US Midterm Elections: The Base Case Scenario and Its Implications

The national midterm elections are tomorrow. As of this morning, Nate Silver’s FiveThirtyEight website[i] is giving the Democrats an 85.6% chance of taking the House of Representatives and the Republicans an 85.6% chance of keeping the Senate. This forecast should be no surprise; the president’s party almost always loses House seats in the first midterm election, and the Republican margin of control there is narrow. Below, I outline some key issues and the potential implications if this forecast becomes a reality.

Potential Market Impacts Wall Street analysts seem to agree with FiveThirtyEight’s odds, and the outcome of a Democratic House and Republican Senate is likely priced into the markets. I don’t expect markets to move in this scenario.

Potential Gridlock Many believe that a divided Congress would result in gridlock. House Democrats would likely propose raising the corporate tax rate from 21% to 25%, but I don’t think they’d succeed. I see possibilities for a Democratic House to work with Trump in areas where their priorities align, including infrastructure, drug price controls and a hike in the minimum wage.

Trade I think the US-Mexico-Canada Agreement (USMCA) will be ratified, though it may have a harder time getting votes from a Democrat-controlled House. Democrats generally support Trump’s protectionism, so I don’t expect them to stop the emerging trade war with China.

Regulatory Issues Trump will likely take regulatory actions and issue executive orders to bypass Congress. Trump could also reverse or nullify any executive orders and regulations that Obama had imposed without Congress. I have environmental and education regulations in mind.

The Federal Budget There is a serious risk of a budget impasse and temporary shutdown starting December 8. Trump may veto a budget that does not have border wall funding, and if Democrats take the House, December could be the last opportunity for congressional Republicans to include border wall funding. A temporary shutdown will likely have only a small impact, since much of the government will be funded by that time and there is no debt ceiling deadline associated with the budget.

The Debt Ceiling The debt ceiling has been suspended but will come back into force in March. Eventually, Congress will, in my view, need to raise the debt ceiling to avoid a technical default for Treasurys. I think Congress will likely have to deal with the issue before August 2019. Democrats could force a confrontation in which they demand higher taxes to reduce the deficit as the price for raising the debt ceiling. I believe Trump would reject these demands. I presume there will be a last-minute rescue, as there was in 2011, but it could be a rocky road to get there. Trump may have to make some concessions to congressional Democrats to get the debt ceiling raised (for example, he may concede a hike in the minimum wage).

Investigations I expect numerous House committee hearings on various Trump activities, including possible campaign finance violations, Trump’s taxes, and settlements with various women in Trump’s past. The Democratic “young guns” in the House will likely demand impeachment hearings, though I doubt the House would actually vote on a bill of impeachment. If Mueller’s investigation finds hard evidence of collusion by Trump, hearings could get ugly. I’m not sure what Congress would do in this scenario. I do believe the Republicans would counter with renewed investigations into Hillary Clinton’s issues.

[i] FiveThirtyEight is a website that focuses on opinion poll analysis, politics, economics, and sports blogging. The website, which takes its name from the number of electors in the United States electoral college, was founded on March 7, 2008, as a polling aggregation website with a blog created by analyst Nate Silver.

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