Macro Bytes: House Rules – the outlook for US politics in 2023

Speakers: Luke Bartholomew, Lizzy Galbraith

Luke  00:06

Hello and welcome to Macro Bytes, the economic and politics podcast series from abrdn. My name is Luke Bartholomew, and today we're going to be talking about the outlook for US politics in 2023. Now, the mid-term elections at the back end of last year, left Washington with divided government, with the Republicans taking the House of Representatives, which means that the power of the Biden White House is diminished significantly, but also the narrowness of the Republican victory has also left Republican leadership with less power than it might otherwise have had with the leadership vulnerable to certain actions within the Republican Party, all of which has important implications for the outlook for policy this year. And on top of that, as the year progresses, it's likely we're going to see increased jostling amongst potential candidates for the presidential election next year. So, there is a lot to talk about in terms of the US political outlook. And therefore, I'm delighted to say I am joined today by Lizzy Galbraith, political economist at abrdn. So, Lizzy, thanks very much for joining us. Probably a good place to start is with a review of those mid-term elections given how important those are in shaping the political outlook for this year. So perhaps you can give us a sense of who you thought were the big winners and losers of those elections?

 

Lizzy 01:38

Yeah, so in terms of the results, we ended up with, actually, the Democrats doing surprisingly well, given that traditionally in the US, the party of the President tends to do quite badly in the mid-terms. So based on historical expectations, they actually ended up doing pretty well and outperforming historical norms. The Democrats only lost nine house seats, which did result in them losing the House, but it was significantly less than the historical average since World War 2 of a loss of 26 seats for the party of the President. The Democrats actually ended up picking up a Senate seat as well, retaining control of, of the Senate, although they have since technically lost a seat as one of the as one of the Democrat senators has decided to become independent, although she's still caucuses with the Democrats. So, in terms of what the outcome is, the Democrats retain control of the Senate, but crucially have lost the House with quite a narrow margin. That does mean that one of the big winners coming out of the elections is actually Biden himself, expectations going into the election were pretty low, he wasn't polling amazingly well. And there was lots of speculation about whether or not he was going to be able to run for a second term. What the result means is that he's seen a bit of a poll bump, although he's had a bit of a rocky start to 2023. But broadly, what we're going to see is that Biden is going to be able to decide whether or not he runs for re-election on his own terms, without pressure from kind of outside political forces making that decision for him. We also saw Republican, Florida Governor Ron DeSantis, have a very good election cycle as well. He massively improved his own re-election on his first term. And he is in pole position to challenge Donald Trump for the Republican nomination for the presidency in 2024. Which does bring us on to Trump who has to be the person that was one of the bigger losers from the mid-term elections. Most of his endorsed candidates didn't do particularly well. And there was definitely an issue with candidate quality that really dragged on the Republican fortunes in this election that has been associated with some of the decisions that he's made, and some of the conspiracy theories that he's pushed, particularly with regards to the outcome of the election in 2021.

 

Luke  04:17

Thanks Lizzy. So in that period, after the mid-terms and before the new Congress that’s just been elected were signed in we had this so called ‘lame duck’ session where the previous Congress people were sort of still sitting and awaiting the new Congress to come in early this year. So was there anything important legislation wise passed in that time? Or were there any sort of important lessons for us to draw during that period?

 

Lizzy  04:44

Yeah, so the big thing that happened in the lame duck was the passage of actually quite a big spending bill for 2023. So it's not normal that you'd get a budget passed in the lame duck, but it's sort of been punted down the road in the autumn which meant that it was a bit of a must pass for Congress in the lame duck session. What we saw from that is that the Republican leadership in the House and the Senate actually differ quite strongly on strategy. And we are seeing some quite significant policy gaps opening up as well. So we saw the Republican leader in the Senate, Mitch McConnell, actually prioritise stability, a lot more and sort of demonstrating that Republicans can be sort of competent governors, when they do actually have the power to change things. So the Senate Republicans were much more focused on actually passing legislation in the lame duck, you know working on a bipartisan basis with the Senate Democrats, whereas in the House, what you saw is the then presumptive speaker, Kevin McCarthy, was actually pressuring for the decision to actually be kicked into January when the Republicans would have assumed a majority in the House, and they'd have been able to exact model spending concessions in theory from the Democrats. So the focus on House strategy was much more out of confrontation with the Democrats rather than the bipartisan working arrangements. And what we saw is that McConnell, in part because he was concerned about the volatility of the Republican controlled House, when it was sworn in, actually decided to go with the more kind of stable option, which was the passage of a bipartisan bill in the lame duck rather than withhold votes and kick it into January. So what we got was a $1.6 trillion government funding bill for 2023, with a very big increase in both defence and non-defence spending. So, when we when we get on later to talk about Republican strategies for 2023, there are some big numbers that we see in the government funding package that don't necessarily align well with what some Republicans want to see going forward.

