WashingtonWise Investor: Episode 32
Transcript of the podcast:
We are barely two weeks into the new year, and it has been an astonishing start to 2021 for our nation and for our democracy.
The storming of the U.S. Capitol in an attempt to disrupt the certification of our presidential election was shocking, to say the least.
Yet hours later, members of Congress reassembled to finish the job and certify Joe Biden as the president-elect.
A day earlier, Georgia voters cast ballots in the state’s twin run-off elections, choosing two Democrats to represent them in the Senate and flipping majority control of the chamber—giving Democrats full control of Washington.
This week, the city remains on edge in anticipation of more unrest in the days leading up to the presidential inauguration. The Capitol grounds are now surrounded by a seven-foot fence, and some of the more than 10,000 National Guard members who have deployed to the city are visible on nearly every street corner.
But the markets, thus far, have been relatively unbothered by the uncertainty and the tension. For investors, for all citizens, these are extraordinary and confusing times.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and the confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.
Today’s show is going to be a little different in that I’m going to devote the entire episode to an exploration of what the new Congress means for the policy agenda in 2021 and the potential impact on the markets and investors. With last week’s riots and the transition to a new president dominating the headlines, it’s actually the new power balance in Washington that will have the biggest long-term influence on the markets and investors.
On this show, our focus is what investors are most concerned about, so without dismissing the seriousness of the crisis around the presidential transition, that’s where I’m going to focus today.
Before we dive into specific policy issues, I want to take a few moments to offer some context for how this narrowly divided Congress came to be and how it will work in practice.
With their victories in last week’s runoff elections in Georgia, Democrats have forged a 50-50 tie in the U.S. Senate. The two new senators from Georgia, Raphael Warnock and Jon Ossoff, have not been sworn in yet, so the 50-50 tie won’t be official until that happens—which should be in the next few days.
Under Constitutional rules, the vice president breaks ties in the Senate. Once Vice President-elect Kamala Harris takes the oath of office on January 20, she will become the tie-breaking vote, giving Democrats the narrowest majority possible in the Senate.
One interesting side note is that the situation could have a significant impact on Harris’s role in the new administration. Harris will likely have to stick close to Washington in case she’s needed for a vote—something that may mean that her international travel, normally a significant part of the vice president’s job, is limited to only times when Congress is not in session.
It’s not clear how many times Harris will be needed to break a tie. In our nation’s history, vice presidents have cast more than 250 tie-breaking votes, dating back to John Adams, who cast the first of his 29 tiebreakers in 1789. The outgoing vice president, Mike Pence, has done so 13 times in the past four years—that’s the most by any vice president since the 1870s. And Pence’s party had a clear majority in each of his four years, meaning some Republicans had to buck the party in order to create a tie vote situation.
With an actual 50-50 split, Harris is likely to have to vote even more frequently. The mechanics of a 50-50 Senate are tricky. Incoming Senate Majority Leader Charles Schumer of New York and the soon-to-be Minority Leader Mitch McConnell of Kentucky will have to hammer out a formal agreement on the details.
But there is a precedent they are expected to use. When George W. Bush took office as the 43rd president in 2001, the Senate was 50-50, with Republicans holding the majority by virtue of having the vice presidency. The leaders of the Senate worked out a power-sharing agreement that included equal membership on all Senate committees, including equal resources and office space.
And because bills cannot move out of committees and on to the Senate floor without a majority support in the committee, they created a special rule that allowed the majority leader to move any bill that was tied in committee to the Senate floor for consideration. Expect a similar deal to be struck in the coming days.
The 50-50 tie in 2001 only lasted for about four months. In May of that year, a Republican senator switched parties, giving the Democrats a 51-49 majority for the remainder of that cycle. There has been some speculation that that could happen in 2021, after Senator Lisa Murkowski, a Republican from Alaska, said in an interview last week that she thought President Trump should resign and questioned her future in the Republican party.
On a practical level, the 50-50 tie means that Democrats will need to be fully unified on every vote in order to ensure they have a majority. But that’s not necessarily going to be the case. The Democratic caucus within the Senate spans an extremely broad ideological spectrum, from high-profile progressives like Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts to moderate-to-conservative lawmakers from red states like Senator Joe Manchin of West Virginia and Senator Jon Tester of Montana. It’s going to be very challenging for incoming Senate Majority Leader Schumer to keep his party unified.
That tenuous majority will also put a lot of focus on moderate Republicans like Senator Murkowski in Alaska and Senator Susan Collins from Maine. If Democrats can attract votes from a few Republicans on some issues, that would give them much more flexibility. I’ll be watching for signs of bipartisanship throughout the year ahead.
