The midterms and your money: What a divided government means for the U.S. economy

Stock market responds to midterm elections

This year's economic woes — the highest inflation in 40 years, a bear market and lagging wages —played into voters' choices as they headed to the polls on Tuesday. The result is likely to be a divided government, which could have an impact on everything from the stock market to the federal government's ability to respond in the event of a recession next year, experts say.

While the midterm election results are still being sorted out as of Wednesday afternoon amid several close races, the balance of power in Washington, D.C., looks likely to be split between Democrats and Republicans, with the GOP projected to gain control of the House. Control of the Senate remains a toss-up as each party has each secured 48 seats as of Wednesday morning, with four races yet to be called, CBS News projects.

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A divided government, with Republicans in control of at least one chamber of Congress and a Democrat in the White House, would likely pose challenges over the next two years. Among them is the risk of drama over the debt ceiling, with Republicans signaling they plan to use their House control as a negotiation tool with President Biden to rein in government spending. And Mr. Biden may have more difficulty passing major legislation moving forward. 

"A narrow Republican victory in the House would spell the end for President Joe Biden's domestic agenda, and the potential for further big shifts in fiscal policy," said Andrew Hunter, senior U.S. economist at Capital Economics, in a research note. "It would also raise the risks of another crisis over the Federal debt ceiling next summer."

What if there's a recession?

The U.S. economy has managed to skirt a recession — so far. But economists warn that the nation could sink into a recession in 2023, putting millions of jobs at risk as businesses cut spending to cope with an economic pullback. 

A divided government would make it harder for Biden to pass legislation to counter the effects of a recession, especially as Republicans have blamed his administration's spending for the highest inflation since the early 1980s. 

"A legislative response to a potential recession would also be more difficult, we believe, as the House and Senate would likely pursue different approaches and the odds of gridlock would be somewhat higher than if Republicans controlled both chambers," Goldman Sachs analyst Alec Phillips said in a report on Wednesday.

That could hobble the government's ability to provide relief to workers in case of a downturn, such as George W. Bush's 2008 Economic Stimulus Act, which sent stimulus checks in the wake of the Great Recession. 

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In other words, if there's a recession in 2023, a Republican-controlled House might oppose proposals such as extra unemployment aid or stimulus payments in keeping with the GOP's desire to restrain spending and tamp down inflation. 

But a more immediate concern may be the nation's historically elevated rate of inflation, which is pinching household budgets and causing market turmoil. In this case, the Federal Reserve's policies are more important to investors than election results, Wall Street analysts note.

The Fed, which makes its decisions independently from the White House and Congress, is on a campaign to reduce inflation through a series of interest-rate hikes. That is unlikely to be influenced by the election, with central bank officials examining economic trends such as inflation data and job growth to set its agenda rather than the polls. 

How will the stock market react?

Historically, the stock market has performed well both after midterms and also when control of government is divided between parties, experts say. 

The markets have risen in the year following the last 18 midterms — going back to 1950 — according to Barry Gilbert and Jeffrey Buchbinder of LPL Financial. Investors may be cheering the end of uncertainty surrounding the midterms, or showing their anticipation of balanced policy priorities when the parties are sharing power.

Of course, past performance is no guarantee of future results, as the saying goes, and the market has plenty of headwinds to contend with.

"[T]his time the market may behave differently considering the mix of historically high inflation, global geopolitical tensions and the hard-to-die pandemic, but, considering the market already suffered in the past months, the overall outcome could continue to be on the positive side," noted Guido Petrelli, founder and CEO of Merlin Investor, in an email. 

So far in 2022 the S&P 500 has shed 21% of its value, hitting workers and retirees alike. 

Another debt ceiling drama?

One issue that could arise as a result of divided government next year: More drama over the debt ceiling. That refers to the maximum amount the U.S. is allowed to borrow to pay its debts. If the amount of government debt hits that threshold but doesn't lift the ceiling, the U.S. would be unable to pay what it owes and could default. 

The issue could take center stage next year because the nation's gross national debt in October exceeded $31 trillion, nearing the statutory ceiling of roughly $31.4 trillion.

Ahead of the midterms, House Republicans made clear that if they succeed in winning control in the midterms, they could use the looming debt limit as a negotiation tool with Mr. Biden. In other words, they could refuse to raise the debt ceiling if the president doesn't agree to their demands to contain government spending. 

That's occurred in the past under a divided government. "Under a Republican House and Democratic Senate in 2011 and 2013, debt-limit uncertainty disrupted financial markets and led to substantial spending cuts," Goldman Sachs noted.

Impact on older Americans? 

Part of the spending cuts that Republicans are pushing for is to overhaul the nation's old-age programs — Social Security and Medicare. 

Some Republican lawmakers have floated the idea of changing Social Security from a mandatory spending program into discretionary one would require Congress to approve funding every year.

House Republicans, meanwhile, want to raise the eligibility age for seniors to claim both Social Security and Medicare benefits to 70 years old. The reason, they say, is to align the program with gains in longevity, while also trimming the programs' spending by cutting the number of years that seniors can access these benefits.

Currently, Americans can sign up for Medicare, the government health care program for seniors, when they turn 65. Under the plan, seniors would have to wait until they turn 70 to get access to the program. And the retirement age for Social Security would also increase to 70, compared with today's full retirement age of between 66 and 67 years old.

That could result in a spike in poverty for seniors, as well as higher out-of-pocket health care spending for people between 65 and 70, who would be locked out of Medicare, experts say.

If there's a positive note about retirement, it's in the potential for the Secure Act 2.0 to move forward, according to Wells Fargo analysts. The legislation aims to bolster Americans' retirement readiness, and comes as almost half of older workers have no retirement savings. 

That bill "would expand retirement-savings tax breaks, principally by loosening restrictions on required minimum distributions and by facilitating small business sign-ups," they noted in a recent report. 

If the bill doesn't pass in the current lame-duck Congress, it's likely to be taken up and passed in 2023 given that it has support across both parties, Wells Fargo said. 

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