• Allon Advocacy

Congress in Control? Think Again.

With divided government looming, expect an already busy executive branch to get much busier.

Civics 101: there are three branches of the U.S. government. The legislative, the judicial, and the executive. But on its website, the White House, which stands at the head of the executive branch, gives readers an overview of the other two. Noting Congress is a “coequal” branch relative to the executive, the site says, “All legislative power in the government is vested in Congress, meaning that it is the only part of the government that can make new laws or change existing laws.”

That statement is quite a concession to the members of the U.S. House and Senate, even if it is technically and constitutionally accurate. Sure, the legislative branch is the only one that can make law, but that does not mean it is the only one that can make policy. In fact, executive branch policymaking has exploded over the last two generations. And if government is divided between the two parties after the 2022 midterm elections, as current polls predict it will be, it is likely that those efforts will grow even further over the final two years of President Joe Biden’s first term.

As usual, let’s start with a bit of history.

A Short History of Executive Branch Rulemaking

George Washington University’s Regulatory Studies Center is one of the most reliable sources for data on executive branch rulemakings. President Ronald Reagan issued only a couple of economically significant regulations in his first year in office. (Economically significant is defined by the White House as having “an annual effect on the economy of $100 million or more or adversely affect[ing] in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”)

President George H.W. Bush issued about 25 economically-significant rulemakings and President Bill Clinton doubled that number. The impact of the executive branch on policy has continued to grow since, with President Joe Biden’s administration writing more than 70 economically-significant regulations in just its first year.

In his entire eight years in office, President Reagan’s administration wrote about 150 economically-significant rules. President Clinton and President George W. Bush were about even at 350 or so each. In his eight years in office, President Barack Obama’s administration released approximately 500 significant rulemakings.

Rulemakings are not the only way that the executive branch can impact policy, the economy, consumers, or the business community, of course. The executive branch also wields significant oversight and enforcement powers. Federal agencies can fine bad actors and even put them in jail (after trial, of course). And with consumers facing skyrocketing prices for everything from rent to gas, the Biden administration has promised to step on the oversight accelerator. Particularly if the legislative branch is no longer in Democratic hands.

Current Outlook for the Midterm Elections

Democrats currently are in control of both chambers of Congress, albeit narrowly. Vice President Kamala Harris is the tie-breaking vote in a split 50-50 Senate chamber and Republicans need a net gain of just five seats to take over the House.

As we have noted previously, presidents with approval ratings under 50 percent tend to fare badly in midterm elections. In President Clinton’s first midterm election in 1994, where presidential approval was at 47 percent, Democrats lost 52 seats in the House. In President Obama’s first midterm election in 2010, his party lost a crushing 63 House seats. His approval rating was 45 percent at that point. President George W. Bush escaped first midterm losses in 2002, but his approval rating was at a healthy 62 percent. (Republicans lost 30 seats in President Bush’s second midterm election. His approval was in the mid-30s at that point.)

The State of the Union and Americans’ resolve to meet Russia’s threat to Ukraine have helped to improve President Biden’s approval ratings over the last week, but only by an incremental amount. According to the RealClearPolitics average, about 42 percent of Americans now say they approve of the job President Biden is doing, up from about 40 percent at the end of February.

Those numbers mean President Biden and Democrats are still in very vulnerable territory coming into the midterm elections. Democrats did have a significant political victory this week when the Supreme Court refused to hear Republican challenges to new congressional district maps in North Carolina and Pennsylvania, but most analysts don’t think that win will help the party retain the House. David Wasserman of Cook Political Report has said, “[R]edistricting could simply end up mitigating House Democrats’ losses rather than giving them a good chance to retain control.”

The outcome in the Senate, where about one-third of its 100 seats are up for re-election every two years, is much less clear. Republicans have had a difficult time recruiting candidates to replace the six GOP senators who are retiring. The party also is defending 21 seats to Democrats’ 14. But, of course, Republicans only need to win one chamber of Congress to bring legislative policymaking to a virtual standstill.

Which is why we can expect the Biden administration to become even more forceful in its efforts to shape federal regulatory and enforcement policy. In fact, it already has.

A Lot of Regulatory Activity Already Is Underway

Tax season is just around the corner and the Internal Revenue Service (IRS) is one place where we will see the Biden administration exercise power through enforcement. As white-collar law experts John Marston and Joanna McDonough have written, “While the volume of IRS enforcement actions has waned, it may soon increase. Even at current relatively low audit and investigation levels, the IRS remains aggressive in the cases it does pursue.” To wit: the omnibus spending bill that Congress will likely pass this week to fund the government for the rest of the year will increase the IRS’ budget by nearly $700 million.

There also is a new sheriff in town at the Federal Deposit Insurance Corporation (FDIC). Trump administration holdover Jelena McWilliams announced her retirement in January. Her last day was Friday, February 4, and her successor, Acting Chair Martin J. Gruenberg, wasted no time filling the void. He issued a press release at 6 a.m. ET on Monday, February 7 outlining the FDIC’s priorities for the coming year, which include strengthening the Community Reinvestment Act, addressing the financial risks of climate change, reviewing the bank merger process, evaluating crypto-asset risks, and revisiting Basel III capital rules.

At the Consumer Financial Protection Bureau (CFPB), Director Rohit Chopra has promised to remain laser-focused on consumer fees. Specifically, on February 10, Chopra said the CFPB will put banks under the microscope as part of the bureau’s effort to get rid of so-called “junk fees.” Chopra also has pledged tougher oversight of credit bureaus, mortgage servicers, and student loan servicers and to enact policies aimed at improving racial equity and fair lending.

According to CNBC, the U.S. Securities and Exchange Commission (SEC) has approximately 50 regulatory changes it is considering. Amy Lynch, president of Frontline Compliance and a former SEC compliance official, told the news network, “This is one of the largest regulatory agendas we have seen from the SEC in many years.” Chair Gary Gensler has promised to increase antitrust enforcement and private market oversight and disclosures. He also plans to add investor protections, including for cryptocurrencies.

What’s to Come if Democrats Cannot Legislate?

If Republicans take at least one chamber of Congress, President Biden’s Build Back Better plan will be officially dead, along with any tax and climate provisions in it. Particularly on climate, that will mean more activity at federal agencies, including the SEC and the U.S. Treasury Department.

Over the next two years alone, we expect the SEC to tackle environmental, social, and governance (ESG) disclosures, expand crypto oversight and regulation, tackle payment for order flow and gamification, and boost action actions on private market disclosures and antitrust. Taxpayers also will see the IRS work even more forcefully to close the tax gap, which is the gulf between what taxpayers pay and what they actually owe.

If President Biden steps on the regulatory gas, it would defy history somewhat. There was not a significant spike in executive branch rulemakings after Democrats lost Congress in 1994 or 2010, for example, or after Republicans lost the legislative branch in 2006. But the Biden administration already has demonstrated a greater zeal for executive branch policymaking, especially in the financial services ecosystem. With his hands tied on Capitol Hill, have no doubt: he will seek to use its rulemaking power more often.

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