by Jofi Joseph, an analyst at Global Risk Insights
Republican control of the Senate, which would make Senator Mitch McConnell the new Majority Leader, may have practical policy impacts, some of which will be of great interest to global investors.
Although the U.S. midterm elections remain six months away, oddsmakers are increasingly predicting the Grand Old Party (GOP) will assume majority control over the Senate and thus put all of Congress under Republican control.
Today, there are 53 Democratic Senators, along with two Independent members who caucus with the Democrats, giving Majority Leader Harry Reid a comfortable 55-45 margin of control. However, Republicans only need to flip six seats this November to retake the majority. With some analysts predicting that Republicans are competitive in as many as ten Democratic-held seats this fall, a GOP takeover is increasingly likely.
Broadly speaking, a Republican takeover of the Senate could break the policy deadlock between the Obama Administration and Congress, which has defined the U.S. political system since 2011. Ironically, once Republicans assume full control of the Congress, their leadership will come under greater pressure to demonstrate concrete results — they will no longer be able to get by through simply blaming Reid and Obama.
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At the same time, as President Obama enters the lame duck stretch of his presidency, he and his senior staff will be increasingly focused on specific policy accomplishments that can add to his historical legacy. These parallel sets of conditions will create unique incentives for both sides to put aside some of their ideological rigidity and devise compromises in pursuit of shared victories.
What might constitute some common ground for an Obama White House and a GOP-controlled Congress?
First, look to international trade as a potential venue for a breakthrough. The White House has been stymied in its efforts to rejuvenate global free trade talks as Congress has refused White House requests to provide fast track authority for parallel sets of negotiations — the Transatlantic Trade and Investment Partnership (TTIP) talks with the European Union and the Trans-Pacific Partnership (TTP) talks with Asian partners.
The primary source of Congressional opposition lies in the Senate Democratic caucus, where Majority Leader Reid is unwilling to subject some of his more vulnerable Members to tough votes that cross labor constituencies. With a Senate under GOP control, the prospects for the granting of free-trade authority, and the likely boost that will provide to both sets of talks, immediately brightens. The Republican Party, especially its internationalist wing, remains a strong supporter of free trade and would find common cause with the White House there.
Second, an even grander breakthrough could come in the form of comprehensive tax reform. Both President Obama and GOP congressional leaders have expressed interest in fundamental revisions to the U.S. tax code to sweep out the existing web of deductions and credits, primarily geared towards special interests, and enable lower tax rates across the board to boost economic growth.
However, this discussion has been caught up in the broader debate over deficit reduction and the disagreement over whether tax reform should maintain existing revenue levels (as the GOP prefers) or increase revenue levels to finance new spending programs (as the White House prefers).
A renewed GOP control of the Senate could reset the terms of this debate. Both sides may have greater incentives to compromise, with one scenario involving a White House agreement to largely preserve existing revenue levels with a one-time exception for a significant boost to national infrastructure spending.
If it proves too difficult to agree on overall tax reform, the White House and Congress could compromise on a slimmed down package focusing only on corporate tax reform and leave personal tax reform to their successors.
Either way, the common assumption that a GOP takeover of the Senate will only further entrench political paralysis and gridlock in the United States is likely mistaken. If anything, it may encourage both sides to cooperate out of self-interest as both Democrats and Republicans will seek to demonstrate their accountability to voters for shared responsibility of power.
As President Obama looks out to the last two years of his presidency, a GOP Senate ironically may set the stage for a final burst of policy success.
