This article first appeared in Barron’s on November 11th, 2022.
Every election cycle brings surprises, the question is only how many and where. The 2022 U.S. midterm elections were no exception. While the full results are still uncertain as of the time of this writing, the GOP appears to be on track to regain control of the House of Representatives. And it is clear that if they do, it will be with a far narrower margin than many pundits had expected, or that many Republicans had hoped for.
There’s no doubt that the business community tended to prefer Republican victories in congressional races. The U.S. Chamber of Commerce, for example, heavily backed Republicans in competitive races this election cycle, endorsing eight Republican challengers to Democratic incumbents, but zero Democrats challenging Republican incumbents, while backing Republicans in 100% of the 16 open seat races where they made an endorsement.
But the desired outcome wasn’t simply about control of the congressional chambers. Particularly in the House, margins matter—and the final margin of Republican control of the House appears to be narrow enough to represent a near worst-case scenario for business.
Without a broad margin, the presumed House Speaker-in-Waiting Kevin McCarthy could at any moment find himself at the mercy of any faction of his caucus that wants to make demands about any issue it chooses. This is a dilemma through any number of political and policy lenses, but it will be a particular problem for a business community in search of relative stability with a dose of bipartisan dealmaking.
With a healthier margin, McCarthy would have had room to maneuver to engage in such dealmaking. While any sorts of grand bargains would probably still have been wishful thinking, progress could have been more easily made on both day-to-day governance and incremental areas of bipartisan agreement. Now, even such modest objectives are in jeopardy. Even a Democratic hold of House and Senate control would likely have been preferable to what the business community will now face. While some new legislation disfavored by business may have moved in a Democratic-controlled Congress, markets would at least have been able to operate with some assurance that basic governing functions would continue unimpeded.
Instead, general legislative gridlock is likely to be the norm for the next two years. The odds of government shutdowns, or even a debt limit default, will have never been higher. The serious consequences of such scenarios on businesses, workers, and the economy as a whole are self-evident. Beyond these table-stakes matters, businesses with a legislative policy wish list—even for small or noncontroversial issues, such as seeking technical fixes to provisions of the Inflation Reduction Act—are likely to find those exceptionally hard roads to hoe, given the minimal number of legislative vehicles likely to be available for them to be attached to.
In the absence of control of the White House (and possibly the Senate), Republicans will continue to lack the power to see their preferred policies enacted. As a result, House Republicans have already previewed their intent to make investigation, rather than legislation, a priority. While much of these will focus on topics of a primarily political nature—Hunter Biden, border security, the Afghanistan withdrawal, the FBI and Department of Justice, and others—several will directly implicate various sectors and the business community at large. Investigations into big tech and social media firms; corporate and investor environmental, social, and governance policies; Covid, infrastructure, and Inflation Reduction Act federal spending recipients; and U.S.-China business ties will all be high on the list of priorities for Republican-controlled House committees.
History tells us that in times of divided power, the party in control of the White House is likely to more frequently attempt to sidestep Congress altogether, through regulatory and presidential actions. But a series of recent Supreme Court cases highlighting the limits of agency rulemaking and executive orders may narrow the scope of where the Biden administration feels comfortable testing the limits of its authority.
Part of the backdrop of everything that happens in Washington for the next two years will be the coming 2024 presidential election. Some have suggested that the midterm losses experienced by many high-profile candidates backed by and campaigning in the style of former President Trump may give Republicans additional room to distance themselves from him. But here again the small margin means very few House Republicans will need to ally themselves to any Trump dictates for a Speaker McCarthy to be forced to address an issue to Trump’s satisfaction.
Regardless of party control, everything is harder in Congress with a small majority. The last two years of a tiebreak-controlled Senate and single-digit Democratic House reminded any who had forgotten that the individual power of every member has an inverse and exponential relation to the size of their majority. But in a political environment where seemingly no longstanding norm can be relied on, the next two years are likely to further test the limits of what new precedents can be set. That adds up to an environment where business is likely to struggle not merely to find opportunities to secure proactive legislative wins, but even to have short-term confidence in some of the foundational elements of market stability.