Five ways the 2022 midterms could affect the US economy

The 2022 midterms are poised to unleash a “red wave” in the House of Representatives and potentially the Senate, followed by a powerful United States legislature in 2023.

Republican leaders, feeling the optimism of the polls and the dissatisfaction of Americans with the economy, teased the economic plan and even increased the anger after recommending cuts in entitlement spending in the next legislative session.

But on election night, the results in the midterms painted a different picture for the next Congress.

Forecasters still expect a GOP-led House, but the majority is expected to be narrow. The fate of the Senate also hangs in the balance, and Democrats have picked a seat to replace retiring Sen. Pat Toomey (R-Pa.).

Control of both chambers is still up for grabs as states continue to count votes, but gridlock in the next congressional session is almost inevitable. The implications for the US economy could be massive.

Even a small Republican majority in either chamber would prevent President Biden and the Democrats from passing sweeping legislation along party lines. Bipartisan standoffs over government funding and the debt ceiling may be common, but major legislative breakthroughs will be rare.

A GOP takeover of the Senate would also force Biden to seek Republican support for his next administration’s nominees.

Here are five ways mid-2022 could affect the economy.

Less federal spending

Republicans focused their midterms largely on concerns about high inflation and the likelihood of the US slipping into recession sometime next year. GOP lawmakers have pledged to rein in federal spending, which they blame for high inflation, if given the chance to run for the House or Senate.

A narrow majority in either chamber would give Republicans the power to block any spending bill they deem too generous and force Democrats to offer cuts to win their support. But Republican leaders may also find it difficult to move a spending bill if conservative lawmakers oppose an eventual bipartisan deal.

“The House majority will probably be 10 seats or less for one of the parties, which makes the government challenging at best. The midterms have basically caused a gridlock,” Brian Gardner, chief Washington policy strategist at investment bank Stifel, wrote in an analysis on Wednesday.

“Given the upcoming split, passing the government spending bill and raising the debt ceiling will be more challenging than expected.”

Higher risk of debt ceiling defaults

Several Republican lawmakers and former President Trump himself have called on GOP leaders to use the federal debt ceiling as leverage in federal spending negotiations. While GOP leaders have vowed to ensure the US does not default on its debt, they may have a hard time convincing conservative campaigners to attack the deal despite the serious implications of a debt ceiling breach.

The US has experienced credit downgrades and financial market turmoil after showdowns in 2011 and 2013, and this country sees even steeper risks of financial crisis as the economy faces headwinds.

“The odds of something worse than brinksmanship 2011 is higher than ever before and the consequences will be even worse than before,” tweeted Jason Furman, former chairman of the White House Council of Economic Advisors under former President Obama.

“In 2011 it got close to the brink leading to a huge collapse in confidence, financial market reverberations, and a downgrade of US debt,” he continued.

Stimulus during recession will be less likely

Republicans will have little incentive to help the economy if the US falls into recession on Biden’s watch, even if they control the House or Senate.

GOP lawmakers will find it hard to push back on economic relief after blaming the stimulus released by Biden in March for the high inflation attacks that helped them win the majority. Republicans may also find it easier to defeat Biden and Democrats if they can blame them for the recession, a dynamic some GOP lawmakers have welcomed.

“If the US enters a recession in 2023, a divided Congress will struggle to pass a fiscal stimulus bill that would leave the Federal Reserve as the primary institution responsible for setting economic policy in the country,” Gardner wrote.

Push Biden to the center in the nomination

While the House does not play a role in federal nominations, the GOP-controlled Senate will force Biden to nominate officials who can garner enough bipartisan support to pass the upper chamber. Senate Minority Leader Mitch McConnell (R-Ky.) opened up several dozen administrative and judicial seats when the GOP ran the Senate during Obama’s last two years and is likely to force Biden to find common ground with Republicans to fill other seats.

Potential vacancies in the Treasury Department, Federal Reserve and other financial regulators could be high-stakes battles between Democrats and Republicans even in the evenly divided Senate where Vice President Harris holds the tiebreaking vote.

These difficulties will also leave Biden unable to cement some of his economic agenda.

“If Republicans win the Senate, or even if it remains 50-50, progressives will not be able to convince their people,” wrote Ian Katz, director at research firm Capital Alpha Partners, in an analysis.

tougher supervision of federal regulators.

If the GOP takes over the House or Senate, federal financial regulators can expect intense oversight from Republican-led committees and political pressure over several polarizing initiatives.

Republican lawmakers have opposed efforts led by the Biden appointee to expand attention to climate-related financial risks, expand disclosures from publicly traded companies and increase efforts to police cryptocurrencies.

“GOP lawmakers will hit regulators with a tsunami of paperwork: Letters, subpoenas and requests for testimony,” Katz wrote.

“A lot of documentation can potentially slow down an institution. It’s impossible to know how much, but nothing.

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