by Greg Valliere, AGF Management Ltd.
DON’T GO TO SLEEP: Elections change overnight as ballots are counted past midnight; that has happened for decades. Everyone who went to bed last night thinking there might be a split decision in Georgia got quite a surprise this morning — it appears that the Democrats have won both races. Here’s an early take on the implications . . .
THE CONGRESSIONAL AGENDA JUST CHANGED: Republican David Perdue trails by over 16,000 votes this morning; a recount cannot change a gap that large. With the Democrats thus capturing both Georgia seats, the Democrats will control the Senate in a 50-50 tie.
FIRST OF ALL, Joe Biden is likely to get all of his Cabinet nominations approved, with the possible exception of Neera Tanden to head OMB; she has Democratic detractors. But Biden will not have to spend political capital on his nominations, and he now has the upper hand on judicial appointments.
AND CLEARLY THERE’S A MUCH BETTER CHANCE that another stimulus bill will pass later this winter as Covid rages; the $900 billion package two weeks ago was simply a “down payment,” as Biden stated. He probably will get more than $1 trillion in the next bill, a plus for the economy (but a concern for the bond market, where the 10-year Treasury yield topped 1% overnight).
REGULATORY CHANGES: Biden already was planning to move aggressively on this front — tougher environmental regs, especially on carbon emissions, and reversing Trump on labor standards, antitrust policy, etc. Mitch McConnell and the Republicans won’t be able to stop this.
BUT WILL SWEEPING, ACTIVIST LEGISLATION PASS? Maybe not, without reform of the filibuster rules that require 60 votes to cut off debate. This undoubtedly will frustrate Biden, but we don’t think he can change this; not every Democrat is on board with filibuster changes.
THE RECONCILIATION PROCESS: This is important because it will allow the Democrats to pass a major package with only 50 votes if it’s part of a budget-related bill — maybe twice in 2021, some sources say, once for another stimulus, once for tax hikes. But non-budget bills on issues like a Green New Deal probably will languish.
THE BIG WILD CARD, obviously, is taxes. A package of tax hikes will come into focus by late spring — higher capital gains rates, a hike in top corporate and individual rates, a new minimum corporate tax, higher Social Security payroll taxes, a higher estate tax rate, etc.
IF THE DEMOCRATS ATTACH TAX HIKES to a reconciliation package next fall, could it pass with 50 votes? The focus will shift to two moderate Democrats — Joe Manchin of West Virginia and Jon Tester of Montana. They could balk at a huge tax hike but could agree to something modest; perhaps the top corporate rate won’t rise to 28% from 21% now, but it would rise nevertheless.
HIGHER TAXES ARE COMING, the only issue is when and by how much. It’s possible that Biden will wait until it’s certain that the economy is back on its feet, but we feel confident in predicting that higher taxes will be a major issue for investors now that Biden may have the votes to prevail via reconciliation.
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THE POLITICAL IMPLICATIONS: Trump won’t go away, he will never concede and will continue to claim the election was stolen, stoking more anger from people who will protest in the streets of Washington today.
BUT IF THE GOP WANTS A COMEBACK in the 2022 House and Senate races, they will have to distance themselves from the Proud Boys, QAnon — and Trump. The fever will break, perhaps starting with the congressional confirmation of Biden’s presidency, which will come late tonight or tomorrow morning.
SENATORS LIKE TED CRUZ AND JOSH HAWLEY think they can ingratiate themselves with the Trump base, but they have no evidence to prove voter fraud — and they may become pariahs within their own party, which has been stunned by the Georgia runoffs.