US: Midterms – Narrow, Whatever the Color

Published on November 5, 2018

The US midterm elections are a day away, and amid the frenzy of heated pundit speculation asserting either a Democratic “Blue Wave” or a Republican “Red Wall,’’ we think main question is not the color but how narrow the majorities are likely to be in both the House and Senate. 


*** Our base case remains a high probability the Democrats will win control of the House while the Republicans will keep control of the Senate. But contrary to a common assumption that this will translate into a return to partisan gridlock, we think it more likely the conventional wisdom will be defied on two key fronts, with another major boost to fiscal spending, and an extension of harsh trade policies, aimed primarily at China. ***


*** With the polling indicating a tightening in the most competitive races, however, an outlier outcome of either the GOP hanging on in the House — perhaps by a single seat — or the Democrats taking the Senate cannot be ruled out. While neither is likely, we think the more important takeaway is that even with a shock blue wave or red wall outcome, neither would be likely to alter the fiscal or trade policy outcomes we think more likely than not. ***


*** The legislative outcome will be shaped in a volley of Antietam-level crossfire, not negotiations, not collaborations, but as conditions ultimately tacked on a Continuing Resolution or debt limit increase. On hugely consequential fiscal policy, the biggest fiscal stimulus will be a Democratic push to expand state eligibility for Medicaid, which neither President Trump nor Senate Majority Leader McConnell would be in the position to stop. ***


Narrow Majorities


On the House side, the Democrats need a net gain of 23 seats for a House majority, which as we believe, they are highly likely to win. But even if they expand on that single-seat majority to a possible 35-50 seat majority — the outer range of high probabilities — we caution that Democratic control of the House in January 2019 will in fact be a thinner majority in practical terms than its numbers would suggest.


We think Speaker Pelosi, assuming she does indeed win a return engagement, will find herself in the same hall of mirrors of an unruly, hard-to-govern majority that haunted her Republican predecessors, John Boehner and Paul Ryan. In her case, a highly vocal and energized progressive wing will be carping for a bigger, bolder agenda, especially on fiscal policy with demands for higher spending on Medicaid, Medicare, education, and infrastructure (see SGH 10/18/18, “US: A Thin Democratic House”).


Pelosi knows the only issue that unites all Democrats is expanding federal spending on healthcare. Indeed, we believe her staff is involved in pushing the states to expand Medicaid eligibility, either by action of Governors or citizen referenda, a big potential acceleration of spending that neither Trump nor McConnell can stop because such options were authorized by the Affordable Care Act, which survived all GOP attempts to repeal.


On the Senate side, the base case likewise remains for the Republicans to retain control of the Senate, perhaps with even a net gain of one to two seats, barring a stunning true blue wave that spills into the mostly red states of this year’s Senate map. The GOP has an advantage in demographic and geographic makeup that would be very hard for Democrats to overcome.  


One way to think of 2018: Pelosi will win back her job as Speaker because her party will carry the suburban areas Hillary Clinton carried (or lost closely) whereas Mitch McConnell will keep his job by only losing a few states that Trump carried.


Most of the key Senate races are competitive in states won by President Trump in 2016, while in Florida, Missouri, and North Dakota Democrats are on the defensive after the Kavanaugh hearings. 


That notwithstanding, the GOP control of the Senate will still be a very narrow one, far short of a filibuster-proof 60 seat majority. And that, in turn, is likely to make it difficult for Majority Leader McConnell to repeat his obstacle course strategy first perfected by his Democratic predecessor Harry Reid.


Fiscal Accelerator


Most or much of the political analysis on the consequences of the midterms are for a return to the gridlock politics of the last decade or more. But we think just the opposite is more likely than not, or at minimum, should be taken into account when assessing the impact of the likely changes in the balance of power on Capitol Hill. On two fronts.


The first is on fiscal policy. We expect Democratic control of the House to see a major push for another fiscal stimulus, one that is likely to reflect the Democratic progressive priorities for social spending priorities such as expanded Medicare and health care, education, and in particular, there is a major push underway on a boost to oft-promised infrastructure spending. 


Such a spending spree scenario may seem to defy political conventional wisdom, but then nothing has been conventional about US politics since 2016. We think a few of those Democratic fiscal priorities will largely align with President Trump’s own populist leanings, his vision even more sharply focused on his 2020 re-election prospects (see SGH 9/10/18, “US: Midterms, Trade, and a “Fiscal Accelerator”).


Importantly to the political dynamics of the new coalitions on Capitol Hill, almost all the previous leverage of the fiscal hawks over the last few decades has been largely neutralized in the Senate as well as the House, and that will apply to most Republicans with their own expensive wish list of higher military spending.


And while President Trump may suddenly discover fiscal rectitude and a newfound concern over deficits, we doubt it will be sustained. Trump’s occasional remarks about the accumulated national debt sound forced and unnatural. They certainly don’t excite him or his crowds. Sadly, attacking the Federal Reserve Board does.


We suspect all ideas to boost the currently strong economy going into 2020 will dominate policy planning in the White House.


The question in our minds is whether the renewed fiscal stimulus will come into place in 2019 or in 2020; an important distinction to be sure for the markets — and for the Federal Reserve — but we do think it is coming. 


Ongoing Trade Confrontations


We suspect the outcome tomorrow will defy the conventional wisdom for gridlock on the trade front as well as fiscal policy. As we have written (SGH 7/12/18, “China: The Road to 500 Billion”), trade and specifically the fight with China trade policy is far more existentially tied-in to the Trump White House than a mere midterm card to be played out in a few months. It is fundamental to the Trump presidency and to his 2020 re-election prospects. 


More importantly, we suspect the President may find more support among Democrats than assumed, even as the Democratic-controlled House investigative committees are gunning impeachment proceedings. Beijing may be miscalculating badly in expecting a weakened Trump, post midterms, to translate into a weakened US position on trade.

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