A Republican House–Now What?

A brake on spending. We hope. Maybe more.

The U.S. Capitol in Washington on Aug. 6, 2022. Anna Rose Layden/Getty Images

Commentary

With Rep. Mike Garcia projected to win California’s 27th congressional district, giving the Republicans 218 seats in the House of Representatives, the GOP will take control of the lower house in January 2023. So now what?

Well, certainly there will be investigations and perhaps even a performative impeachment of Homeland Security Secretary Alejandro Mayorkas that will likely go nowhere with Democrats’ control of the Senate.

But the short answer, at least in terms of legislation, is: gridlock. The slim Republican House majority won’t be able to pass legislation out of the whole Congress, and on the off chance it does, President Joe Biden will likely veto it. Likewise, the Democrat-controlled Senate isn’t likely to get legislation passed in the Republican-controlled House.

That’s likely a good thing. Hopefully, it means that the reckless, feckless, spending of the Biden administration will come to a halt, and we can start seeing a way toward an end to the duress of inflation and, more important, inflation expectations, which spiked again on higher gasoline prices in the most recent Federal Reserve survey (summarized below).

Federal Reserve Bank of St. Louis, 5-Year, 5-Year Forward Inflation Expectation Rate [T5YIFR] / Federal Reserve Bank of St. Louis data through November 4

The toughest challenge in the coming weeks will be whether the White House attempts a lame-duck session to address the debt limit. That looks increasingly unlikely, so that the Republican House—assuming it sticks together—will be able to contend with the debt limit and spending in the next Congress. (The debt limit must be raised in any event, regrettably, because the limit applies to past spending, not future. The debts that have already been incurred must be paid.)

A gutsy GOP House can also engage in some brinksmanship on other issues without a close nexus to the budget or spending. For example, the GOP House could hold the debt limit in limbo until Biden hardens the border or funds more police in major cities.

The more budget-conscious conservative wing of the GOP has far more leverage over Minority Leader Kevin McCarthy’s quest to become speaker as he could not muster 31 votes from his own conference when it caucused earlier this week. When the House votes as a whole, with Democrats and Republicans voting as a whole, McCarthy will need to unify the GOP caucus, including the Freedom Caucus and other conservatives. The right has more leverage to hold him to account in budget negotiations and rules changes in the next Congress.

One of the Freedom Caucus’s proposed rule changes would hold McCarthy on a particularly tight leash by allowing any member to move to vote a recall of the House Speaker. This is how former GOP Speaker John Boehner was ousted in 2015. McCarthy is, understandably, opposed. But a more right-leaning GOP caucus might very well supersede his objections.

Why It’s Important

Much of the money supply (M2) has been created since Joe Biden was sworn as president. On the Monday before President Donald Trump left office in January 2021, M2 was about $19.401 trillion. On April 18, 2022—just 15 months later—M2 had reached $22.052 trillion, a staggering $2.6 trillion, or 13.7 percent, increase in M2 and well after the COVID recession had hit and as the economy was returning to normalcy from COVID-19 lockdowns. The majority of it came from the president’s $1.9 trillion American Rescue Plan that the Federal Reserve had to finance with “printed” money.

Thankfully, the Fed has taken steps to reduce its balance sheet. But that will be a long, slow, slog, and should there be a liquidity problem in the markets, reversible. It may also cause a deep recession, though that has yet to be determined as the Fed simultaneously raises rates at a rapid pace.

The Republican House and a (presumably) Republican Speaker will constrain the Biden administration’s spending plans, provided that GOP representatives don’t defect from the party’s professed ideology. That should at least restrain the rate of growth of spending if not reduce it outright.

That foot on the brake of fiscal policy as the Fed simultaneously applies tighter monetary policy will attack inflation far more aggressively than would have occurred had the Democrats retained control of both houses of Congress. That should cause bonds issued at the Fed’s terminal rate—likely 5 percent, give or take 25 basis points, if economist Larry Summers is to be believed—in highly rated, investment-grade bonds to appreciate. (That is, as spending slows and the Fed reduces the balance sheet, longer-term rates will come down, so bond values at or near the terminal rate will appreciate.)

The Potential Good From Hair’s Breadth Majorities

One of my hopes—given the slim majorities for Democrats in the Senate and Republicans in the House—is that the Senate will return to regular order and stop passing legislation through reconciliation, a rule created to pass budgets that has been hijacked for non-budget matters. Senators such as Joe Manchin (D-W. Va.) and Kyrsten Sinema (D-Ariz.) have the opportunity to bring along their more centrist Democrat colleagues to start producing bipartisan legislation that can survive a filibuster. The same would apply for Republican senators like Susan Collins (from Maine) and Mitt Romney (from Utah) with their more centrist Republican colleagues. Legislation would need to muster 60 votes, plus one, in any event, to invoke cloture and end Senate debate.

That would mean that sane, sensible, widely accepted legislation, which a majority of Americans support—roughly the 60–80 percent of the populace that are in “the middle”—would pass.

A return to regular order would allow only legislation that is within the guardrails of “regular order” to be considered seriously by Congress. The kind of useless, faux, single-party posturing and politicking “legislation” put forward only for the cameras as to create partisan talking points could be noted for what it is and, hopefully, squelched by leadership.

Takeaways

• Republican control of the House can provide a helpful brake on the spendthrift ways of the Biden administration and potentially allow greater leverage over its exercise of executive powers.
• It will also help stem inflation by supplementing Fed tightening with reduced spending.
• Bond investors who invest at or near the Fed’s terminal rate should see appreciation in their investment as rates normalize toward the Fed’s target rate of 2 percent.
• If “grown-ups” on Capitol Hill assert control and restore regular order, we could see a productive, problem-solving Congress that makes the likes of Rep. Alexandria Ocasio-Cortez (D-N.Y.) and former Rep. Steve King (R-Iowa) the inefficient distractions that they are and were.