More on Biden’s COVID Relief Plan and Gridlock

Editors’ Note: As always, our political commentary is non-partisan by design. We favor no party or politician and assess developments solely for their economic or market impact.

Four weeks ago, with victories in both Georgia Senate runoffs, the Democratic Party clinched nominal control of Washington, DC. Even though it was flimsy control, hinging on Vice President Kamala Harris’s Senate tiebreaking vote and the smallest House majority since 1900, most commentators seem convinced the party had enough clout to make passing bills smooth sailing. If necessary, they could just use budget reconciliation to bypass Republican filibusters, negating the need to scrounge up 60 Senate votes. Now it seems this thesis is getting its first test after President Joe Biden reportedly rejected GOP Senators’ $600 billion counteroffer to his proposed $1.9 trillion COVID relief package as “way too small” in a meeting with party leaders. Later Tuesday, Senators voted to start the budget reconciliation process. Yet there is also some dissent simmering within the Democratic Party, suggesting even reconciliation won’t succeed without horse trading and a watered-down bill. If a measure with broad philosophical agreement behind it can’t pass easily, the likelihood anything remotely controversial skates through seems quite low. This gridlock should be a powerful tailwind for stocks as investors’ fears of sweeping change prove false.

Passing COVID relief through reconciliation isn’t quite as simple as some coverage suggests. For one, unless a Republican Senator or two breaks ranks, it would require Democratic unanimity. That appears much easier said than done. On Monday, Bloomberg reported two of Biden’s own economic advisors think the proposed personal “stimulus” checks are too large at $1,400 and have too high of an income cap.^[i] Even deeper divisions emerged later that day when Harris took to the airwaves in West Virginia to sell Biden’s proposal directly to voters. That raised the ire of West Virginia Senator Joe Manchin—a centrist Democrat who holds a critical vote on any partisan legislation. In a follow-up interview, Manchin said Harris’s appearance wasn’t cleared with his office and noted Democrats aren’t even fully on board with Biden’s plan—and seemed generally miffed overall.^[ii] While Manchin supported moving to reconciliation in Tuesday’s vote, we aren’t certain that seals the deal.

Two, budget reconciliation bills can’t just have any old thing. They can cover only the basic areas of revenues, spending and the debt ceiling, with no more than one bill for each area per fiscal year. But that doesn’t necessarily mean three bills per year, given the potential overlap between taxation and spending. A refundable tax credit, for example, ticks both boxes—crucial now, since boosting the child tax credit and making it refundable was a key part of Biden’s proposal. So if that is in a bill that passes through reconciliation, then that takes up the allotment for spending and revenue—but that isn’t necessarily a deal breaker, considering Congress didn’t finalize a fiscal 2021 budget in calendar 2020. That means they can use the reconciliation process twice this calendar year if they choose—once for fiscal 2021 and once for fiscal 2022. This is why there is already chatter about larger tax changes being on the docket later this year, including lifting the cap on state and local tax deductions.

Because reconciliation bills’ categories are so narrow, it isn’t clear how much of Biden’s initial proposal would qualify. A budget reconciliation provision known as the Byrd Rule, for the late Senator Robert Byrd, prevents “extraneous” measures—broadly defined as those that don’t alter revenues or spending, aren’t under the relevant committees’ discretion, amend Social Security and increase deficits beyond 10 years. Based on our reading of the situation, that would seem to include the proposed federal minimum wage hikes, which Manchin also said Tuesday he opposes—likely killing its chances of being in the final package, but time will tell.^[iii]

For markets, what is in the final bill matters less than what the whole saga demonstrates: For all the chatter about single-party control and pushing big change though reconciliation, the reality seems to be intraparty squabbling and gridlock. The minimum wage hikes weren’t exactly the biggest changes members of the Democratic Party touted on the campaign trail. If it encounters this much resistance, what does that say about the likelihood of big tax hikes, a Green New Deal and Medicare for All? To the extent party leaders could even twist either of the latter two into budget reconciliation legislation, which seems like a stretch, finding universal support from all wings of the Senate’s Democratic caucus seems unlikely. Manchin isn’t the only centrist Democrat the more progressive colleagues would have to win over. There are five Democratic Senators facing re-election battles in purple states next year, giving them heavy incentives to force moderation. We think that likely throws mountains of sand in the gears.

As even less-contentious bills like COVID relief struggle to pass, the low likelihood of more extreme ideas becoming law should become clearer. This won’t dawn on investors all at once—and people may not even consciously realize it. Gridlock’s prevention of radical legislation always seems more stealthy, as people get caught up in the headline squabbling and tense environment. But markets are very good at seeing through the tension and realizing that congresspeople who argue constantly and do little aren’t jacking up uncertainty for households, businesses and investors. In our view, the fewer big shifts investors and businesses must account for, the better for markets in 2021.