Finally, the important thing to remember is that in the Senate, it’s very hard to move legislation forward without a supermajority of 60 votes—that’s the number of votes needed to end a filibuster, a threat that hangs over most legislation. Democrats are obviously far from that number—and that means that they will have to make some compromises on their priorities in order to find issues that have broader bipartisan support.
But Democrats do have one tool available to them—something you will hear a lot about in 2021 called “budget reconciliation.” It’s a special process the majority party can use to move legislation that directly affects government revenue. The important feature of this process is that it cannot be filibustered—so it does not need that super-majority to move forward. A bill that moves under these special rules can be approved with a simple majority vote—and that means Democrats could use this process to pass a package of their highest priorities.
Now, there are many limitations to what can be included in a bill considered under the budget reconciliation process. Normally budget reconciliation can only be used once per year, but because the 2021 budget was never finalized, the Democrats will have two opportunities this year. However, with so many items on their agenda—including another round of stimulus and expanded healthcare—they will have to choose carefully when to use this resource.
There’s one other piece of this puzzle that is not getting much attention. In all the hoopla about a 50-50 Senate, not many people realize just how narrowly divided the House of Representatives is.
As of now, there are 222 Democrats and 211 Republicans, with two vacancies. One of the vacancies is due to an election in upstate New York that is still being contested in the courts, and the second vacancy is due to the tragic death of a newly elected Republican in late December due to complications from COVID-19. That seat will be filled by a special election in March, and it is expected to stay in Republican hands.
In addition, three members of the House are planning to resign to enter the incoming administration. And that will create three more temporary vacancies, reducing the margin to 219 to 211, until those seats are filled by special elections in the coming months. That means that if just five Democrats vote against the party in the House, and all the Republicans remain unified, then Democrats would lose that vote. That’s an extremely thin margin for House Speaker Nancy Pelosi to navigate.
At the end of the day, the narrow margins in both chambers fall far short of the much-discussed “blue wave,” prompting some pundits to call it a “blue ripple.” So what does all of this mean for investors? What can investors expect in 2021?
Once Joe Biden is sworn into office, Democrats will have what is known as full control of Washington, in that they will hold the White House and have majorities in both the House of Representatives and the Senate. It will be the first time since the start of Barack Obama’s presidency in 2009 and 2010 that Democrats will have that control.
But “control” is a relative term in Washington, and as I’ve just outlined, the Democrats control of Congress will be by the thinnest of margins. That will likely curb some of the most far-reaching proposals from the campaign trail.
For example, in recent months, some Democrats have pushed for changing Senate rules to end the filibuster for legislative items, something that could be done by a simple majority vote.
Democrats first changed the filibuster rule in 2013, ending the ability of the minority party to filibuster the president’s nominees to lower courts and to government positions, including the Cabinet. Republicans expanded the rules in 2017 to end the use of the filibuster on Supreme Court nominees—a rule change that allowed Republicans to confirm three Trump nominees to the high court in the past four years.
Now, some Democrats have openly proposed ending the filibuster entirely, including for legislation. The narrow Senate margin, however, may make that impossible. Senator Joe Manchin, a conservative Democrat from West Virginia, has publicly said he is opposed to the idea, and several other Democrats have expressed concerns. Even President-elect Joe Biden, who served for more than three decades in the Senate, has been lukewarm about changing the Senate rules.
Other ideas that were discussed during the fall campaign, such as making the District of Columbia or Puerto Rico the 51st state, expanding the size of the Supreme Court, or making changes to the Electoral College system—all seem highly unlikely.
And that’s also true of some of the most ambitious legislative proposals out there, from Medicare for All to the Green New Deal.
In the absence of Democratic unanimity on these and many other ideas, the incoming administration and Democrats on Capitol Hill will need to temper their goals and expectations for 2021.
So let’s take a closer look at what might be achievable in the new power structure of the nation’s capital—issues where there is broad Democratic support, or perhaps even more importantly, issues that have the potential to attract bipartisan support.
I’ll focus on what I believe to be the realistic and achievable policy issues that will impact investors in the coming weeks and months.
And at the top of that list is another round of economic stimulus and coronavirus relief. I would be very surprised if that is not the first issue out of the gate for the new administration. But don’t expect this to be easy.
President-elect Biden recently outlined his priorities, including another round of stimulus payments to taxpayers of $1,400, which when coupled with the recent $600 payments, will get the total amount up to $2,000—an amount that many members on both sides of the aisle supported when President Trump pushed for it in December.
