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No split government after all

January 07, 2021

graph depicting the household saving rate

Source: Bureau of Economic Analysis

Democrats won both runoff elections in Georgia on Tuesday, giving the party control of the Senate and opening the door to another fiscal aid package in the weeks ahead. President-elect Biden said earlier this week that $2,000 stimulus checks would go out “immediately” in the event of a Democratic sweep and has also expressed support for state and local government aid, additional unemployment benefits, and further funding for virus testing and vaccine distribution. These ideas are now much more likely to find their way into law than they would have with a Republican Senate.

As with the stimulus legislation signed by President Trump last week, any forthcoming fiscal support should be viewed more as downside protection than as a catalyst for a near-term surge in growth. The new COVID case count remains elevated and state and local restrictions on business activity, while not quite as pronounced as those of last spring, are still widespread. Against that backdrop, it is easy to imagine a renewed spike in the saving rate in the months ahead along the lines of that in the wake of the CARES Act last year (recall, as well, the jumps in the saving rate after tax rebate checks went out in 2008 and after early dividend payments in 2012). At the margin, these developments further reduce the probability that real GDP will decline in the first quarter and add to the potential for booming growth once the pandemic runs its course, but they are unlikely to appreciably alter the near-term narrative.

More broadly, it is important to stress that, while the markets prefer split government, this will be one-party rule of the narrowest of margins and will be hard-pressed to produce dramatic change. Individual, corporate, and capital gains tax rates may all be lifted at some point within the next two years, for example, but the increases will almost certainly have to be modest to garner sufficient congressional support. Moreover, the Senate’s cloture rule will limit the scope for legislation in general as long as neither party holds 60 or more seats. Federal government policy will be more a variable than had been apparent in the immediate aftermath of Election Day in November, but it is still unlikely to be a defining element of this cycle.


Daily Trivia

Driven by the destruction of its industrial base during World War II, what country experienced the worst case of hyperinflation in recorded history, with prices doubling roughly once every 15 hours?

Previous Question

Which metropolitan area is home to close to half of all economists working in the U.S.?


Washington D.C.


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