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As Far as Midterms Go, Turns out It Is Not ‘the Economy, Stupid’, After All

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The US election results were clear evidence that for midterm
American polls, Bill Clinton’s mantra is wrong. It’s
not “the economy, stupid” that determines outcomes.
Polling prior to the vote showed 65pc of Americans rated the
economy “good” or “excellent” — the
most optimistic since 2001. Yet Tuesday’s polls showed a
large swing in the popular vote to the opposition Democrats, and
that party regaining control of the House of Representatives.

Midterm elections are always tough for parties with incumbent
presidents. These results were by no means a disaster for
Republicans — a wipeout, or the so-called “blue
wave” Democrats hoped for. The Grand Old Party (GOP)
strengthened its grip on the Senate although it ceded its majority
in the House. But given the excellent economic backdrop, this was
surely a missed opportunity for sustained control of both houses.
That they neither managed nor expected it shows how the
president’s behaviour, and huge national divisions on
healthcare, immigration and much else, makes it difficult for the
party of Trump to build out from its base.

However much those who detest Trump’s tweeting, public
pronouncements and explicit embrace of nationalism would wish
otherwise, the American economy has performed extraordinarily well
under his tenure. In the last six quarters of president
Obama’s presidency, annualised growth averaged just 1.5pc. It
has been 2.8pc in the Trump era. Real GDP growth for 2018 is now
forecast to come in at above 3pc; a large increase on the
pre-election forecast of 1.8pc from congressional bodies, and a
world away from the raft of warnings that a Trump victory could
trigger a recession. Whether one attributes this pick-up to
Republican policies or not, the party in power could not have asked
for more favourable conditions.

And business clearly felt a Republican presidential victory a
factor. Sentiment inflected on Trump’s election. The
proportion of businesses surveyed by the National Federation of
Independent Businesses who say now is a good time to expand shot up
and now stands at 33pc, against just the 11pc seen in late 2016.
Small business optimism hit record highs, while consumer confidence
peaked earlier this year at its highest level since 2004. No wonder
now-former Republican House majority leader Paul Ryan implored the
president to campaign harder on the booming economy, and less on
culture war issues and illegal immigration.

Politically, of course, Democrats sought to diminish
Trump’s economic record by crediting positive trends to the
legacy of president Obama, before swiftly changing the subject.
They pointed out that while there have been just over 4m new jobs
created under Trump’s presidency, 4.5m were created in the
equivalent 22 month period at the end of Obama’s tenure.

But this compares apples with oranges. One would expect job
growth to slow as the economy got closer to full employment. In
fact, it is remarkable how robustly the labour market has
performed. A year ago, economists still worried about Americans
having permanently given up looking for work. Now the employment
rate for 25 to 54-year-olds is higher than before the recession.
Unemployment has fallen from 4.8pc to 3.7pc, with workless rates
for women, African-Americans and Latinos all now at multi-decade
lows. Even real wage growth has picked up somewhat in recent
months.

Clearly, it would be a mistake to assume all these economic
trends are within the gift of the president or Congress. But the
large tax rate cuts the president and Republicans championed,
coupled with a very significant slowdown in new regulatory
activity, would be expected to enhance growth prospects, at least
temporarily. The narrative that the GOP had taken active steps to
increase prosperity should have been handy in an election year.

Yet there was little evidence that the economy was the central
factor in these results. Yes, the seats up for grabs favoured
Democrats in the House (and Republicans in the Senate). But results
and polling suggest that non-economic issues — healthcare and
immigration in particular, but also the fallout from the recent
bitter dispute of the Supreme Court Justice Brett Kavanaugh —
were all important factors in voters’ thinking. Perhaps
unsurprisingly then, this became more of a “base”
election. That appears to be what Trump wanted, and probably helped
shore up the Senate. The Democrats obliged too by focusing on wedge
issues where voters in urban areas in particular fundamentally
object to Trump’s politics.

Losing the House though, and having divided government from here
on, will likely paralyse a major economic policy agenda. Further
tax cuts, and much-needed reform of the US’s runaway old-age
entitlement programmes, are now firmly off the agenda. But one area
to watch is infrastructure spending. The president promised a
“massive” spending package in his election campaign.
Here his instincts are probably much closer to House Democrats than
representatives in his own party. The former are chomping at the
bit for major federal investment.

Unless an unforeseen economic recession occurs, the next two
years will likely follow this election in being dominated by
non-economic issues.

Of course, the Republicans would likely have fared far worse in
bad economic conditions. But strong growth midway through a
presidential term perhaps gave some voters the luxury of
considering these other issues, where the Republicans and Trump are
less trusted or liked. Whichever line of reasoning one prefers, it
is clear the GOP underperformed relative to the economy.

US politics seems to be rapidly polarising towards a pro-Trump
and anti-Trump camp, and the president pushed for these votes to be
a referendum on him. This led to surprising strength in some rural
regions. But it was also accompanied with the loss of a house
despite an amazing economic backdrop. Yes, it could have been far
worse for the GOP. But in time they will surely rue this missed
chance to consolidate.



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