Washington Outlook: What to Expect from a Split Congress

January 2019 -

Historically, the party in the White House almost always loses congressional seats in midterm elections, and the 2019 shift to Democratic control of the House of Representatives fits this trend. Yet expected or not, the outcome clearly signals significant changes ahead for Washington policies and politics that could affect the U.S. economy and financial markets.

During the first two years of the Trump Administration, with Republican majorities in the Senate and the House of Representatives, Congress passed major tax legislation, while the President pushed for deregulation in every part of the economy and imposed tariffs on major U.S. trading partners to try to address a growing trade deficit and win other concessions.

Now, with control of Congress split between parties unlikely to find much middle ground, the next two years may be notable largely for what doesn’t get done, says Sarah Binder, senior fellow in governance studies at the Brookings Institution and professor of political science at George Washington University. But gridlock has its own impact, and even if neither Democrats nor Republicans can do much to implement their policy agendas, they’ll still have to govern, passing spending bills and other necessary legislation. Binder describes what may be ahead.

OUTLOOK: What does history tell us to expect from a split Congress?

Sarah Binder: In the 70 or so years of the postwar era, it’s actually been rare for parties to split control of Congress. The most recent times were 2011-2014 and 2001-2002. Before that, you’d have to go back 20 years to the early days of the Reagan Administration, and before that to the years of the Great Depression. If we look at legislative performance during recent periods of split control, not surprisingly, there was a considerable amount of gridlock, since parties come to the table with different priorities. And it’s not just that they don’t agree on how to solve problems, they often don’t even agree on what the problems are. A good example today is climate change, which many Republicans say isn’t a problem, and which Democrat believe is something Congress should act on immediately.

OUTLOOK: Is the partisan divide as sharp as it feels, compared with previous times?

Binder: Parties certainly have become more competitive. The last time we looked at the United States on election night and saw a big blue or red map was 1984, with Ronald Reagan’s reelection. When parties win these days, the majorities are often smaller than in the past, which intensifies the partisan battle to re-capture control of Congress and the White House. That’s hardly a recipe for cooperation to tackle big, public problems.

OUTLOOK: What’s the likelihood that things will get done, or are we looking at two years of gridlock?

Binder: I don’t think our baseline expectation should be zero. On the other hand, you have to consider what the incentives are for both parties to go to the bargaining table. Do both parties see an incentive to deliver something to voters, particularly in the run-up to a presidential election year? Each party will ask itself what the costs are for refusing to go to the negotiating table.

In 1996, despite having a Democratic president and a Republican Congress, both parties seem to have decided they needed something to show the voters, so we saw major welfare reforms and environmental laws introduced. In 2015, with President Obama and a Republican Congress, there was quite a lot of legislative action. Senate Majority Leader Mitch McConnell and Senate Republicans decided after several years of being the party of “No” that they needed to show voters that the GOP could be trusted to govern. The result was landmark education reform, a multi-year highway bill, a mammoth spending deal and a solution to a decade-old Medicare “doc fix” problem. So, there may be issues on which a Democratic House and a Republican Senate each decide they can’t afford to be seen as blocking progress.

OUTLOOK: What are some possibilities?

Binder: Student debt might be one. Or prescription drugs – neither party wants to be seen as in the pockets of Big Pharma. Then it’s a question of how far parties are willing to go in terms of setting drug prices. So we may get some incremental measure on prescription drugs. We could see some kind of infrastructure bill, but I’m a little skeptical, in part because the Democratic Senate leader, Senator Chuck Schumer [D-NY], said recently that any infrastructure bill would need a green component to it. That means climate change, and, potentially, some kind of carbon tax. Republicans are unlikely to embrace a carbon tax, so Democrats have a license not to participate in a Republican infrastructure bill.

OUTLOOK: Now that Democrats control the House, what do you expect them to push for?

Binder: My guess is Democrats will push their agenda in two ways. First, they’ll do a lot of messaging about key economic and social priorities that most Democrats agree on, such as controlling health care costs, implementing a $15 minimum wage and campaign finance reform. They’ll push bills through the House, knowing full well that Republicans in the Senate will take up almost none of them. But, passing them in the House will give Democrats a message to voters for the 2020 election: Return us to full power and this is what we’ll do.

