Election 2020: Divided we stand?


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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