US Politics: Senate majority is a game changer, but challenges remain – Notwithstanding the extraordinary events of Wednesday on Capitol Hill (which, although significant from a political-historical perspective, have little bearing on the macroeconomic outlook), the most important news of recent days was the Democrats’ win of two further Senate seats in the Georgia runoff elections. This gives the party a narrow majority with which to push through president-elect Biden’s policy agenda.
The most pressing item on the agenda will be a follow-up to the $900bn (4.3% of GDP) pandemic relief provisions that were passed at the end of 2020. In particular, the $600 stimulus checks currently due to be rolled out are likely to be topped up to $2000, as promised by Biden in the run-up to the Georgia Senate elections. This has the support not just of Democrats but also some Republicans, following the calls of President Trump for such a move. There is also likely to be more support for state and local governments that was absent from the most recent package, and potentially a widening of eligibility for unemployment benefits. All told, a new package is likely to be in the range of $500-800bn (2.4-3.8% of GDP), erring on the lower end of that range given the bipartisan nature of this package. We are currently reviewing our US growth forecasts in light of this, and expect to make a significant upward revision to our current 3.2% growth forecast for 2021. We will share our new GDP estimates in the near future when we publish our 2021 US Outlook.
Further ahead, the slim majority in Congress presents opportunities… – The Senate majority gives Biden a crucial additional lever with which to implement his policy agenda. The most important of these from a macroeconomic perspective is likely to be his bold ‘$2trn over four years’ green energy investment plan (c.10% of GDP). Given the lack of a filibuster-proof majority (which would require 60 Senate seats), Democrats will likely use the budget reconciliation process to pass these spending plans, which requires only a simple majority in the Senate. Ordinarily there would be only one opportunity per year to use this mechanism, but in 2021 Congress will get to use this twice, as the procedure wasn’t used last year. Given the amount of detailed work that will be needed to firm up this plan, we do not expect any legislative moves here until later in the year; as such, the growth effects will likely not be apparent until 2022 and beyond. However, should this plan come to fruition, we expect it to keep growth well above trend throughout Biden’s presidency, and lead to a much more rapid closure of the output gap caused by the pandemic.
Alongside legislation, Biden can also use executive orders to implement his agenda, albeit within the bounds of existing legislation. The most headline-grabbing of these will probably be the US rejoining the Paris Climate Accord. This will have the knock-on effect of putting added pressure on Congress to pass the $2trn green investment plan, as investment on this scale will certainly be needed for the US to meet its commitments. Other things include rolling back various executive orders issued by Trump, such as those limiting union and environmental protections.
…but also challenges – However, any major new regulatory changes beyond the scope of existing legislation – for instance, the proposal for a $15 hourly federal minimum wage, or regulatory (as opposed to budgetary) measures to combat climate change – will require new legislation in Congress. Such measures will struggle to pass due to the filibuster. Furthermore, Biden will probably also struggle to pass measures that more moderate Democrats might disagree with, such as raising the corporate tax rate from 21% to 28%, and raising income taxes on higher earners. While these measures are likely to find more support later in Biden’s presidency – when the economy is on a much stronger footing – we doubt we will see these moves in the current recovery phase. The combination of big spending plans and few or limited tax rises suggests deficits are likely to remain large for the foreseeable future.