Is it too early to talk about midterm elections?
[Editor’s note: Linda’s on vacation the next two weeks but she left this piece on politics and will have another next week on what might trip up the bullish outlook. Her regular weekly reappears next month.]
Is it too early to talk midterms? The White House almost always loses House seats in the first midterm election—an average 29 since World War II—and in 2022, Dems look particularly vulnerable. They’re on track to potentially end up with a single-digit majority (a handful of seats remain up in the air), with 23 representing GOP-leaning suburban districts that Republicans occupied for decades prior to 2018’s blue wave. Down-ballot elections strengthened the Republicans’ hold on more states, giving the GOP control of the all-important redistricting process, particularly in older industrial blue states that are in line to lose House seats once the Census is finalized. Congressional Democrats increasingly are seen by much of the country as out-of-mainstream urban progressives. Even as the party added seats following its 2010 low point, Dems have been getting destroyed in rural areas and small towns, losing ground in Deep South, Mountain, Plains and several Midwestern states, and even in New York. Unless President Biden can push his party to the center, differences between progressives and swing-district members will make governing the House a nightmare for leadership. Republicans have their challenges, too: 20 GOP Senate seats are up for reelection in the midterms versus only 13 for Democrats.
Democrats’ narrow election sweep—the House lost at least 13 seats—implies no mandate for aggressive change. We should get a taste of Biden’s sales skills as he works to push through his $1.9 trillion Covid relief/stimulus package. West Virginia moderate Democrat Joe Manchin, who has emerged as a key swing vote in the Senate, has said he’s no fan of $2,000 checks going to those unaffected by the pandemic. But incoming Senate Budget Committee Chair Bernie Sanders is all for the full amount and for a lot of other stuff too. Even with a convincing win, history shows most campaign promises never come to pass. For example, President Obama had a 79-seat majority in the House and a 14- to 16-seat advantage in the Senate his first two years but only achieved two major legislative wins: the big stimulus bill during the 2008-9 recession and the Affordable Care Act. Similarly, for two years President Trump had a 47-seat House majority and a 2- to 4-seat lead in the Senate. But while he issued many executive orders, his one big legislative success was the 2018 tax cut. And that was only achieved through the cumbersome budget-reconciliation process that requires legislation to be exclusively budget-oriented, with spending and tax items bound by strict budgetary limits set by Congress and offsets and sunsets to items that fall outside of those guidelines. The benefit of this approach: legislation can be approved by a simple majority vote and avoid a potential Senate filibuster requiring 60 votes for passage.
Along with tax hikes, it looks like non-Covid multitrillion-dollar plans for green infrastructure and health-care reform under Biden’s “Build Back Better” banner will be introduced closer to summer, when Biden can claim (hopefully) that the worst of the Covid crisis has passed and the country needs to pivot to the economy. He’s already calling his infrastructure plan a “jobs bill” to make it more politically palatable. Tax reform is trickier. It’s typically a lengthy process, even under budget reconciliation, and any proposed increases (corporate, capital gains and high income are targets) will have to be sold as spending offsets to fit reconciliation’s requirements. Waiting to try and raise taxes until 2022 would put candidates facing competitive challenges in midterms at a disadvantage, particularly in swing districts. Maybe taxes don’t get raised in the first two years, if at all. This is what some on Wall Street think. This likely would let a triple-trillion-dollar deficit ($3.3 trillion on a 12-month basis in December) continue to balloon. We’d all be Modern Monetary Theorists then.
On the more immediate front, because Biden’s $1.9 trillion plan doesn’t comport with budget reconciliation guidelines (aid to states and local governments falls outside its narrow parameters, for example), it’s possible his agenda gets carved up. But if the full deal survives, it would imply real disposable income growth of 6-7% in 2021, the highest ever recorded. This is because the cash payments would be about 1.5-2 times larger than the boost from last March’s CARES Act and hit at a time that labor incomes already have recovered 75% of their drop from last year’s first half. This would be on top of an already large pool of savings built up by consumers cooped up in their homes due to pandemic restrictions. As the virus fades and restrictions fall, watch out. If even half the Biden stimulus money gets spent in 2021, Applied Global Macro Research estimates consumer spending growth could surge as high as 10% year-over-year in the fourth quarter—enough to drive the jobless rate down to an all-time low in early 2022. As former President Trump might have said, this would be h-h-u-u-u-g-e!
Payback’s a pain In a December Wall Street Journal opinion piece, U.S. Sen. John Barrasso (R-Wyo.), the third-ranking Senate Republican, recalled Democratic efforts to delay or block the confirmation of 24 of Trump cabinet and cabinet-rank nominees. When lower-level nominees are included, Democrats attempted to block 79 executive-branch appointments the first two years. The previous six presidents combined faced the same obstruction only 18 times in their first two years, he wrote.
I love New York? Strategas Research’s Dan Clifton relays that he received “a love note” from his co-op board saying the maintenance bill on his apartment will rise 7% this year. This was due in no small part to an expected 63% decline in the building’s commercial real estate rental income since 2019. To add insult to injury, New York City real estate taxes on the building are rising 12% this year and are expected to account for 53% of the corporation’s operating budget.
The Mister did buy a Tesla Unlike lower-income workers, many higher-income workers have been largely unaffected by the pandemic while they work from home, order from online retailers and delivery services, and even conduct financial trades. The upshot: governors who were predicting dire budget shortfalls when requesting $500 billion in aid earlier this year say it’s not so bad now. Bloomberg reports California is expecting $26 billion from all the taxable activity, while New York and Connecticut reported better-than-anticipated tax revenue. Overall, the Center on Budget and Policy Priorities’ projected state budget shortfalls through fiscal 2022 have shrunk to a total of $400 billion vs. $650 billion previously.