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United States: Biden's challenges

Economic Report

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  • Biden has been declared the winner of the presidential election. While it remains uncertain until January 5 which party gets control of the Senate, the most likely outcome is that the Republicans hold on to a majority. The Democrats will keep a majority in the House of Representatives, albeit smaller
  • Under a Biden administration foreign and trade policy will remain focused on meeting the challenge of China as the main rival of the US. However, Biden is likely to return to a multilateral approach
  • The fiscal policy plans of the Democrats are likely to be stopped by the Republicans in the Senate. We are looking at two years of gridlock on domestic policy, until the midterm elections of 2022
  • With limited support from fiscal policy, it is up to monetary policy to prop up the economy. However, this comes at a time when the Fed’s ammunition is almost depleted and fiscal policy would be more effective. The combination of limited fiscal policy and continued need for monetary stimulus is likely to remain a drag on longer-term interest rates
  • Trump contesting the 2020 results could be seen as the start of his 2024 campaign. He may very well become the informal leader of the Republican opposition after January 20, 2021

Introduction

On Saturday, US news stations made the call that Biden had the 270 electoral votes needed to become the next President of the United States. While President Trump is contesting this result, it now seems likely that he will have to leave the White House on January 20. Although Biden won a solid majority of the popular vote, it was a close race in the Electoral College. However, after more than three days of counting it turned out that the Blue Shift was large enough to overcome the Red Mirage. However, as we explained in Election meltdown this two phase pattern in the election results made it unlikely that we were going to see any candidate concede early.

In contrast to the presidential election, the elections for the House of Representatives and the Senate did not go well for the Democrats. The Blue Wave they were hoping for did not materialize. In fact, in the House of Representatives the Democrats actually saw their majority reduced. They are still in the race for the Senate, but at best they can keep the Republicans at 50 seats, which would give the Democrats control of the Senate with Vice President(-Elect) Harris as the tie-breaker. We may have to wait until the run-off elections in Georgia on January 5 before we know who controls the Senate. But at present, the Democrats are facing an uphill battle. They need to win both run-off elections. While the distance in the Ossoff (D)-Perdue (R) race seems surmountable, the Warnock (D)-Loeffler (R) race seems a stretch. So the most likely result is that the Republicans keep 51-52 of their 53 seats in the Senate. This means that the Biden administration will be restricted by the Republican Senate, especially when it comes to domestic policy. In fact, we are looking at two years of gridlock, at least until the midterm elections of 2022. (Unless one or more vacancies occur in the Senate prior to the midterms.)

A common enemy abroad

In terms of foreign and trade policy, a US President has considerable powers and it is more difficult for Congress to alter his decisions. What’s more, despite ever increasing polarization, Democrats and Republicans share their negative views of China. During the last 15 years, a negative opinion of China has changed from a minority view to a majority view in both parties. So there is some common ground abroad for Biden and the Senate Republicans. However, on other issues, such as international climate agreements, Biden – feeljng pressure from left wing Democrats – will be at odds with the Republicans.

Forget about fiscal policy

Biden’s ambitious plans to boost the economy through expansive fiscal policy will be shot down in the Senate if the Republicans keep a majority. The same is true for any sizeable fiscal stimulus package after the CARES Act. Only a severe deterioration in economic data could persuade the Republicans to temporarily let go of their newfound fiscal conservatism. So we can forget about all those plans to spend on education, public R&D, green infrastructure, health care, unemployment benefits and social programs. The same is true for tax hikes for corporations and high income and high wealth individuals. This means that the Biden administration will find it difficult to spur economic growth. The flipside is that the public debt to GDP ratio will not receive a boost as well. Democratic plans to bring back and increase regulation will be restrained by both the Republicans in the Senate and the overwhelming conservative majority in the Supreme Court.

Keeping the Democratic coalition together

While Biden will face fierce opposition from the Republicans in the Senate on most issues, he will also have to keep the Democrats in the House of Representatives and the Senate together. The centrists in the Democratic Party may be willing to compromise with moderate Republicans, but the left wing demands radical change from a Biden administration. In this respect we compared – without any disrespect – Biden’s presidential style to that of a prime minister in our post-election special Election meltdown. He will have to keep a broad coalition together ranging from centrists to democratic socialists (see our special The Red President for their ideas) while compromising with a fierce Republican opposition. What’s more, this opposition may be spurred on by Trump, who will have to leave the White House after January 20, but he will still have access to his Twitter account. Although Biden has a wide experience with building coalitions in Congress, and reportedly a good personal relationship with Mitch McConnell, he will have to operate in a political environment that may not reward compromise.

Trump 2024?

We already mentioned Trump’s twitter account. The president is still contesting the outcome of the election and is sticking to the narrative that his re-election has been stolen from him. Apart from his personal motives (nobody likes to lose), he also has a political incentive to tell this story. The feeling of being robbed in 2020 will drive his supporters to the polls in 2024, if he decides to run again. By then Trump will be 78, the same age as Biden within two weeks. So age won’t be an issue, if his health allows. Neither will the Constitution. While a person can be US President for only two terms, they need not be consecutive. In fact, there is a precedent: Grover Cleveland was President of the United States in 1885-1889 and in 1893-1897. And we should keep in mind that this year’s presidential elections were close, at least in the Electoral College.

If the Democrats continue to think that left wing economic policies will bring back white blue collar workers to the Democratic Party, there are heading for disappointment. Our statistical analysis in Economy or identity? showed that for most Trump voters it is identity that matters, not economic inequality, stagnant income or the loss of manufacturing jobs. Four years of a Democratic administration – and gridlock in Congress – may be enough to give Trump the nomination as the Republican candidate in 2024 and a realistic chance of getting back in the White House. In this light, Trump contesting the 2020 results could be seen as the start of his 2024 campaign. And returning to his Twitter account: what is to stop him from starting his own media network and keep the pressure on Republicans in Congress? He could very well become the informal leader of the Republican opposition after January 20, 2021.

Fed on its own

If Republicans hold on to the Senate, we are likely to see only limited support to the economic recovery from fiscal policy. Instead, it is up to monetary policy to prop up the economy. However, this comes at a time when the Fed’s ammunition is almost depleted, as we discussed last week in our FOMC Post-Meeting Comment Don’t count on fiscal policy. What’s more, fiscal policy is more effective in the current circumstances. Households, businesses and local governments need the spending powers of the federal government, not the lending powers of the Fed. So the economic recovery could become a drawn-out affair. Meanwhile, the combination of limited fiscal policy and continued need for monetary stimulus is likely to remain a drag on longer-term interest rates.

Conclusion

Although President Trump is contesting the outcome, we are likely to see Biden sworn in as the next President of the United States on January 20. However, we may have to wait until January 5 to know whether he will be supported by a majority in the Senate. If not, his ability to govern will be severely restricted by a Republican Senate, especially when it comes to domestic policy. Meanwhile, Trump will be leading the Republican opposition from Mar-a-Lago.

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Author(s)
Philip Marey
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 71 21437

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