Biden has said his stimulus package would also include aid for state and local governments; an expansion of enhanced unemployment benefits; significant funds for vaccine distribution; and additional rounds of funding for small business loans, for schools, and assistance for people struggling with rent payments.
He has also championed cancelling some student debt, which could be done by executive order or included in the stimulus package.
Of course, it is Congress that will actually develop the bill and ultimately have to pass it—and that means that other spending priorities could come into play.
Many Republicans are expected to reject the spending, which even Biden has acknowledged is likely to be “in the trillions of dollars.” But Biden is hoping to build bipartisan support for the package.
If he cannot, he can use the budget reconciliation process, which requires only a simple majority. But the rules around what can be included under that process may limit the scope of the stimulus package.
The other key question for an economic stimulus package is whether Congress will pay for it with tax increases, or whether it will be pure deficit spending, as the various 2020 stimulus measures were.
And that brings us to the topic perhaps most on the minds of investors: taxes. For months before the election, it was the topic investors asked me about most, usually in some variation of “How much will my taxes go up if there’s a blue wave?”
With Democrats in control of both chambers, there’s no question that tax increases are on the table this year.
But it’s important for investors to understand that increased taxes are far from a certainty.
As a candidate for president, Joe Biden outlined a long list of tax increases that he would propose, as a way to pay for a long list of spending priorities. And, of course, Democrats on Capitol Hill have their own tax proposals—some of which go much further than any of Biden’s.
But campaign proposals are one thing, and legislation that can pass a narrowly divided Congress is another. Expect the practical-minded Biden to focus on what is achievable.
When it comes to taxes, keep in mind that Democrats are not planning to propose a stand-alone tax reform bill. Rather, tax increases are more likely to be attached to other legislation to offset the cost of those bills. That could include the economic stimulus package, and it will almost certainly include future initiatives on issues like infrastructure, health care, and climate change.
Among the tax proposals from the campaign, Biden’s call for a modest increase to the corporate tax rate and his plans to return the top individual tax rate to 39.6% have the broadest consensus within the Democratic party. They have the highest likelihood of happening.
But a long list of other proposals, including changes to the estate tax, changes to the taxation of capital gains and dividends, wealth taxes, a financial transaction tax—these do not have unanimous Democratic support and those seem like longer shots.
One other important thing for investors to know—if any tax code changes become law in 2021, it is highly unlikely that they will be retroactive to the beginning of the year. There is little historic precedent for that. It is much more likely that they will be effective on January 1 of 2022. In other words, investors will have time to understand the implications of any tax increases and plan for them before they go into effect.
Of course, there is no guarantee of that outcome. It is possible that they will be retroactive to the beginning of this year, but I think it is highly unlikely.
China is another issue that will challenge the new administration—and the markets will be watching. Incredibly, this week is the one-year anniversary of the signing of the U.S.-China “phase one” trade deal, which at the time seemed like it would be among the signature accomplishments of Trump’s presidency.
Twelve months later, the relationship has deteriorated into a tense standoff of mutual mistrust. So many issues beyond just failures to live up to the trade deal have arisen since then—from the lack of transparency around China’s initial response to the virus outbreak to the crackdown in Hong Kong to rising tensions in the South China Sea to the delisting of certain Chinese stocks from American stock exchanges, among others—that the relationship between the United States and China is at its coldest in a generation.
President-elect Biden has said he won’t make any quick decisions on how to approach China. But investors will be watching carefully to see what unfolds.
Another area investors should keep an eye on in 2021 is how Democrats approach Big Tech companies, particularly in the social media space. Last fall, House Democrats released the results of a 16-month investigation into the anti-competitive behavior of Amazon, Apple, Facebook, and Google—and said explicitly that these companies need to be “reined in.”
Days later, the Justice Department sued Google over anti-competitive behavior in its advertising and search businesses.
And the spread of misinformation before, during, and after the election put companies like Facebook and Twitter squarely in the hot seat—and those seats got much hotter in the wake of last week’s unrest in Washington.
The decisions by Twitter and other companies to ban President Trump for inciting violence have exacerbated the long-held feelings by Republicans that they are being treated unfairly by these companies.
Expect all of these issues to get a highly public airing in the weeks and months ahead. What’s less certain is what will come out of all of it. Both parties are frustrated with these companies—but a consensus on a regulatory or legislative approach to address their concerns has yet to come together.