 

Luke  06:58

So, Kevin McCarthy, who you described during that lame duck, as the presumptive Speaker has, indeed become Speaker, but the process of him been becoming so involved an extremely public struggle with his party and multiple rounds of voting and opposition. So why did he face that degree of opposition? And is there a sort of an important lesson from that? And then what ended that opposition and what allowed him to eventually become Speaker?

 

Lizzy  07:26

Yeah, so we saw a fairly extraordinary election of the Speaker in a lot of the drama around wrangling of votes actually played out in literally in front of the cameras, rather than behind closed doors. And we saw multiple speakers votes and McCarthy was eventually elected on the 15th ballot, which is not entirely unprecedented, but fairly unprecedented for modern speaker votes, at least, what happened was, you essentially had a group of 20 Republicans that were very strongly opposed to, essentially the concept of Kevin McCarthy, rather than his sort of political allegiances. What you tend to get is this group, mostly being described as sort of fairly anti- establishment, viewing McCarthy as an establishment figure who has sort of been around Washington, and Washington sort of lobbyists / fundraisers for quite a long time. And what they wanted was someone who was unattached to what they saw a sort of vested interest in Washington. The problem was that although all of these people had quite strong criticisms of McCarthy, and what they felt he represented, they couldn't agree on alternative candidates, even amongst themselves, and their various sort of choices for candidate never really gained any traction with the wider Republican Party. So, although it was a fairly successful blocking movement, it didn't really have any legs to actually change the outcome of the Speaker's vote. So, we saw McCarthy successfully sort of peel them off towards the end of that voting process with various concessions. But essentially, what that means going forward is that we're going to see roughly 10% of House Republicans continue to employ these blocking tactics to increase their influence over the future political direction of the House, and that's going to be really important going forwards.

 

Luke  09:22

Well, let's be a little bit more specific, then in terms of those areas, where those tactics will be of importance. And I guess, perhaps the most pressing right now is the question of the debt ceiling and how Congress will go about raising that and what the opposition from the Republican Party means around that, but then also any other issues where you think these sort of Republican tactics might have important implications for specific policy areas as well?

 

Lizzy  09:54

Yeah, so the the Treasury is going to start deploying emergency measures on the 19th of January to make sure that Congress, well the government can continue to pay its debt obligations. At the moment and the Treasury Secretary, Janet Yellen, is estimating that the X-date, the point at which those emergency measures will run out, will be no later than early June. And that means that Congress is going to have to find a solution to raising the debt ceiling before that X-date happens. This has traditionally been an area where a political makeup like it is now - so with a Democrats-led President with a small House Republican majority, this tends to be the recipe where you get sort of brinkmanship around the debt ceiling as Republicans look to leverage the debt ceiling to gain concessions on spending. That's very likely what we're going to see this time as well. And we're going to see those brinkmanship tactics that this group of House Republicans employed in the Speaker's election, sort of come back into the fore around the debt ceiling negotiations as well. So it's quite likely that we'll see those negotiations go down to the wire, and that in the interim, we're going to see quite a lot of noise and quite a lot of - on both sides - policy proposals that just won't be able to gain bipartisan support. So at the moment, the Democrats are proposing what they call a clean increase to the debt ceiling. So essentially, a no strings attached increase to the debt ceiling, while Republicans have actually yet to coalesce around a clear set of demands. But varying demands have included things like capping the government budget at 2022 levels, ensuring that government debt is falling, within the decade, things like that. So there's some very big, big spending demands going on already. We'll see that narrow towards the X-date, but it's still likely to go to the wire, as you see those more right leaning Republicans sort of hold out on bipartisan consensus, to try and get some additional funding cuts from the Democrats in the final days of the debt ceiling negotiations.

 

Luke  12:25

One of the things you hear some people talking about as a way in which the debt ceiling issue can be avoided, and I'm not so sure how seriously they're talking about this rather funky idea of the Treasury minting a $1 trillion coin and then depositing that at the Fed and then getting financing against that. I mean, just for the record, how seriously, should we take those kinds of proposals?.

