The Republican plan to jolt markets if they win in November – Yahoo Finance

You wont see it in any campaign ads, but Republicans plan to cause some financial friction if they win one or both houses of Congress in the November 8 midterm elections.

The GOP campaign plan is to ding President Biden and his fellow Democrats for high inflation, while exploiting voter concerns over crime and illegal immigration. It might work. Data site fivethirtyeight gives Republicans good odds of winning the House and lesser odds of winning the Senate. Republicans only need to control one chamber to block Bidens legislative agenda and redirect Congresss focus.

If Republicans do take the House, they seem poised to mount a debt-ceiling showdown, as has happened several times beforeusually triggering voter disgust. Legislation dating to 1917 sets a limit on the total amount of federal borrowing, with Congressional approval required when the government needs to borrow more. Congress has raised the debt ceiling many times, usually without much of a ripple. But Republicans have developed a strategy of holding up debt ceiling extensions for political purposes, knowing that financial markets would crater if Washington couldnt pay what it owes, and had to default. By threatening financial chaos, the (il)logic goes, Republicans draw attention to policy priorities voters would otherwise ignore.

House Minority Leader Kevin McCarthy, who would probably become House Speaker if Republicans prevail in November, recently told Punchbowl News that his party might demand government spending cuts in order to vote to extend Washingtons borrowing limit. You cant just continue down the path to keep spending and adding to the debt, McCarthy said. You got to change your current behavior. The problem is, Republicans would probably propose something drastic that President would be sure to veto, setting up a possible debt-ceiling smackdown.

The last time Congress raised the debt ceiling was in December 2021. It didnt really make news because nothing dramatic happened. Democrats who controlled Congress werent going to cause chaos on their own watch, so they raised by borrowing limit by enough to last for about 18 months.

Story continues

Republicans broadly voted against raising the debt ceiling then, knowing they could vote that way, as the minority, and the extension would pass anyway. Republicans, in fact, are usually deficit hawks when theyre out of power. They become more dovish when theyre running the government, however. The GOP controlled Congress and the White House for the first two years of the Trump presidency, from 2017 to 2019. They passed a big tax cut bill, but did nothing to curtail spending. Federal deficits during Trumps first three years in office averaged about $1.1 trillion per year, the same as under President Obama before him. Including 2020, when Congress passed massive amounts of federal stimulus, federal deficits under Trump averaged about $2.1 trillion per year.

[Follow Rick Newman on Twitter, sign up for his newsletter or sound off.]

Republicans hint that theyll use the next debt-ceiling deadline, which will probably occur in mid or late 2023, to tighten up eligibility requirements for Social Security and Medicare, and impose work requirements for some welfare programs. They wont actually get any of that, and everybody knows it. Biden would veto any such legislation, if a Republican-controlled Congress passed it. If Republicans control just one chamber and simply block a debt-ceiling extension, demanding spending cuts as a condition of extending it, Biden will call their bluff and Republicans will back down at the last second. Thats how the play has ended every other time Republicans have performed it.

The debt-ceiling drama usually has little impact on markets, since everybody knows the script. The one exception came in 2011, when down-to-the-wire negotiations caused a sharp stock selloff and led Standard & Poors to cut the US credit rating by one notch, because of political brinkmanship. The debt is much bigger now, as percentage of GDP, than it was in 2011. And interest rates the government must pay to finance the debt are higher. So who knows, the threshold for market mayhem in 2023 may be lower.

There are at least two other scenarios in which voters might rue a Republican Congress, or one Republican-controlled chamber able to block Biden-backed legislation. The first scenario is a recession that might call for new fiscal stimulus measures. Economists now think theres at least a 50-50 chance of a recession by early 2023, and Republicans have spent a lot of breath complaining about the last big stimulus bill Democrats passed, with no GOP support, in 2021. If theres any stimulus at all during a 2023 recession, Republicans will want to make it smaller rather than larger, and they might block it completely while claiming theres still stimulus money in the system from 2021.

Republicans also seem less inclined to approve military aid for Ukraine, with McCarthy telling Punchbowl, Its not a free blank check. Reduced aid for Ukraine wouldnt affect American voters directly, except that Americans seem to favor vigorous aid to Ukraine and a foreceful rebuke to Russia. As disruptive as Russias war in Ukraine is, it would be worse if Russia were to win and feel emboldened to threaten other European countries or wreak even more havoc on global food and energy markets.

If Republicans do ascend in the midterms, theyll mostly use these tactics to demonstrate why voters should return the GOP to full control of government in 2024. Voters appreciate restraint, and may welcome a less activist approach than the Biden Democrats have offered. But they dont love chaos, and we may find out next year if Republicans realize that.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

Click here for politics news related to business and money

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube

See original here:

The Republican plan to jolt markets if they win in November - Yahoo Finance