One tenet that the outcome of this election upholds is that we Americans prefer our government divided. After all, the system of checks and balances is the underpinning of our entire governmental structure. As much as we say we want to be unified, in a lot of respects we really do not, unless it comes down to defending our country.
In many cases in the past, we have preferred that the House be Republican because they are fine watchdogs over the expenditure side of the ledger. We have also preferred the Senate to think more broadly especially about the poor and deserving, a role that has often been the purview of the Democrats. The few Independents have navigated between the two depending on the issue at hand.
This time is different. We can anticipate a great deal more of domestic spending proposals being proposed by the Democratic majority in the House. Of course, the needs are great. One area of spending that we have been anxious and eager about is ramping up on spending for infrastructure. Whether the consensus for infrastructure is really, truly there is now very likely to be tested.
The Senate probably will be put in the position of just saying no to the proposals coming out of the House. Once again, infrastructure appears to be one of the priorities where it will be much easier to say yes.
In the meantime, the federal deficit is not getting much air time. However, it was acknowledged in the mainstream press that the deficit for the last federal fiscal year has reached a new high. However, the deficit is poised to grow even higher in part because the corporate tax cut is permanent and the personal tax cuts have a few more years to run.
On the positive side, there is nothing quite like a relief rally of substance in equities. The 10 year traded off a tad, but the recovery in equities was well worth the climb in yield. As is typical in these kinds of scenarios, municipals did not overreact. The latter is reflective of the lighter supply environment.
The Republican side of the aisle may be able to take another run at Tax Cut 2.0, but it is a lot less likely to muster the votes now.
There is still a real risk the municipal tax exemption could get caught up in the budget back and forth. I cannot totally rule out an ironic circumstance where the trimming of the municipal friendly provisions would be recommended as the price for obtaining approval of an infrastructure bill. In the first instance, the original infrastructure bill placed more emphasis on private sector solutions and not on traditional municipal solutions. Clearly, the federal assistance in the original version had been proposed on a more modest level.
And yet, the policy process of the Congress may find a way to obtain the goal of more infrastructure spending via compromise. We may still be in a position eventually to test those most celebrated negotiating skills residing in the Oval Office in this regard.
There have been somewhat unpredictable outcomes in this election cycle that were not fully appreciated or anticipated. The fact that four states voted to expand Medicaid, including some “red” states, is most revealing. Healthcare or the lack thereof still remains front and center and is likely to be a major issue in the 2020 election. In the meantime, hospitals have gone about their business and have continued to upgrade their physical plants and systems to meet the needs.
Another outcome that is shocking and unfortunate is that Proposition 3 for the Delta Conveyance project for the water tunnels in the Bay Area has gone down to likely defeat with 95% or more of the vote counted. Some cite the amount of bonds at $8 billion and some have been speculating that the new administration would prefer a scaled back version of the project. The perceived value of water in the West has always been held in very high regard versus in the East. A lot of this perception difference is based on supply and availability of the commodity. This will not be the last word on making improvements and providing more water for Southern California, but the negative vote is clearly a setback in timetable if nothing else. Perhaps, the fallback will be one tunnel. But I would recommend that the planners talk to N.Y.C. Water before they go that route.
Many of the school improvements around the nation have been approved. It is especially heartening that in places such as New Jersey that school safety is being singled out as a high priority.
I wish all of the newly elected and re-elected governors well. In very rapid fashion, they will need to be out with budget proposals in the near term. Although the economy is in good condition and revenues are growing, budgets are never quite that simple to balance. Let’s hope there is ample consideration for existing and to-be-issued debt service and that all of the other priorities are satisfied.
This fiscal year may be the easy one for most of this crop of governors to balance. A groundswell of economists are calling for a recession by 2020. Stay tuned.
