Dark clouds hanging over fiscal policy?
The impact of the U.S. census on midterm elections and spending.
When Congress returns to Washington next week after enjoying the Independence Day holiday recess, lawmakers will have a daunting to-do list for the rest of the month.
First, the two-year suspension of the federal debt ceiling expires on July 31. Treasury Secretary Yellen has warned that if the debt ceiling is not raised or suspended by the end of July, she will exhaust her emergency measures to continue paying the government’s bills while Congress is out (yet again) on a six-week summer recess that runs into mid-September.
Next, Congress needs to pass the bipartisan $1.2 trillion infrastructure bill it crafted with President Biden in June. Finally, Congress needs to figure out what, if anything, it will do with Biden’s additional spending plans for another $4 trillion to $6 trillion on a series of social programs, paid for with higher tax rates and more debt. House Speaker Pelosi has said that she wants these critical votes concluded by the end of July, before Congress leaves again for vacation. She warns that if the social-spending package is not passed first, she won’t bring the infrastructure bill to a vote.
The November 2020 election sharply narrowed the Democrats’ majority in the House of Representatives, and the 2020 decennial census results will erase that slim majority in the 2022 midterm elections. Knowing that Republican challengers are likely to use legislative developments this month as a political cudgel against their Democratic opponents in the midterms, that self-preservation dynamic may serve as a chilling effect on how some Democratic moderates vote now. To a significant degree, then, last year’s census and the threat of next year’s midterm elections may very well dictate the substance of legislation today, which could significantly impact inflation, interest rates, the federal debt and deficit, economic and corporate profit growth, and financial market performance.
2020 census results Over the past decade, the U.S. population grew only 7% (22.7 million people), the second-slowest growth rate in the 230-year history of the census and the slowest growth rate since the 1930s. This sluggish population growth is due to a declining birth rate and a slowdown in immigration (see our Market Commentary “Are demographics economic destiny?”)
This U.S. population migration over the past decade was generally away from colder, northern, higher-tax blue states (such as California, Illinois and New York) to warmer, southern, lower- or no-tax red states (such as Texas, Florida, Nevada, Arizona, Tennessee and the Carolinas). Republicans were expected to gain 10-15 seats from last decade’s migration, but they gained only six seats, perhaps because Covid-19 impaired the census count and results.
Biden’s executive order In January 2021, President Biden signed an executive order reversing former President Trump’s earlier order, which added approximately 3 million undocumented immigrants (about 1% of 331 million U.S. residents) back into the official population tally. That change in count prevented an additional four to six seats from shifting from Democratic states to Republican states.
Congressional ‘gerrymandering’ next States will receive more detailed final data from the Census Bureau on Sept. 30, at which point they will begin redrawing new congressional district lines. This happens every 10 years, and it will impact which party controls Congress for the next decade. According to the 2020 Census, California (D), Illinois (D), Michigan (D), New York (D), Pennsylvania (D), Ohio (R) and West Virginia (R) are each set to lose one Congressional seat, and Texas (R), Florida, (R), Montana (R), North Carolina (R), Colorado (D) and Oregon (D) each gained a seat (Texas added two seats).
Power of the computer mouse Seven small states have just one Congressional district, so no redistricting is required. But in 26 states, the legislature redraws its own boundaries, and there are more Republican governors and state legislators at present. In the other 17 states, independent, nonpolitical commissions handle the redistricting.
To offset this redistricting disadvantage, Democrats are currently proposing the most significant changes to election law since the 1960s. Key features include the end of partisan gerrymandering, which would see the federal government control the redistricting process, rather than the state political party in power. Instead, states would establish independent redistricting commissions composed of an equal number of Democrats, Republicans and independents to draw new voting maps.
Whither the House midterms? In the postwar history of the U.S., a new president has lost an average of 28 seats in his first midterm election, and a new Democratic president has lost an average of 40 seats. The Democrats enjoyed a very comfortable 35-seat lead in the House going into the 2020 election, and the polls forecast that the Democrats would expand that lead to a massive 55 seats. But the pendulum unexpectedly swung the other way, and the Democrats’ lead narrowed to a slim six-seats, their smallest House majority since 1880.
The expected census-related changes of a six-seat gain for the Republicans will make the House a coin flip in 2022. So, if anything remoting resembling the aforementioned history of first midterm elections holds, then we can expect the balance of power in the House to flip next year. In our view, this is precisely why President Biden and the Democrats are pushing so hard to pass progressive legislation now. The likelihood is that their window of opportunity is short-lived. If they can’t get legislation passed this year, it may never pass.
Senate more favorable for Democrats in 2022 The Senate is currently divided 50-50, with Vice President Harris casting the tie-breaking vote to give Democrats control of the chamber. In the November 2022 midterm election, 34 Senate seats are up for re-election, with Republicans defending 20 seats while the Democrats are defending only 14. Importantly, Republicans will have five vulnerable seats, as Senators Pat Toomey (Pa.), Rob Portman (Ohio), Richard Burr (N.C.), Richard Shelby (Ala.), and Roy Blunt (Mo.) have all announced their retirement. In addition, Sen. Chuck Grassley (Iowa) at 87 is the longest-serving Republican senator, and he is thought to be mulling retirement. It is much easier for the Democrats to win and reclaim an open seat than an incumbent seat. While the president’s party loses an average of one Senate seat in his first midterm, the Democrats appear to be in the Senate driver’s seat in 2022.
Research assistance provided by Federated Hermes summer intern Gilles Gouraige.