Sealing Votes with the Debt Ceiling

It seems Washington was bitten by Olympic spirit Wednesday, as our elected leaders defied the odds, overcame adversity, raced to the finish line and ... raised the debt ceiling two weeks before they allegedly absolutely had to. Or, more specifically, they voted to suspend the limit until March 2015, allowing the Treasury to borrow to its heart’s content for another 13 months without any histrionics along the way. If this were last October, this next sentence would be about how headlines could finally stop panicking unnecessarily about an extremely unlikely default—but this time around, most media and investors were rather sanguine about the whole affair. Perhaps they realize we’ve gone through this 109 times now, and it just isn’t an economic issue—or anything that would make a true default on debt even remotely likely. It is a political issue, however, and the politics behind the breakdown of votes has interesting implications for investors, in the form of 2014 midterms.

From the start, headlines didn’t pay the debt ceiling much mind this time around. When the ceiling was reinstated on February 7, after its last temporary suspension, Treasury Secretary Jack Lew tried to whip up a frenzy with his usual warnings of default if Congress didn’t act before extraordinary measures to fund the government ran out on February 27, but folks didn’t bite. Congress, too, didn’t react in typical fashion—neither party tried to leverage the ceiling to win some other battle. Both houses seemed largely ready and willing to pass a “clean” bill—it was just a matter of when, with lawmakers about to take a week and a half-long break. But they got their homework done early, with the House voting 221-201 on Tuesday and the Senate passing the measure 55-43 Wednesday. And giving the nation a yearlong break from debt ceiling politicking in the process!

Economically, that’s where the story ends. Politically, however, this is where it gets interesting—the vote is rather telling about this November’s midterm election posturing. The Senate largely voted along party lines—no shock there, with the contest structurally favoring a continued Democratic majority. Neither party much wanted to shake up their base. But the House didn’t—House leadership favored the bill, but only 28 Republicans voted “yea.” The House race structurally favors Republicans—they have fewer vulnerable seats, making a continued majority likely. But likely isn’t certain! Vulnerable seats need hanging on to, and a good way to do that is pander to the constituents a bit. It’s no accident that, of those 28 Republican “yes” votes, 26 were from Representatives up for re-election in states that voted Democratic in 2012’s presidential race. These reps know they’ll need a fair amount of Democratic support in November, and voting to suspend the debt ceiling is an easy way to shore things up—much more convenient than having to explain and defend a “nay” on the campaign trail.

Actually, there probably won’t be much of anything debt ceiling-related on the campaign trail, given the deal conveniently pushes the next deadline out months after the contest. It seems Congress realizes the last go-round—the shutdown/ceiling double whammy of October 2013—just wasn’t popular with voters. Folks have largely tired of budget bickering and the increased polarization of America’s body politic. Perhaps that leads to an altogether less theatrical campaign season—they know we’re annoyed, and if they’re smart, they won’t annoy us further.

But lest you think you think Congress has entered a new era of grand compromise, think again—gridlock still reigns supreme. With the legislative branch still split, there isn’t much chance major measures pass. That likely stays true after the election as well, given the structural factors at work—it would take flawless campaigning for either party to win both houses. This is welcome news for investors. Markets like it when chances are slim to none that Congress passes big, controversial legislation that could radically alter property rights or the regulatory landscape or otherwise spook investors gets passed are slim. Though, there are some potential casualties of gridlock and campaigning, too—fast track trade authority, for example, likely stays back burner until the next Congress. But for now, markets likely see more to like in the US political arena than not—a competitive economy with little legislative risk is a fine backdrop for more bull market.