The Impact Of The 2022 Midterm Elections On US Economic Policy: Congressional Focus To Shift To Budget Negotiations, Congressional Investigations, And A Few Bipartisan Bills – Fin Tech

Now that election results are clearer, here’s what we
can expect in the next Congress:

• The impact of the 2022 midterm elections will be felt
  primarily in US fiscal policy, as the US House of Representatives -
  narrowly under Republican control – will seek to restrain federal
  spending though budget negotiations with the Biden White House and
  a Senate under Democrat control, and prevent further tax
  increases.

• Divided government will not result in a complete
  legislative deadlock over the next two years. It is likely,
  however, that only legislation on a few limited subjects – and with
  strong bipartisan support – will make it to the President’s
  desk, such as legislation that funds the federal government and
  authorizes the Department of Defense.

• With few opportunities to pass their legislative priorities
  – and limited ability to impact federal agency action – House
  Republicans will turn to congressional investigations of the Biden
  Administration as well as certain corporate practices, such as the
  role of ESG in investing and large tech platforms’ speech
  moderation policies and impact on children.

• Notwithstanding a divided Congress, federal agencies will
  move to finalize rulemakings initiated during the President’s
  first two years in office.

In this Legal Update, Andrew Olmem, Jonathan Becker, and
Warren Payne discuss the impacts of the US 2022 midterm elections
on US economic policy, congressional investigations, and federal
regulatory agencies.

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Budget Negotiations and Debt Ceiling Brinksmanship

Both parties over the past decade have passed significant pieces
of legislation using the budget reconciliation process, a
parliamentary procedure that overrides the Senate’s filibuster
rules for certain tax and spending bills. Reconciliation allows
passage of legislation by a simple majority vote. Republicans
passed the Tax Cut and Jobs Act in 2017 via reconciliation (when
they controlled both the House and Senate), and, in the current
Congress, Democrats relied on reconciliation to pass the American
Rescue Plan in 2021 and the Inflation Reduction Act earlier this
year.

In a divided Congress, reconciliation will be off the table,
which is why we will likely not see any significant tax or
spending/stimulus bills. Congress and the White House will still
need to negotiate a new budget agreement at some point next year.
It is expected that House Republicans will seek to reduce federal
spending, while Congressional Democrats and the Biden White House
work to protect the spending priorities they enacted over the last
two years. If not addressed during the upcoming lame duck session,
Congress will also need to pass legislation to increase the federal
debt limit, which the Treasury Department expects to reach around
the fourth quarter of 2023.

If Congress fails to increase the debt limit in the upcoming
lame duck session, some Congressional Republicans will, in 2023,
likely use consideration of the debt limit as an attempt to secure
concessions from President Biden on federal spending. This approach
was adopted in 2011 when negotiations between House Republicans and
the Obama White House stalemated, and the US narrowly avoided
defaulting on some of its debt.

Even if Congress avoids the brinksmanship of 2011, we can expect
House Republicans, Senate Democrats, and the Biden White House to
engage in intense negotiations next year over the federal budget
and debt limit. This could disrupt financial markets and will need
to be watched carefully.

It is also important to note that Congress is a very reactive
institution. Unexpected economic or national security events can
have great impact on legislation a Congress ultimately passes. With
the US economy potentially in recession next year, it is possible
that the legislative priorities of Congress (as well as the White
House) could shift toward combating an economic downturn, though it
will be a challenge for the two parties to reconcile their views
regarding what caused a downturn and how to address it.

Possible Legislation

It is always hard for a divided Congress to pass legislation,
and the upcoming 118th Congress will be no different. However,
divided government has occurred frequently during the past century,
and historically has not prevented Congress from moving bipartisan
bills that can secure votes needed for passage. While the upcoming
Congress will likely be less active than the one preceding it,
there will still be a few areas of agreement where we can expect
bipartisan consensus.

