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Who’s Afraid of the Big Blue Wave?

Posted on January 21, 2021January 21, 2021 by Kyle de Paolo

Capped by stunning victories in the Georgia Senate runoff races, the Democrats have now swept into control of government. With the Presidency and both houses of Congress under their command, the legislative ability of the Democrats has undoubtedly grown more powerful that in would have been with a GOP-controlled Senate.

But what does this really mean? What are the limits of what the Democrats can and can’t do? And what is likely or unlikely to be done, especially given the very slim majority in the Senate and acute focus on the pandemic? As we’ll see, while Democrats could theoretically wield almost unlimited power, the extent of their legislation is likely to be more restrained.

Legislation: An Overview

As to legislation generally, only a simple majority vote is needed to pass things in the Senate (and House). However, the filibuster remains a Senate-specific tool that can be used to block a wide spread of potential legislation. GOP members can use unending debate to prevent votes on legislation they disagree with. Only a 60 member agreement can overcome a filibuster to bring legislation to a vote – meaning some GOP would have to be on board with the item. This can be used to prevent a significant array of legislation from passing.

An important distinction, however, is that budget-related matters have a constitutionally pre-set debate limit in the Senate – meaning the filibuster cannot block bringing them to a vote. Thus, anything that can reasonably be wrapped into budget related legislation will be passable by the Democratic majority. This includes things like tax-law changes for individuals and corporations, an expansion of healthcare subsidies, infrastructure spending, and so forth. Conversely, legislation like strengthening union rights or abolishing the liability shield for social media companies would be unlikely to fall under budget-related debate, so the GOP could block potential legislation in those areas if they so desired.

Checks and Balances

The primary check on the Democrats’ power remains their slim majority in the Senate. Democrats will need to get every single member on board with initiatives for them to have a chance of passing (unless they pull some GOP members across the aisle). Centrist Democrats will thus wield immense power, being the marginal votes needed for most legislation. Another likely check is the government’s general focus on getting the US through the pandemic. This may cause Democrats to pause any tax hikes or related items that may crimp the recovery.

Investment Implications

From an investment perspective, the takeaway is that the Blue Wave is likely to remain friendly to markets, as the slim Democratic majority and pandemic keep a lid on any truly threatening policy. Spending initiatives may well come to fruition in the more immediate term, and could be areas for investment opportunity. Tax hikes, while perhaps on the horizon, may not be of imminent concern.

Unlimited Power?

As an aside, the “unlimited power” mentioned earlier was a reference to the so-called “nuclear option” in the Senate. This is a procedural maneuver that the Democratic majority could use to change debate rules on any topic, requiring only a simple majority to bring a matter to a vote. This has been used in the past to change debate rules and pass legislation regarding Executive Branch and Judicial nominees. However, this extraordinary tool is disfavored by centrists, and seems unlikely to be used but for the most extreme matters. It has only ever been used twice in US history.



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KYLE DE PAOLO


@kyledepaolo
Long Story Short is a distilled view on events shaping finance, economics & politics. I’m a research analyst for Mitchell Anthony Capital Management. More about me here.

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