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How will US divisions impact the Democrats' agenda?

29 January 2021

Tammy Hall, Portfolio Manager, LGT Vestra US

The recent election delivered a mandate for Joe Biden and the Democrat party to implement their agenda for the next four years. To a point. The national popular vote was divided 52-48, a split which may sound familiar to readers on this side of the Atlantic. A metric which added resonance to the President's calls for unity and reconciliation at his inauguration. It is clear that the tears in the social fabric of the US still exist and will be a defining feature of the Biden Presidency, in much the same way as a 52-48 split in the Brexit vote in the UK has resulted in a search for reasons that will only become clear when history comes to write its analysis of this time. The US Presidential Election was historic for many reasons and we believe the implications of this will be felt over the coming years.

The Senate race was particularly interesting. Had the Georgia run-off resulted in a Republican Senate, it would have been the first time since 1884 that a Democratic President took office without a Senate controlled by their party. As it is, the Democrats control the Senate via the tie-breaking vote of the Vice President. Whilst this does make life easier for the President in appointing Cabinet positions, which only need to be passed by a simple majority, it does mean that some of the more progressive parts of the Presidential agenda are unlikely to be achieved. However, the President does have significant power to enact policy through executive order and in his first week signed 22 executive orders, more than any previous occupant of the Oval Office.

This political calculus has important implications and will require cooperation to pass important legislation. Such cooperation may be difficult to achieve given the split of the national popular vote and the looming threat of mid-term elections that have Senate races in the six states which had the closest margins in the 2020 election.

There are two issues that must be resolved by Congress in the short term, where Senate calculations will be important.

Firstly, President Biden is focussed on delivering another stimulus package, with an additional round of stimulus cheques – an extra $1,400, to add to the $600 cheques posted in December, at which time Democrats had demanded $2,000 payments. Democrats have signalled that they may seek to approve this package via budget reconciliation, which gives a higher chance of success but limits the scope of a package. It may also become hostage to Republican recriminations for the decision to continue with the impeachment trial against the previous president, which the Senate recently voted to proceed with.

Secondly, in mid-2021, Congress will have to address the debt ceiling, the effective borrowing limit of the US government. This limit was suspended in 2019 and again in 2020 due to the impact of the pandemic. Without an agreement on this, the Treasury will be forced to reduce its outstanding debt by a historically large amount, at a time where the country may need additional flexibility. President Biden has a long history as a Senator for Delaware and a history of being able to reach bipartisan agreement with Republican Senator Mitch McConnell – the Republican minority leader – both in the senate and as Vice President but this may be tested as the year progresses.

Both of these issues are likely to weigh on the collective mind of the markets in the first half of this year. It is clear to us that the volatility we have become used to in the past year will be a feature of markets for some time to come.

The new President made much of his multi-generational family and ability to unify people during the campaign and must now use all of the skills he has learned in these two roles to govern a deeply divided country over the next four years. Whilst the upheaval and volatility of the previous administration is now in the past, it may not be smooth sailing from here. 

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