Energy is another sector that a lot of investors are asking about, because they are expecting the change in administration will mean an increased emphasis on renewable energy sources. That’s not an unreasonable assumption of course, but that doesn’t mean traditional energy sources like oil and gas are going away anytime soon. One Wall Street analyst recently described the transition to renewable energy sources as a “multi-decade” process—and I could not agree more. And oil and gas may benefit from a return to travel and an uptick in commuting later in 2021.
Retirement savings is another issue I’ll be watching carefully this year. It’s not a topic likely to grab a lot of headlines, but it’s one with real-world implications for savers and investors.
Last fall, the leaders of the House Ways & Means Committee, Chairman Richard Neal, a Democrat from Massachusetts, and the panel’s top Republican, Congressman Kevin Brady from Texas, unveiled a bipartisan bill that has significant support on both sides of the aisle. A similar Senate bill, championed by Democratic Senator Ben Cardin of Maryland and Republican Senator Rob Portman of Ohio, also has attracted bipartisan attention. Don’t be surprised if retirement savings emerges in 2021 as an issue that could move forward.
The Neal-Brady bill in the House has a number of provisions of significance to all investors. It would raise the age at which individuals have to begin taking required minimum distributions from their retirement accounts from 72 to 75.
It would add a second tier of catch-up contributions at age 60. It would expand the qualified charitable distribution—often known as the IRA charitable rollover—by increasing the amount an individual could roll directly from a retirement account to a charitable organization.
And it would take a number of steps to improve employer-sponsored retirement plans, including making it easier for small businesses to start a plan and making it easier for all businesses to automatically enroll their employees in the plan.
The start of a new Congress means that everything resets in Washington, and that goes for bills, too. So the retirement savings bill will have to be re-introduced this year and go through the regular legislative process before it can be voted on by the House and the Senate.
It’s probably not at the top of anyone’s list, given other priorities, but later this year, I think the bill has a real chance of becoming law, which could have dramatic impact on the retirement planning for 2022 and beyond.
Finally, there is one other aspect of this situation that’s worth spending a minute on. And that’s the indisputable fact that in modern Washington, by the time one election is finally put to bed, the next election has already begun.
As though we need any more intensity around our elections, the narrow margins will make the mid-term elections in 2022 extremely closely fought. Republicans believe they can capture both the House and the Senate in those midterms.
By historical standards, they have a great chance. Midterm elections are notoriously terrible for the president’s party. In fact, going all the way back to the Civil War, we find that the president’s party has lost seats in the House of Representatives in 37 out of the last 40 midterm elections.
On average, the president’s party loses about 33 seats. With a current margin in the House in the single digits, you can see why Democrats are worried about the midterms.
The situation is not quite as stark in the Senate—in the last 19 midterm elections, the president’s party has lost Senate seats 13 times. The average is about three seats.
Interestingly, there will be 2022 Senate races in each of the six most closely contested states of the 2020 presidential election: in Arizona, Georgia, Nevada, North Carolina, Pennsylvania, and Wisconsin. Three of those seats—Arizona, Georgia, and Nevada—are currently held by Democrats, and the other three are currently held by Republicans. Two of those Republicans, Senator Patrick Toomey in Pennsylvania and Senator Richard Burr in North Carolina, have already announced that they will not be running for re-election, so those two seats will be open. Given the age and experience of some of the other Senators who are up for re-election in 2022, it is widely expected that there will be other retirement announcements in the coming months.
The other issue for Republicans, in both the Senate and the House, is their worry about primary challenges. President Trump has vowed that in 2022 he will throw his influence behind challengers he views as more loyal. And it’s a big reason why so many incumbent Republicans have struggled with whether to support Trump’s claims of a stolen election.
In Washington, every elected official makes decisions with one eye on their next election. That dynamic will weigh heavily on the issues in 2021.
Well, that’s all for this week’s episode of WashingtonWise Investor. I’ve just outlined a lot of issues for investors to watch in the year ahead, and this podcast will be keeping track of all them for you.
So please take a moment now to subscribe so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.
Dems Take Control, but No Carte Blanche for Biden
Democrats will have full control of Washington, but with a slim majority in the House and a 50-50 tie in the Senate, compromise will be required to move their priorities through Congress.
In this episode of WashingtonWise Investor, Mike Townsend focuses on the new balance of power in Washington and shares insights on the mechanics of such a narrowly divided Congress. He explores issues that are likely to be at the top of Biden’s policy agenda—from more COVID relief to tax increases—and the likelihood that the necessary consensus can be built to get them approved.
WashingtonWise Investor is an original podcast from Charles Schwab.
If you enjoy the show, please leave a rating or review on Apple Podcasts.