after a decade due to the budget reconciliation sunset.

 

What could this mean for markets?

 

If the rules change, then suddenly the White House has a much freer hand to get things through the Senate, especially when it comes to far-reaching, permanent reform of the tax system.

 

It’s worth keeping a close eye on this topic. Changing the rules wouldn’t have helped with healthcare reform where the Republicans couldn’t even agree among themselves. But it would significantly ease the constant state of gridlock in Washington.

 

Abandoning the filibuster is often described by Washingtonians as the “nuclear option”. If it happens, it would be an escalation of Trump’s challenge to the institutions and norms of the US political process. But by making tax reform, and other business-friendly legislation, more likely markets would probably cheer to see the filibuster finally busted.

 
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