 

Lizzy  12:50

I think they can be pretty conclusively dismissed at this stage. I mean, the White House has said that it's not something that it's considering. And certainly given the Democrats in the Senate, those actually that kind of hold the power to pass the vote - so those two names you hear quite often, Joe Manchin being one of them. They only tend to pass legislation when it has bipartisan support. So the idea of the government essentially circumventing a bypartisan process with, with a proposal like that would be deeply unpopular, and will probably have quite significant political consequences. So I think it's, it would never be anything other than an absolute sort of last ditch effort to avoid something kind of truly calamitous. But the White House has said that that is off the table. And it's going to be a debt ceiling raised by traditional means only while that option is still available to them.

 

Luke  13:51

Okay. So I think that pretty conclusively puts that issue to bed, at least for now. So looking beyond fiscal policy, what else can we expect House Republicans to focus on over the next two years with this very narrow majority that they have?

 

Lizzy  14:05

Yeah, so we are going to see the House pass quite a lot of essentially symbolic legislation that will demonstrate what their political priorities are but won't pass in the Senate and therefore, in practical terms won't mean anything. So early bills that we've seen passed by the House focused on some fairly narrow anti-abortion measures, and restricting the funding of the IRS, again, because these things won’t gain support in the Senate, they're essentially going nowhere. But this sort of symbolic passage of fairly sort of standard conservative legislation at this point will continue as they try and set out a platform for the 2024 elections. We're also going to see them prioritise lots of committee investigations, so it will surprise noone who kind of spends time listening to Republicans that investigations into Hunter Biden are extremely likely to happen. Investigations into Joe Biden himself are also quite likely, as well. And again, it's a way of Republicans sort of finding a platform that sets out their political agenda ahead of the next electoral cycle. One thing that we will see as well is Republicans are quite likely to launch investigations into the use of ESG standards, by investors as well. So the Republican leader of the House Financial Services Committee, has confirmed that he's going to be focusing on oversight of the new SEC climate disclosure rule as part of his tenure over the next two years. So climate disclosure and ESG and investing is also something that we can expect House Republicans to focus on going forward as well. Although, as I said, if at this point, it's symbolic due to the Democrat controlled Senate.

 

Luke  15:55

Now, this being American politics, having just got through the mid-terms, already, pretty quickly, attention is starting to turn, as you say there to the next electoral cycle. And indeed the big one of the presidential election race in 2024. So how can we expect that to start to shape up through the year? And what are the big things to watch in that respect?

 

Lizzy  16:17

Yeah, so far, the only declared candidate on either side is actually Donald Trump. He's declared very early, largely f boxed in by his very heavy hinting towards the run up to the mid-terms. But we don't actually know when the Iowa caucus will be yet. It's the first caucus for the Republicans. That tends to dictate the timing that candidates normally use for announcing their runs. It's usually between January and February. So we're expecting it to be January February 2024. And if we use sort of traditional expectations around candidate announcements, we would expect more Republicans to start announcing over the summer months to give themselves a good sort of six months of lead-in time until that first caucus. So Ron DeSantis, who's so far dismissed any questions about his presidential aspirations, but it's a sort of obvious front runner, he is continuing to fundraise. He is publishing an autobiography in fairly short order. And he's likely to announce after the end of the current Florida legislative session, which would be in early May, so we would expect him to announce over the summer. There are plenty of others in the Republican Party that are also considering a run. So you have you know, candidates like former Vice President Mike Pence, former Maryland Governor, Larry Hogan, is also quite openly considering a bid. And you also have other former Trump appointees like Mike Pompeo and Nikki Haley are also exploring bids, as well. There’re some sitting governors like Texas Governor Greg Abbott, as well. So it's all shaping up to be quite a crowded field on the Republican side. And that does mean that we're likely going to see very noisy early stages, more like the 2016 Republican primaries, where we had an incredibly crowded field early on that actually took quite a long time to narrow because so many people were sort of convinced that they could win in the end. And because of that it's important that we don't write Trump off despite the difficult midterm cycle and his sort of legal issues. He is still polling quite well within the Republican Party. And lots of the outcome of the Republican primary is likely to depend on his sort of general engagement with the primary process this time around, as well as just how many of these prospective candidates actually do decide to run? It's also likely that on the Democrat side, we'll see Biden announced in early 2024. If either way, if he decides he is going to run, then we'd expect that to essentially be the end of any speculation around the Democratic primary. It's very unlikely that anyone will challenge him. If he does decide that one term is enough, then we would again expect quite a crowded Democratic field particularly with a lot of the current sitting governors deciding to put their hats in the ring, as well.

 

Luke  19:33

Super, thanks, Lizzie. So I think that is all we have time for this week. So please do allow me to ask you once again to rate, review and subscribe to us on your podcast platform of choice. And all that remains for me to do is first thank Lizzy for her excellent contribution today. And thank you for listening. So thanks very much and speak to you again soon.

 

20:03

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