The Green New Deal. Medicare for All. Huge income and capital gains tax hikes. Wealth taxes. These policy ideas, and similar others, plagued many investors since 2020’s election campaign kicked off. Now, halfway through the Democrat-“controlled” government’s first 100 days, the recent debate over the administration’s $1.9 trillion COVID aid package showed you again those extreme ideas stand no chance. Gridlock rules Washington—a positive for stocks.
Ever since November’s election—and subsequent Democratic victories in Georgia’s Senate runoffs—many investors feared a raft of extreme legislation. As I wrote here November 26th, gridlock largely rules Washington. The Democrats’ House majority is their smallest since 1893—peanuts. At 50/50, their Senate “edge” depends on a party-line vote teeing up a vice presidential tiebreaker. The lack of a clear majority is a first for a new Democratic president since Grover Cleveland in 1885. Given policy divides between progressives and self-described centrists, getting anything big done in various categories is beyond challenging.
The recent COVID aid debate demonstrates this. We were always likely to get another fiscal relief act this year—no matter who won the White House. The general, pre-specifics idea wasn’t broadly seen as contentious by either party: The government locked the economy down destructively. So sending government checks reflexively is just natural political cover. It’s something those seeking 2022 re-election will tout while campaigning. Disagreements boiled down to size, who gets how much, and bacon, sausage, ham or hocks on the side. But the simple concept was politically relatively bipartisan from the get-go. Yet DC routinely weaves in morphications into mortifications far removed from any central thrust. This time, that headline was chiefly the Biden administration’s push for a $15 per hour federal minimum wage.
Policy prescription isn’t my wheelhouse. I don’t go there. But the push to include it added a dose of divisiveness—a window revealing gridlock’s effect. The House narrowly passed a version including the wage hike. But there was no way the Democrats could avoid a senate filibuster by getting 10 GOP senators to support that. So, instead, they chose to use budget reconciliation rules allowing passage of tax, spending or debt ceiling-related bills by simple majority vote.
Many democrats thought that could seal the $15 social issue’s passage. But no. The Senate Parliamentarian ruled it didn’t qualify under budget reconciliation rules, scrapping it. End of story. The $15 minimum can only pass now via 60 votes. And that won’t happen in this Congress.
Forget, briefly, all the chatter and pundit disagreement over the $1.9 trillion. Instead, consider a bigger picture: If the Democrats are so many votes away on a minimum wage hike, how in heck can they pass bigger, more contentious non-budget bills—essentially most all of which require 60 votes. Good luck there!
Biden claims he will advance a green infrastructure plan next. But politicians have talked up trillion-dollar fixes for “crumbling highways and bridges” for over a decade. Whatever you think of this concept or Biden’s plan for it, is there any way one could pass now? Yes! But it would need be vastly smaller and heavily empty symbolism.
Tax plans are much more divisive still—because some obviously win while others obviously lose. Take the GOP’s 2017 tax reform. Despite having a 47-seat House edge then—and a 52 – 48 Senate advantage—they had to water down their bill to pass it. In President Barack Obama’s first term, his Democrats initially had a 59 – 41 Senate majority and a 79-seat House edge. But repealing the so-called Bush tax cuts, an often-cited Obama campaign talking point, took until 2012. And then, most weren’t repealed at all. On the contrary: It made all but those targeting the very highest earners permanent.
I often hear political commentators claiming: “This isn’t your parents’ or grandparents’ Democratic party.” Maybe so!. Or not! But what is crystal clear from the recent relief debate: The more progressive wing can’t hold court in this government outside of simple spending. Gridlock rules.
This gridlock should prevent legislative extremities from passing and creating winners and losers. As 2021 evolves, the combo of narrow margins, non-budget reconciliation rules, and intraparty gridlock that nixed the minimum wage provision will mute ever more—making gridlock apparent to all. In my experience, nearly two-thirds of high-net-worth investors lean Republican. Gridlock will prove a relief to them, encouraging them to bid stocks up. As I wrote here November 26th, we usually must wait for midterms to enjoy this lulling. That is why stocks rise much more—and more often—in presidents’ third and fourth years than years one and two.
For stocks, that is 2021’s true political peculiarity: We got gridlock’s greatness early, a tailwind for markets here and now. For investors, that is perhaps the chief benefit of the debate over more COVID aid: It revealed the gridlock we got.