The sustainable investor for a changing world
sealight and yacht_1600x900

Runoff elections in Georgia – Here’s why they matter

Blog

Mark Allan
 

A double victory for Democrats in the Georgia runoff elections would give control of the Senate to the Democrats and allow another multibillion dollar round of fiscal stimulus including cheques to households, and support for small businesses and the unemployed to be passed by spring.

Later this year, or in 2022, an infrastructure bill or changes to healthcare paid for by higher taxes could then pass. However, significant legislative changes in areas unrelated to fiscal policy look unlikely. Those would require abolishing the Senate filibuster rule. That could only be done with unanimous approval of all Democrat Senators and some oppose the idea strongly.

Even with control of the Senate, Democrats’ grip on both chambers of Congress would be tenuous. Marginal, most conservative, Democrats in both chambers would have an effective veto over legislation. If either of the Republican candidates wins, speaker Mitch McConnell would remain in charge of the Senate. Any major legislation would need his approval: this would not be not an easy task for the incoming Biden administration.

Can Democrats sweep Georgia?

It looks close; the only outcome that would be a real surprise would be a blow-out win for either party.

There are two Senate seats up for grabs in Georgia, one of the swing states in the recent presidential election: if Democrats can win both, they would gain control of the Senate thanks to vice-president Harris’s casting vote.

Opinion polling has been limited. It points to both races being close: the two Democratic candidates (Warnock and Ossoff) lead their Republican opponents by 1-2 points, giving them the narrowest of edges.

Early voting is generally believed to have benefited Democrats: an increased share of the ballots already cast came from Black citizens (see Exhibit. 1) and turnout was generally stronger in Democratic leaning Atlanta and its suburbs than in more conservative, rural parts of the state. That said, a drop-off in turnout compared to last November was greatest amongst younger voters, perhaps pointing to more resilience in the Republican turnout than has generally been appreciated.

One key issue is the extent to which president Trump’s attacks on the integrity of the general election, particularly in Georgia, will depress turnout among Republicans. This effect may be small, but in a close contest, it could prove decisive.

Georgia runoffs_05012021

Source: BNP Paribas Asset Management

What if Democrats win both seats?

Democrats’ control of the chamber thanks to vice-president Harris’ casting vote would mean they can decide which legislation is debated and who chairs the Senate’s committees. Democrats would be able to wave through president-elect Joe Biden’s nominees and it would allow Biden to make legislative progress on parts of his agenda without having to win over support from the Republicans.

With complete control of Congress, Biden will use reconciliation to pass more fiscal stimulus

Biden is expected to want to pass further fiscal stimulus [1]: aid to states, more support for the unemployed and another round of stimulus cheques. That might cost USD 500-1 000 billion (2.4-4.8% of GDP) on top of the USD 900 billion bill that passed at Christmas. More fiscal stimulus would require the approval of both chambers of Congress. Passage in the Senate could be complicated.

Current Senate procedure allows any Senator to filibuster a bill, and that filibuster can only be stopped by a 60-vote super-majority. In practice, this means bills lacking the support of at least 60 Senators don’t pass. However, under the reconciliation process, legislation on purely fiscal matters can clear the Senate with a normal majority as long as it conforms to criteria, the most important of which is the requirement that it does not increase the deficit after 10 years.

With Democratic control of Congress, Biden would use reconciliation to get more fiscal stimulus through in the next month or two. He could also use this mechanism to pass a substantial infrastructure package later this year or in 2022, and changes to healthcare – including increases in corporate taxation to help fund it.

The huge obstacle to the non-fiscal parts of Biden’s agenda

When Congress is as deeply divided as it has been in recent years, and presidents rely heavily on pure party line votes to pass major legislation, the most marginal member of the party in power becomes incredibly important. Democrats would not be able to lose a single senator in any vote, and so anything controversial including ending filibustering would become extremely challenging to pass.

Without filibuster repeal, major legislation on anything unrelated to fiscal policy – be that constitutional arrangements, the federal minimum wage, civil rights, or competition law – will not pass.

Similarly, fears that Democratic control of the Senate will lead to a tidal wave of regulation look misplaced. Passing new legislation would immediately run into the constraint posed by the Senate filibuster. If the Biden team intends to interpret its executive rule-making powers in an aggressive way, the primary constraint it faces will be the courts, not Congress.

One rationalisation of the market reaction to the November election result was the realisation that the stretch scenario where Democrats could end up with 53-54 Senate seats, which would have made filibuster repeal conceivable, was off the table.

In that view of things, it was not so much divided government the market was welcoming, but the removal of the risk of really radical government.

[1] See for example Biden promises 3rd round of stimulus checks, but says the specific amount would be ‘a negotiating issue’

Also read:

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

On the same subject: