Midterm fall­out

These re­sults show it’s not ‘the econ­omy, stupid’ af­ter all

The Daily Telegraph - Business - - Front Page - Ryan Bourne

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.

‘Un­less a re­ces­sion oc­curs, the next two years will likely fol­low in be­ing dom­i­nated by non-eco­nomic is­sues’

Demo­cratic win­ners Sen­a­tor El­iz­a­beth War­ren and Con­gress­woman Kather­ine Clark em­brace in Mas­sachusetts: di­vided gov­ern­ment could now hit Pres­i­dent Trump’s eco­momic agenda

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