The second approach will be to use their power of the purse, through annual spending bills, effectively to make incremental down payments on policy priorities. One area where we might see additional spending is in expanding access to broadband internet service, a key concern for rural businesses and residents, as well as for electric cooperatives. Congress has already been making these investments in the Farm Bill and the National Defense Authorization Act, and we may see more of this approach. That’s the sort of incrementalism that’s possible in a period when it’s hard to muster support for larger initiatives.

OUTLOOK: The midterm election saw a surge in victories by women and people of color, and an influx of political newcomers. How will this impact the Democratic Party’s agenda?

Binder: The key question is, what does it mean for House Democrats and their ability to coalesce behind a single agenda? The influx of freshman members is going to pull the Democratic caucus to the left and create potential friction with the more moderate Democrats from suburban districts that had traditionally been Republican turf. This leftward shift is going to create pressures on newly reelected Speaker Nancy Pelosi to keep the peace and to not make deals with the Republicans and the president.

There will also be pressures on the freshman members, many of whom have little legislative or prior electoral experience. They face a steep learning curve and don’t have a sense of the reality of how difficult it is to get things done in Washington, of what’s actually possible. On the one hand, there’s the idealism, activism and protests against Trump that helped get them into office. But when that idealism hits the reality of how hard it is to build bipartisan super majorities for major change, there will be some frictions and some fireworks.

In any case, the economy in 2019 will likely be affected by factors that have little to do with whether or not there's a political gridlock.
OUTLOOK: What’s likely to happen with regard to the Republicans’ focus on deregulation, a hallmark of the Trump presidency?

Binder: Republicans have been using a procedure in the Congressional Review Act that allows Senate Republicans to avoid a filibuster of motions to repeal Obama-era regulations. In the last Congress, the GOP House readily agreed with the Senate and pushed to repeal more than a dozen regulations. That effort won’t fly with the House controlled by Democrats. In fact, I wouldn’t be surprised if Democrats put riders into spending bills explicitly prohibiting the Environmental Protection Agency, for example, from dismantling the Clean Power Plan, or requiring the Energy Department to commission studies on damage from coal-fired power plants.

House Democrats will likely also use their investigative powers to force greater public and media scrutiny on recent deregulation. They may hold hearings and call leaders of corporations that have benefited from deregulation to testify. The House Financial Services Committee may look at what deregulation has meant in terms of financial consumer protection, public access to credit and the health and stability of mortgage markets.

OUTLOOK: How does political gridlock tend to affect financial markets?

Binder: Some studies suggest that gridlock is good for markets, particularly for stocks, though I’m a little suspicious of these conclusions. To me, it’s hard to draw a causal link between a legislative stalemate and investor enthusiasm for the stock market. For example, when the economy started taking off in the mid-1990s after the recession of 1992, some observers attributed the strong economy to partisan gridlock. But Congress had been taking significant actions in the preceding years: There was a budget deal in 1989 that raised taxes, there were spending caps enacted in 1990, and tax increases passed again in 1993. One might argue that those actions, rather than political gridlock, helped create the strong economy. In any case, the economy in 2019 will likely be affected by factors that have little to do with whether or not there’s political gridlock.

Split Control of Congress and Impact Based on Salience of Issue
OUTLOOK: What are those factors?

Binder: One key question is where trade issues are going, particularly with China. President Trump clearly believes that tariffs are the route to getting the economic outcomes he wants, and I think he’ll keep at it in an effort to increase investments in the United States and gain concessions from trading partners. He may, at some point, simply declare victory and bring the trade war to an end, and I imagine equity markets would be quite pleased.

Another issue concerns the Federal Reserve’s plans for a series of interest rate increases in 2019. The tax cuts enacted in late 2017 created economic stimulus in 2018. Now that we’re coming off of that “sugar high” and the president’s trade wars are making investors and businesses nervous about the economy in 2019, we’ll have to keep an eye on what the Fed does. Fed chair Jay Powell has already reacted to signs of economic unease by announcing the Fed is likely to “pause” their rate hikes in 2019. That, in itself, might help stabilize the economy, without any action by Congress.

OUTLOOK: Budget battles caused a partial shutdown of the government in December and into 2019, even before the Democrats assumed control of the House. What do you expect on the budget front in 2019?

