U.S. Midterm Elections & Policy Implications

On this episode of Cowen’s Thematic Outlook Podcast Series, focusing on emerging growth and disruptive innovation, Head of Thematic Content Bill Bird is joined by Chris Krueger, Cowen Washington Research Group Analyst for Macro, Trade, and Fiscal & Tax Policy. Chris offers his perspective on the massive policy implications of the U.S. midterm elections and their potential impact on how we address the debt ceiling, tax policy, and clean energy. Press play to listen to the podcast.

Transcript

Chris Krueger:

We’re heading into a cycle that has been very unkind to the party in power.

Bill Bird:

Hello, and welcome to the Thematic Outlook Podcast Series, part of Cowen Insights Podcast. My name is Bill Bird, Cowen head of thematic content and today we have a special guest from Cowen Washington Research Group, Chris Krueger. Today’s topic is the midterm elections. The policy implications in the midterms are massive, including how we address the debt ceiling, tax policy and whether or not Build Back Better investment happens. Our guest, Chris Krueger covers macro, trade, fiscal and tax policy for Cowen Washington Research Group. His knowledge of the contours of the political landscape is better than anyone I know. Today we’ll dive right into the midterm elections, potential outcomes and what those outcomes could mean for policy. Chris, welcome and thanks for joining us today.

Chris Krueger:

Thanks Bill.

Bill Bird:

Chris, appreciating that a lot of factors go into how people vote and a lot can change between now and November 8th, what’s your base case for control of Congress?

Chris Krueger:

Our base case here is divided government with at a minimum the house flipping control. The Senate’s a little more fluid, but it’s very hard to see how at a minimum you don’t have at least the house flipping control from the Democrats to the Republicans.

Bill Bird:

And Chris tell us the policy priorities and implications under this scenario and how you think things will play out. Is it more of the same or is it something different?

Chris Krueger:

Sure and maybe just taking a step back, how we get to that outcome. I mean we’re heading into a cycle that has been very unkind to the party in power. Since World War II, the president’s party in that first midterm loses on average approximately 40 seats, four zero. The Republicans only need to net four seats in these November elections which are in 14 weeks, a little less than a hundred days. And sort of that historic cyclical model appears to be holding like it did most recently with Bill Clinton in 1994, Barack Obama in 2010 and most recently, Donald Trump in 2018 that saw the president’s party lose their majorities in the house. We’re very much following a similar trajectory given President Biden’s approval ratings or lack thereof. We should have some more granularity at the end of August when the primaries are basically done and the redistricting maps are finished.

                We suspect if you told speaker Pelosi right now that the Democrats would have a 10 seat loss, she would probably lock that in if she could. The ceiling though is probably around 40 seats. We would note that 40 pickups would give the Republicans their biggest majority since 1929. The Republicans need 59 for their all time record. Of course that is possible although the amount of quote unquote, swing seats is greatly diminished and Republicans are already starting with a pretty high watermark. They only need to net four. President Biden very much shaping the political ecosystem here. Just like 2018 the president’s low approval is coloring a lot of these races. We would note that President Biden is in worse polling position than President Trump was at this time in his presidency. So the house sort of just a question of margin in our estimation. The Senate, a much more interesting story.

                Obviously it’s the tightest margin you can have being a 50/50 Senate. Republicans only need to net one. The Democrats could actually hold on here if not expand their majority. You’ve got a couple of factors that are unique to the Senate. You have quality of incumbents here. A lot of these Senate Democrats have created their own brands. They’ve largely decoupled from Biden. The map is favorable for Democrats although geography can’t stop a wave, but you do have some multiple pickup opportunities given Republican retirements and probably the bigger story here is one that has plagued Senate Republicans in both 2010 and in 2012 and that is poor candidates. So the Senate much more fluid, you’ve got Arizona, Georgia, Nevada and New Hampshire, sort of the core four on democratic defense. September is sort of the last of the primaries with New Hampshire. But in early August we should be getting a better idea on some of these primaries. So that’s the Senate much more fluid and right now looks like the Senate could hold Democratic.

