What matters for markets in the midterm elections

There’s plenty of political drama surrounding the Nov. 8 midterm elections. Will Donald Trump’s chosen candidates run the table? Is the future of democracy really at stake? Will the guy in the hoodie actually make it to the stuffy Senate?

The financial stakes are high, too, even if you’re not a political junkie. With control of both houses of Congress on the line, the outcome of the midterms will determine what type of legislation Congress passes and how the whole government functions for the next two years, setting the terms for the 2024 presidential election.

There are five possible outcomes, with the size of the ruling party’s majority in the Senate being important, since it affects the filibuster and the vote margin required to pass legislation.

1. Democrats retain control of both houses of Congress with a one- or two-seat majority in the Senate (unlikely).

2. Democrats retain control with a majority of three seats or more in the Senate (unlikely).

3. Republicans gain control of the House while Democrats keep the Senate (possible).

4. Republicans gain control of the Senate while Democrats keep the House (unlikely).

5. Republicans gain control of both houses, with a single-digit majority in the Senate (possible).

If Republicans win one or both houses, that will effectively end President Biden’s legislative agenda, since they can block any Democratic bill from passing. Congress will still have to pass must-do legislation, such as funding for defense and other government functions. But even that could be rocky, with Republicans threatening to block routine spending bills, as they have done before. Democratic Sen. Chris Murphy of Connecticut warned recently that if Republicans win one or both houses, they’ll generate “a series of shutdowns and funding crises.”

That may be hyperbole. Shutting down the government has mostly been a Republican exercise during the last 25 years, and voters typically punish them for it. So Republicans might seek new tactics. One test will arrive around the middle of 2023, when Congress will have to extend the federal borrowing limit again. Democrats passed the last debt ceiling extension in December 2021 without fanfare, so the contrast would be stark if Republicans face the task can’t get it done.

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Republicans might try to block one Biden policy already in place: beefing up the IRS. The Inflation Reduction Act Congress passed in August includes $80 billion in additional funding for the Internal Revenue Service to hire new auditors, upgrade ancient computer systems and improve customer service, through 2031. That money is on top of the IRS’s annual budget of about $13 billion per year.

If Republicans controlled both ends of Congress and passed a law clawing back this money, Biden wouldn’t sign it. But they could also try to pass spending bills that cut the IRS’s annual budget, offsetting some of the new funding. Biden wouldn’t sign those, either. But this is one way a government shutdown…