• Crypto Regulation: In light of recent
  developments in digital asset markets, the upcoming Congress may
  well look to regulate digital assets. Patrick McHenry, likely the
  next Chair of the House Financial Services Committee (HFSC), has
  said he would like to pass legislation establishing a regulatory
  regime for digital assets. Earlier in 2022, he worked with current
  HFSC Chair, Maxine Waters, and the Biden Treasury Department to
  produce draft legislation to do just that. In addition, the Chair
  and Ranking Member of the Senate Agriculture Committee, Senators
  Debbie Stabenow and John Boozman, respectively, introduced the
  Digital Commodity Consumer Protection Act. That legislation would
  grant the Commodity Futures Trading Commission authority over
  digital asset spot markets. These bills could serve as the basis
  for new bipartisan legislation in the 118th Congress.

• China: The 118th Congress may also find
  agreement on ways to counter the increasing economic and military
  challenge to the US from China. This issue generates strong
  bipartisan consensus. The current Congress is already considering
  legislation to establish an outward bound investment review process
  (referred to as outward-bound CFIUS) for certain investment in
  China. There has also been bipartisan support for President
  Biden’s efforts to restrict China’s access to cutting-edge
  technology.

• Reauthorizations and “Must-Pass”
  Bills: Congress will also need to consider reauthorizing
  several programs set to expire in 2023. The Farm Bill and the
  Federal Aviation Administration (FAA) Reauthorization Act are among
  the big-ticket reauthorizations Congress will need to address in
  2023. With only a small number of legislative vehicles moving their
  way through Congress next year, we will likely see many Members of
  Congress use these two bills as a way to push legislative goals.
  For example, we could see the Farm Bill, which reauthorizes certain
  Commodities Futures Trading Commission (CFTC) programs, include
  some provisions to regulate crypto markets. Likewise, the FAA
  reauthorization bill may include provisions to curb the use of
  Chinese-made drones in the US. Congress will also likely pass a
  National Defense Authorization Act (NDAA) – always a
  “must-pass” bill – in late 2023. And finally, if not
  addressed in the upcoming lame duck session, Congress will likely
  devote some of 2023 to a series of tax and trade provisions that
  expire this year.

• Tax and Trade Extenders: There are a number of
  lapsed tax and trade policies some of which are viewed as more
  partisan than others. There will be some effort to restore these
  lapsed provisions in the lame duck session. If that is not
  accomplished, Congress will face pressure to address them early in
  2023. On the tax side, these include lapsed R&D provisions,
  changes to interest limitation and expensing provisions, and the
  lapsed expanded child tax credit. On the trade side, these include
  the lapsed Miscellaneous Tariff Bill program, the Generalized
  System of Preferences, and the Trade Adjustment Assistance
  program.

Congressional Investigations

Because Democrats will retain control of the US Senate and the
White House, House Republicans will have limited opportunities to
advance their policy agenda through legislation. As a result, House
Republicans are preparing to employ congressional investigations as
an alternative way to advance their policy goals. These
investigations will focus on oversight of the Biden Administration,
which could include investigations into alleged politicization of
the Department of Justice and spending authorized by the Build Back
Better Act and Inflation Reduction Act, among other initiatives.
House Republicans have also signaled a willingness to investigate
certain industries and corporate practices. In particular, they may
shine a congressional spotlight on financial services firms that
employ ESG investing to determine whether these policies unfairly
target the US energy sector, violate US antitrust laws, or
adversely impact investors and consumers. House Republicans may
also seek to investigate the large tech platforms regarding their
content moderation policies and impact on children. Additionally,
China-related business activities that trigger national security or
humanitarian concerns could well be the subject of congressional
inquiry.

Federal Agencies

With a White House and Senate controlled by Democrats, it will
be hard for House Republicans to influence federal agency action
and rulemaking though legislation. However, House Republicans will
still have an important role overseeing the federal agencies and
renewing their budgets. House Republicans can, of course, use their
committee gavels to hold hearings on policies of concern and call
agency officials to testify on administrative actions. This
interaction can influence regulatory decisions, but it will likely
not interfere with the Biden Administration’s efforts to
finalize most of its regulatory proposals before the 2024 election,
including the SEC’s climate-risk disclosure rule, federal
banking agencies bank merger guidelines, and FTC and DOJ merger
guidelines, among others.

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