                In terms of policy priorities, again, if it’s just a question of how divided the government is, right, we’re going from basically two and a half years of unprecedented fiscal impulse from Washington. We’re likely reverting to the cyclical mean of divided government and fiscal drag, absent of political black swan landing in the next 14 weeks that the house is very likely to flip. So Bill, to your initial point gridlock is likely back along with rigorous oversight and fiscal drag. The positive news though for markets, no new taxes. This scenario is likely a replay of 2011, along with a debt ceiling fight in the late summer, early autumn. Further tariff relief on China would seem very unlikely. Relations with China could well sink further given Congressional Republican support for Taiwan, outbound investment restrictions, a select committee on the origins of COVID-19. China and Big Tech oversight remain two of the most bipartisan issues in Washington. Would note that there’s likely to be greater defense spending under any scenario. Let me pause there though.

Bill Bird:

That’s super helpful, Chris. Let’s talk about the other two scenarios, Republican control or seemingly less likely Democratic control. What are the plausible policy paths under each of those respective outcomes?

Chris Krueger:

Sure. Well, so the first one’s a lot easier to answer. This is just a question really of scale. It’s a fully divided government with both the Senate and the house flipping. You basically take everything that we mentioned in scenario one and sort of double it for scenario two if you have a Republican house and a Republican Senate. Other than legislative scale, the big change is going to be that the Senate Republican majority is going to be pretty limited in confirming new federal judges, regulators, cabinet officials. Like the Senate has full power over confirming judges and agency heads so that’s one area that you would definitely see, but you’d probably have an even bigger debt ceiling fight and you’d probably have even more increased defense spend. And then the scenario three, it’s really hard to conceive of a scenario where house Republicans don’t net at least 10 seats, but really nothing is impossible.

                If we’re in a situation where the house has held Democratic, the aftershocks of the political earthquake would have to extend to the Senate, at least one would presume, which would mean that the Democrats would probably have sort of surfed this red wave or lack thereof, and probably picked up a couple Senate seats in Pennsylvania and Wisconsin, if right, because if you’re in a scenario where the house is held, that means Democrats have really over performed. So, are we, I don’t know what we’re going to call it at that point, but it’s some version of Build Back Better although one would hope they would rebrand it somehow, but that means huge spend on climate. It’s all the stuff that Joe Manchin essentially threw out. So you’re talking fiscal policy likely being back to an 11, but that also means that tax increases to offset some of that fiscal spend are our back in play.

Bill Bird:

Chris, let’s talk about the unexpected. What are some things that could surprise people in this election cycle?

Chris Krueger:

Yeah, well, it’s a little bit like 1992, the Clinton Bush Perot cycle. It’s the economy stupid. So the inflation reports, the consumer confidence reports, et cetera, one way or the other those are right now largely determinative for the election. At least that’s what most Republicans are hoping for. What most Republicans want this election to be about quite simply is a referendum on Joe Biden. Biden’s numbers continue to be historically low. Anything that really deviates from that is largely a negative for Republicans and there’s a Democratic push to shift this election from a referendum on Joe Biden and the economy and inflation to a choice election.

                And this would be a choice between Joe Biden and basically Donald Trump because in the next couple months before the midterms it sure seems possible, if not likely that Donald Trump is going to announce his re-election bid for 2024, which has a real risk for Republicans of making this election not about Joe Biden, but about making this about Donald Trump and a lot of his personally selected candidates in these Senate races who while are popular with the Republican base, candidly are not the strongest candidates to take on Democratic incumbents in the general election. So those are, along with inflation in the economy the big surprise might well be former President Trump announcing his re-election plans in the coming weeks.

Bill Bird:

And Chris, what are the most important things you’re watching as we look ahead beyond some of what you’ve talked about, approval ratings, the economy, the Trump potential run for president, what are the things that you’re watching most closely to really define the midterm election outcome?

Chris Krueger:

What states in the home stretch are competitive? And what I mean by that is where are the political parties sending dollars? And if you are hopeful for a Republican red wave you would want to see Colorado and Washington state, those Senate races really coming online. If Democrats are having to spend money in a deeply blue state like Washington state, that’s probably a pretty bearish indicator for Democratic chances at the majority. Now on the flip of that, if the red wave is perhaps receding is a state like Ohio or even Missouri coming into play in the Senate race. So, in the final couple months, what states are coming online and from that you can, it’s more art than science, but get a sense at least the scale of the Republican wave. Other than that obviously the inflation reports, consumer confidence, Biden approval, and, or the big X factor sort of remains Donald Trump in the political zeitgeist that we are.

Bill Bird:

Well, Chris, thanks so much for your time with us today. We really appreciated your insights on the upcoming election and we really look forward to some of your upcoming events and expert calls on the midterms. Thank you. And thank you all for listening to us today. Be well and take care.

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