The economic consequences of the midterm elections


The midterm elections were never going to be a game-changer for the US economy. What is surprising, however, is how the economy turned out to be less of a deciding factor in the election.

Pre-election polls showed inflation and the economy as the number one issue facing the country, far outpacing the runners-up. The November poll of the Economist and YouGov had 27% of American adults saying inflation was the biggest problem, followed by 10% who named jobs and the economy and 10% who said health care. Climate change topped the list of issues for nine percent of Americans, and abortion topped seven percent.

National exit polls suggest Economist poll seriously underestimated the importance of abortion. The exit poll places abortion at the top of the list for 27% of voters, just behind 31% for inflation. Far from being a distant fifth, abortion had the second highest share of people saying it was their main problem. There was a partisan divide, of course. Democrats were much more likely to say abortion was their biggest problem than Republicans, and Republicans were much more likely to say inflation was their biggest problem.

In the Economist poll, only 32% of the public said they approved of Biden’s handling of the inflation issue, with 12% strongly approving and 21% somewhat approving (numbers don’t add up due to rounding, apparently ). Fifty-four percent said they disapproved of Biden’s handling of inflation, with 40% strongly disapproving and 13% somewhat disapproving. This disapproval did not weigh heavily on the votes of the Democratic candidates, however. Only 32% of voters said they voted to oppose Biden, far lower than the 38% who said they voted to oppose Trump midterm in 2018.

The Biden administration has argued that it shouldn’t be blamed for inflation, because inflation happens all over the world. They point to double-digit inflation in the UK as if that proves that the policies of the Biden administration cannot be responsible for inflation here. This is a largely absurd claim. The reason inflation is a global phenomenon is that the leaders of so many countries have followed much the same strategy of deploying huge amounts of fiscal stimulus and accommodative monetary policy to head off a pandemic depression. . This does not absolve the Biden administration of blame for inflation in the country. It just means that our policymakers have been as bad as everyone else when it comes to showing restraint when the economy reopens in 2021.

The most likely outcome of the midterm elections will be Republican control of the House of Representatives. Senate control could hinge on the fate of Adam Laxalt in Nevada and what appears to be a runoff between Hershel Walker and Raphael Warnock in George. It’s a recipe for a divided government and a stalemate. There will likely be very little room for cooperation on fiscal policy, which will have the beneficial effect of preventing fiscal deficits from rising. This could be slightly disinflationary.

Although traffic jams have a bad reputation, divided government is actually the most common form of government in the post-World War II era. JP Morgan analysts say Divided Governments have seen average growth of 2.9% since World War II and stock market returns of 7.9% on average. This type of economic growth seems unlikely next year. The economy is very likely to fall into a deep recession as the Federal Reserve continues to raise interest rates. The lack of a reason for fiscal cooperation will likely prevent the federal government from cushioning the blow of an economic crisis, although it is possible that Biden could again organize the suspension of student loan repayments, which would be mildly stimulating (and inflationary) .

It looks a lot like what the country faced in 2010, but with a darker twist. After the Tea Party election, the economy was indeed threatened with a double-dip recession. Inflation, however, was quite low. In the 12 months to December 2010, the consumer price index rose only 1.64%. This gave the Fed enough leeway to loosen its monetary policy through quantitative easing. Indeed, in November 2010, as the Fed realized there would be no more fiscal expansion, the US central bank announced its second round of quantitative easing. This caused inflation to double to 3% in 2011 and may have helped maintain positive economic growth that year. With inflation still near four-decade highs, the Fed will have few tools to dull the pain of a slowdown next year.

As disappointing as the midterm elections may have been for many conservatives, a bigger margin of victory probably wouldn’t have changed that economic picture much. Even a Republican “wave” would have created the same conditions of blockage and budgetary constraint in a context of monetary tightening. Those looking for a silver lining can at least rest assured that the results will make it harder for Biden to blame the coming recession on a Republican majority.


Breitbart

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