Politics seems to have taken a bit of a backseat these days. Perhaps understandably so, as our current president is a bit more reluctant to take the spotlight than his predecessor. It’s a notable change from Trump’s almost daily twitter rants.
This is not to say a lot hasn’t been happening in Washington. Democratic infighting over multi-trillion dollar legislation, a proposed re-writing of the filibuster, unprecedented vaccine mandates on businesses and more have all been taking place. With 2021 coming to a close, and 2022 mid-terms elections upon us, let’s take stock of what’s happening in Washington, including the implications for our markets and economy. On both fronts, the outlook appears muted, if perhaps a bit encouraging.
Current State of Legislative Affairs
Biden’s flagship legislative agenda – the Build Back Better plan – continues to wither on the vine. While the House has passed its version of this bill, Democrats need all 50 of their Senators to agree on the legislation to move it forward. Unfortunately, the hefty price tag, and means of paying it, continues to cause disagreement and stall the legislation.
Democratic Senator Kyrsten Sinema has staunchly opposed tax hikes on individuals or corporations, which are needed to pay for nearly the entirety of the bill. Meanwhile Democratic Senator Joe Manchin continues to balk at the massive overall size of the bill. For example, the bill is packed with billions of dollars in spending to both continue and expand monthly child tax credit payments to individuals. In light of the environment where businesses are struggling to hire workers and inflation is running its hottest in decades, it’s not hard to see why Senator Manchin would prefer to dial back government handouts.
Unfortunately, as the disagreement has persisted among Democrats, the average consumer has become more and more disgruntled with the party and Biden’s ability to deliver on promises. With hiring difficulties and inflation not seemingly on the cusp of immediate resolution, it is seemingly increasingly unlikely that Build Back Better will be enacted.
Democrats have further been unable to pass their promised overhaul to voting rights, which they claim will simply make it easier for people to vote. Republicans have voiced complete opposition, claiming the legislation leaves voting unregulated with laws that are far too loose. With clear disagreement from the opposing party, Democrats first hoped to include this legislation in their Build Back Back plan and pass it through filibuster-proof reconciliation. However, not only does Build Back Better appear doomed, but voting rights aren’t particularly germane to budgetary matters – meaning they can’t really be included in a bill set to be passed as budgetary bill like BBB.
This has left Democrats needing to overcome a filibuster to pass this legislation in an ordinary manner. With Republican opposition unwavering, Biden tried to pressure Democrats into re-writing filibuster rules to ease requirements to end one. Here, Biden was again met with opposition from within his own party. In opposing Biden’s suggested rules change to the filibuster, Senator Manchin quipped “Allowing one party to exert complete control in the Senate with only a simple majority will only pour fuel onto the fire of political whiplash and dysfunction that is tearing this nation apart.” Once again, Americans see their Democratic party unable to reach consensus and keep their promises. Even worse, they see Biden pushing his party members to forcibly rewrite the rules of our Democracy.
Democrats Losing Faith
Throw in the Supreme Court’s recent rejection of Biden’s vaccine mandate on businesses, general consumer dissatisfaction with current inflation trends (even if not Biden’s fault), and you can see where this is going: enthusiasm in the Democratic camp is wavering. Indeed, Biden’s approval rating recently set a new low at 33% in a major poll. At this point in his presidency, Biden’s approval rating is lower than every other modern-era president apart from Donald Trump. So what does this mean? In short, it seems likely that change will be coming to Washington.
A Change in the Guard?
Precedent suggests that the tide will shift towards the out-of-power party – Republicans – to some degree in the midterms in 2022. However, Republicans need to pick up only 1 seat in the Senate and 5 seats in the House to retake the majorities. It seems entirely within the realm of possibility that we arrive back at divided government come 2023, with Republicans potentially controlling both the House & Senate. As far as the market is concerned, this may well be good news – gridlock in Washington, and the typical lack of surprises and new legislation that comes with it – is favored by markets. No new taxes, no massive spending bills – the odd calm of gridlock. This likewise means muted economic impact from Washington as well.
We’ll see just how much Republicans can capitalize on the current Democratic weakness come mid-term election time this November. In the meantime, the Federal Reserve’s policy shift is set to be far more influential on the economy and markets as the year progresses than any political goings-on. Should policy tightening end up taking us into a recession, Democrats may be set up to lose the presidency in the next few years as well, with a loss in the mid-terms all but guaranteed.