Joe Biden has been elected the 46th president of the United States but a “blue wave” failed to materialize
and chances of a government unified under control of the Democrats are fading. Republicans look set to
pick up several seats in the House of Representatives and we expect them to maintain a slim majority in the
Senate. We look at the impact of the likely election outcomes on legislation and examine Biden’s priorities as
he attempts to navigate his agenda through a divided government.
Election recap, waiting on Georgia
The polls were wrong again this year, with President
Donald Trump making it a closer race than many had
expected and Republicans surprisingly narrowing the
Democrats majority in the House, while putting
themselves in position to hang onto their own majority in
the Senate. With former Vice President Joe Biden having
been declared the winner of the 2020 presidential race
and the Democrats retaining a narrowed majority in the
House of Representatives, the focus is now on which
party will control the Senate. The Democrats currently
hold 48 seats while the Republicans hold 50 seats. Thus,
Georgia becomes the nation’s center of attention for the
next two months, as runoff elections for both the state’s
Senate seats will be held on Jan. 5.
Why two runoff elections? Georgia election law dictates a
winning candidate must receive a clear majority of the
vote. In one race, the incumbent Republican won by
nearly 90,000 votes, but failed to reach the 50%
threshold. The second race had 20 candidates vying for
the seat, with the recently appointed incumbent
Republican winning just 26% of the votes and trailing the
Democrat candidate. We expect a deluge of money to
begin pouring into the two Georgia races. However,
Republicans only need to win one of the two seats to
retain control of the Senate.
Our base case for the outcome is one of divided
government. We believe the GOP will win at least one and
possibly both of the seats, as independent voters may
choose to vote for the Republican candidates to serve as a
check on the Democrats’ agenda. In addition, history favors
the Republicans as the GOP has enjoyed a voter turnout
advantage in the last two Senate runoffs in Georgia.
Conversely, should the Democrats win both races, the
Senate would be evenly split at 50 seats apiece, but
effectively under Democratic control as Vice President-elect
Kamala Harris would cast the deciding vote in case
of a tie. This would result in a blue wave, although not the
tidal wave that pollsters anticipated. The Democrats saw
their majority in the House unexpectedly shrink. Despite
expectations that Democrats would expand their
advantage, it looks like the GOP could gain more than 10
seats with 19 House races yet to be decided.
Lame-duck stimulus deal?
While the nation awaits the outcome of the Georgia Senate
races, there is increasing talk that a fiscal stimulus package
could be agreed upon during the lame-duck session of
Congress. Senate Majority Leader Mitch McConnell has
stepped in to replace Treasury Secretary Steve Mnuchin in
negotiations with House Speaker Nancy Pelosi. Ahead of
the elections, the GOP-controlled Senate had offered a
$500 billion stimulus bill while Democrats in the House
were seeking around $2 trillion. The two sides may be
moving closer together, as McConnell has said he would be
open to including aid to state and local government which
has been a key demand of the Democrats.
We believe the two sides will coalesce around a package of
about $1 trillion which, while smaller than the package
we would have seen in a blue wave scenario, is still
equivalent to 5% of gross domestic product. In addition to
aid for state and local governments, we believe the deal
could contain supplementary unemployment benefits,
another stimulus check, additional money for small
businesses via the Payroll Protection Plan, funding for
airlines and more money to continue the fight against the
COVID-19 pandemic. With the current continuing budget
resolution set to expire on Dec. 11, a compromise on
additional stimulus could be combined with a bill to fund
the government into 2021.
If a stimulus deal is not reached in the lame-duck session, we
believe a package of similar size and scope will be agreed to in
early 2021. Biden and McConnell have a history of working
together. During the Obama administration, the two former
Senate colleagues struck compromises, including on such
contentious issues as the debt ceiling and the fiscal cliff.
The Biden agenda
If Republicans retain control of the Senate and our base case
scenario of a divided government comes to pass, we believe
there are several factors worth noting, beginning with
President-elect Biden’s cabinet. Because cabinet appointments
must be confirmed by the Senate, we are less likely to see
controversial candidates named. In addition, Senate
Republicans are likely to block any attempt to raise taxes,
which should help support business and consumer sentiment.
Despite the possibility of a divided government, Presidentelect
Biden will still wield significant power to govern
through executive orders. His administration will likely
pursue a big regulatory push, especially in areas like climate
change, where the president-elect has already announced the
U.S. will rejoin the Paris Climate Accord. We believe the new
administration will seek action on health care and possibly
pursue an aggressive antitrust stance against Big Tech.
On the foreign policy front, we think a Biden administration
will seek to rebuild relationships with allies. We believe the
risk of trade wars will fall, as Biden begins to wind down
tariffs on China while applying pressure via global alliances
and institutions. Lastly, we anticipate a move to restart
negotiations with Iran.
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