Election lessons learned Election lessons learned http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\classroom-small.jpg November 19 2021 November 19 2021

Election lessons learned

Were off-year results a wake-up call?

Published November 19 2021
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Bottom Line

Off-year elections are typically snoozers. But this month's stunning election results in Virginia, New Jersey and Minneapolis, among other places, suggest  the political pendulum has swung to the right in a relatively short amount of time. These bellwether results could have significant down-ballot implications for next year’s midterm elections, which could influence changes in policy now.

What happened?

  • Virginia President Joe Biden carried the state by 10 points in last November’s presidential election. But in the gubernatorial race, Republican private equity manager Glenn Youngkin defeated former Democrat Gov. Terry McAuliffe by 2 points.
  • New Jersey Biden won here by 16 points last year, but incumbent Democratic Governor Phil Murphy barely held off Republican challenger Jack Ciattarelli (a former assemblyman). In another N.J. race, Democrat Steve Sweeney, the powerful leader of the state senate, lost to an unknown Republican truck driver, Edward Durr, whose campaign spent all of $150.
  • Minneapolis Overwhelmingly Democratic Minneapolis, the city where a police officer was convicted of murdering George Floyd in May 2020, voted by nearly 20 points not to defund the police.

Across the country a fortnight ago, from New York to Seattle, Republicans performed much better than expected up and down the ballot, in what pollsters believe is an ominous sign for Democrats. Many suggested that these local races were a referendum on growing voter dissatisfaction with Washington.

President Biden’s poll numbers have fallen sharply in recent months. According to an NBC News poll, 71% of us now believe that the country is headed in the wrong direction. Importantly, Biden’s support among independents voters (who comprise the nation’s largest voting block at 36%) has plunged from 61% in January to 34% last month, according to Gallup. Many voters are disappointed with the summer surge in the Covid delta variant, the 85% decline in vaccinations since last April, the military disaster in Afghanistan, the southern border migrant crisis, the sustainable rise in inflation, the spike in energy prices, among other issues.

No mandate Others point to Biden’s attempt at sweeping legislative initiatives to remake America, much like FDR’s New Deal in the 1930s and LBJ’s Great Society in the 1960s, in a narrowly divided Congress. “Nobody elected him to be FDR; they elected him to be normal and stop the chaos,” said Rep. Abigail Spanberger, a Virginia Democrat who is bracing for a difficult re-election bid next year.

Course correction Over the summer, the Senate worked closely with Biden and passed a popular bipartisan $1.2 trillion “hard” infrastructure bill by a 69-31 vote. The bill includes funding to repair roads, bridges, water, ports, sewers, rail lines, expand broadband expansion and upgrade the electric grid, among other desperately needed projects. Importantly, it is legitimately fully paid for by repurposing $1 trillion in unspent funds from the CARES Act last year and another $300 billion in unneeded funds from Biden’s American Rescue Plan, which he signed into law this past March.

But to create political leverage to pass Biden’s less popular “human” infrastructure bill in the House, Speaker Nancy Pelosi refused to schedule a vote on the $1.2 trillion infrastructure bill until the reconciliation bill passed first. Many of those who were frustrated with Pelosi’s actions cast protest votes against their local Democratic candidates on Nov. 2. Pelosi got the memo, and she passed the stand-along infrastructure bill on Nov. 6.

Whither Biden’s Build Back Better bill? In July, Biden drafted a $3.5 trillion social-spending proposal, paid for with higher tax rates on corporations and wealthy individuals and with more debt. But according to the Committee for a Responsible Federal Budget, Biden’s $3.5 trillion price tag is really $5.5 trillion, given creative usage of sunset provisions.

Biden originally pitched the bill as necessary to lift the economy out of recession. But the National Bureau of Economic Research subsequently declared that the pandemic recession ended in April 2020, marking the shortest and deepest recession in history. Moreover, thanks to the powerful V-bottom economic recovery that began late in the second quarter of 2020, the GDP output gap was fully closed by the second quarter of 2021.

So Democrats smartly shifted gears, arguing that the cost of remaking the U.S. economy would be free, presumably meaning that corporations and the wealthy will pay for it. But given the expected increase in taxes and debt, inflation likely will rise further, GDP growth will slow (as it did recently to 2% in the third quarter of 2021 from 6.7% in the second quarter), job creation will decline, wage growth will decelerate, corporate profits will decline, and share prices will fall. Americans recognize, we believe, that the multiplier effect associated with slower economic growth, rising inflation, fewer good-paying jobs and weaker financial markets are costs that everyone will eventually bear.

Pushback from Senate moderates Critics argue that Biden’s proposed reconciliation bill, which can be passed with unanimous Democratic support and Vice President Kamala Harris breaking the tie, is a redistribution of wealth from corporations and the top 10% of America to the bottom 90%. Moderate Democratic Senators such as Joe Manchin (D-W. Va.), Krysten Sinema (D-Ariz.) and John Tester (D-Mont.) have said that the bill needs to be considerably smaller and much better targeted to widen the social safety net for those Americans who truly need the assistance, rather than an unnecessary expansion of cradle-to-grave entitlements. Manchin wants a scaled-down reconciliation bill of no more than $1.5 trillion, and Sinema won’t support tax increases for corporations or individuals.

What’s next? Earlier today, the House passed their version of this scaled-down $1.7 trillion social spending and climate bill in a largely party-line vote. Congress is leaving Washington now for the Thanksgiving recess, and will return in early December. Senate Majority Leader Chuck Schumer said that the Senate will debate and vote on this bill between now and Christmas, which will likely result in a much smaller and better targeted bill.

Early next year, then, the House and Senate will meet in committee to reconcile their legislative differences. But by then, with the members of Congress individually focused on the upcoming 2022 midterm elections and their own political survival, given the warning shot across the bow fired by voters two weeks ago, there are no guarantees as to what Biden’s transformative legislation will ultimately resemble.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

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