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    1. The implications of divided government

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    The implications of divided government

    Washington policy

    Meera Pandit

    Despite potential gridlock within Congress, we've seen over time that the economy has continued to grow, and the stock market has continued to rise regardless of the configuration of government.

    Meera Pandit

    Although politics was a focal point for markets in 2020, policy will be more important in 2021. While control of the Senate depends on two runoff elections in Georgia, a best-case scenario for the Democrats would be a 50-50 tie with the vice president providing tie-breaking votes. This suggests less fiscal stimulus than would have been the case in a “Blue Wave” scenario.

    The most eagerly anticipated policy item is a new fiscal package to bolster the economic recovery. Although both parties have been at an impasse for months, with the election behind us, the two sides should be able to compromise on a roughly $1 trillion package by the first quarter, with an emphasis on supporting unemployed workers and small businesses through the rest of the pandemic and helping facilitate the distribution of a vaccine.

    Even with less fiscal largesse in 2021, the budget deficit could well exceed $2 trillion following a deficit of over $3.1 trillion in fiscal 2020. In addition, a 50-50 Senate or Republican control of the Senate would likely preclude tax increases on corporations or individuals in 2022, as would likely have occurred with full Democratic control. This does increase the risk of a fiscal crisis toward the middle of the decade as the federal government struggles to finance a now much-larger debt in the face of higher interest rates.

    Beyond this, a divided government likely tempers the ability of the new administration to implement campaign proposals. Any infrastructure package will rely on compromise between Democrats and Republicans, and the price tag could be smaller. Anti-trust legislation against the largest technology companies has been a bipartisan issue, so Congress may continue to pursue that. Significant changes to the Affordable Care Act are unlikely.

    Without the full cooperation of Congress, President-elect Biden may have to lean more heavily on executive orders instead. The Executive Branch can wield more power in both regulation and foreign policy, which may mean re-regulation in the energy sector, rejoining the Paris Climate accord and possibly more financial re-regulation. In foreign policy, a tough but more predictable stance on China is likely, as well as re-engagement on trade and international issues with the U.S.’s allies.

    Although divided government provokes thoughts of gridlock and acrimony, it should be remembered that historically it is the most common configuration of government. Indeed, the U.S. has seen divided government approximately 62% of the time since World War II. It should also be noted that over time the economy has continued to grow and the stock market has reached new heights, regardless of political configuration.

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