Five ways the 2022 midterms could impact the US economy

The 2022 midterms were poised to usher in a “red wave” in the House and potentially the Senate, teeing up a heavily Republican U.S. legislature in 2023.

Republican leaders, feeling a surge of optimism from polling and Americans’ dissatisfaction with the economy, teased economic plans and even stirred outrage after suggesting cutting entitlement spending in the next legislative session.

But on election night, the results in the midterms painted a different picture for the future Congress.

Forecasters are still anticipating a GOP-led House, but their majority is expected to be narrow. The fate of the Senate is also hanging in the balance, and Democrats have picked up a seat to replace the retiring Sen. Pat Toomey (R-Pa.).

Control of both chambers is still up for grabs as states continue to count votes, but gridlock in the next congressional session is almost inevitable. The implications for the U.S. economy could be massive.

Even a small Republican majority in either chamber would prevent President Biden and Democrats from passing sweeping legislation along party lines. Bipartisan standoffs over government funding and the debt ceiling could be common, but major legislative breakthroughs will be rare.

A GOP takeover of the Senate would also force Biden to find Republican support for his next slate of administration nominees.

Here are five ways the 2022 midterms could affect the economy.

Less federal spending

Republicans focused their midterms pitch largely on concerns about high inflation and the likelihood of the U.S. slipping into a recession sometime next year. GOP lawmakers pledged to rein in federal spending, which they have blamed for high inflation, if given the chance to run the House or Senate.

A narrow majority in either chamber would give Republicans the power to block any spending bill they deemed too generous and force Democrats to offer cuts to win their support. But Republican leaders may also find it difficult to move spending bills if conservative lawmakers oppose eventual bipartisan agreements.

“The House majority will likely be 10 seats or less for either party, which makes governing challenging at best. The midterms have essentially resulted in gridlock,” Brian Gardner, chief Washington policy strategist at investment bank Stifel, wrote in a Wednesday analysis.

“Given the coming divide, passing government spending bills and increasing the debt ceiling will be even more challenging than previously expected.”

Higher risk of a debt ceiling default

Several Republican lawmakers and even former President Trump himself have called on GOP leaders to use the federal debt ceiling as leverage in federal spending negotiations. While GOP leaders have vowed to make sure the U.S. doesn’t default on the debt, they may find it difficult to convince conservative hard-liners to strike a deal despite the serious implications of a debt ceiling breach.

The U.S. already suffered credit downgrades and financial market turmoil after showdowns in 2011 and 2013, and the country is looking at even steeper risks of a financial crisis as the economy faces headwinds.

“The odds of something worse than the 2011 brinksmanship are higher than ever before and the consequences would be even worse than before,” tweeted Jason Furman, former chairman of the White House Council of Economic Advisors under former President Obama.

“In 2011 getting close to the brink led to a huge collapse in confidence, financial market reverberations, and downgrade of US debt,” he continued.

Stimulus during a recession will be less likely

Republicans will have little incentive to help bolster the economy if the U.S. falls into a recession on Biden’s watch, even if they are in control of the House or Senate.

GOP lawmakers would find it difficult to greenlight more economic relief after blaming the stimulus deployed by Biden in March for the bout of high inflation that helped them win a majority. Republicans may also find it easier to defeat Biden and Democrats if they can blame them for a recession, a dynamic some GOP lawmakers have welcomed.

“If the U.S. enters a recession in 2023, a divided Congress will struggle to pass a fiscal stimulus bill which will leave the Federal Reserve as the main institution responsible for setting economic policy in the country,” Gardner wrote.

Push Biden to the middle on nominations

While the House plays no role in federal nominations, a GOP-controlled Senate would force Biden to nominate officials who could win enough bipartisan support to make it through the upper chamber. Senate Minority Leader Mitch McConnell (R-Ky.) held open several dozen administration and judiciary seats when the GOP ran the Senate during Obama’s final two years and would likely force Biden to find common ground with Republicans to fill other seats.

Potential vacancies at the Treasury Department, Federal Reserve and other financial regulators could become high-stakes battles between Democrats and Republicans even in an evenly split Senate where Vice President Harris holds the tiebreaking vote.

These difficulties would also leave Biden unable to cement some of his economic agenda.

“If the Republicans win the Senate, or even if it remains 50-50, progressives won’t be able to get their people confirmed,” wrote Ian Katz, director at research firm Capital Alpha Partners, in an analysis.

Tougher oversight of federal regulators.

If the GOP captures the House or Senate, federal financial regulators can expect intense oversight from Republican-led committees and more political pressure over several polarizing initiatives.

Republican lawmakers have fiercely opposed efforts led by Biden appointees to expand attention to climate-related financial risks, expand disclosures from publicly traded companies and ramp up efforts to police cryptocurrencies.

“GOP lawmakers will hit regulators with a tsunami of paper: Letters, subpoenas and requests for testimony,” Katz wrote.

“A lot of paperwork can potentially slow down an agency. It’s impossible to know how much, but it’s not nothing.”

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