Binder: Congress and the president first need to find a way to resolve the current government shutdown. The new budget process for the coming fiscal year begins in February with submission of the president’s budget. But there doesn’t seem to be a whole lot of discussion from either party about fiscal responsibility right now. The government shutdown, for example, was about immigration and the wall, not spending. In contrast, when Republicans took control of Congress during the Obama presidency, they were clearly in favor of spending austerity and argued for retrenching entitlements, although the latter didn’t happen. But now, after two years of unified Republican control under the Trump presidency, concern about fiscal austerity doesn’t seem to have remained as relevant. For example, lawmakers typically don’t cut taxes when an economy is already doing well, but that’s what happened. In the end, arguments about deficits and spending seem to be somewhat politically shaped and dependent on whether it’s a useful position or not at a given moment. On that issue, there seem to be very few pure ideologues.

Statutory Debt Limit and Federal Debt Subject to Limit

That said, a split Congress will face challenges this year when it comes to negotiating the next budget for fiscal year 2020, which begins in October 2019. That’s because spending caps put in place under the Budget Control Act of 2011 are set to expire in fiscal 2020. Without a bipartisan agreement, the spending caps will automatically revert to a lower level that neither party wants. The last time these negotiations occurred in 2018, without a split Congress, the agreement included major new spending for both defense and the domestic agenda. We’ll see whether Democrats and Republicans, sharing power, are able to come up with an agreement both can live with.

OUTLOOK: The federal debt ceiling, which determines how much the government can borrow, was suspended in early 2018. It is set to be reinstated on March 2, and because the U.S. is running a budget deficit approaching $1 trillion a year, the debt ceiling will immediately need to be raised. What is likely to happen then?

Binder: My guess is that Treasury will invoke what are known as “extraordinary measures,” enabling the government to continue meeting its obligations for a few months after the March reinstatement. When it comes to a longer-term solution, formally raising or suspending the ceiling would normally fall to the party in power – in this case, to Republicans, because they control the White House in addition to the Senate. But Senate Republicans will probably look for a way to keep their fingerprints off such an action, to try to show that they still care about fiscal responsibility. As one possibility, they might authorize the administration and the Treasury to raise the debt ceiling, but then leave themselves room to pass a resolution disapproving of it. Or raising or suspending the ceiling could get wrapped into a broader spending bill.

And in this Congress, no matter the diversity of views within each party, those disagreements pale in comparison to the ideological gulf between the parties.
OUTLOOK: Both House Democrats and Senate Republicans have only relatively slim majorities in their chambers. Looking at what has happened historically, does that increase or decrease the likelihood that they’ll cooperate with each other?

Binder: The size of the parties in the majority – whether they have a narrow or large margin over the minority party – by itself doesn’t tell us all that much about the prospects for cooperation. We also need to know something about the ideological cohesiveness within each party and the ideological differences between the two parties. And in this Congress, no matter the diversity of views within each party, those disagreements pale in comparison to the ideological gulf between the parties. And given how polarizing President Trump is to the Democrats (as were Presidents Obama and Bush to their opposition parties), the prospects for significant cooperation to solve major problems seem diminished.

OUTLOOK: Given President Trump’s apparent willingness to secure policy through executive order and other means, could Republicans just attempt to wait out the split Congress in hopes of winning majorities in 2020?

Binder: For sure. That’s the dilemma for polarized parties that divide control of the Congress. Each party thinks that control of the government – Congress and the White House – could be just around the corner in the next election. And if that’s true, why cooperate and share the credit with the other party? Unless the public weighs in decisively in favor of one party’s positions over the other, it’s really hard to break the logjam in Congress.

OUTLOOK: With many House committees poised to investigate the Trump White House, will that undercut congressional attempts at policymaking?

Binder: The Democratic House will have to learn to multi-task as it staffs up its committees to pursue investigations. But keep in mind that most of the Democrats’ legislative initiatives will be framed as messaging efforts. The GOP Senate is likely to be a graveyard for Democrats’ key priorities, so the goal for Democrats will often be to build internal party consensus – rather than the harder work of securing bicameral, bipartisan coalitions for change.

Also in this issue:

  • Interest Rates and Economic Indicators
  • Dr. Scheherazade S. Rehman Joins CoBank Board

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