The midterm elections were never going to be a game-changer for the U.S. economy. What’s surprising, however, is how the economy turned out to be less of a game-changer for the elections.
Polls ahead of the election showed that inflation and the economy were the number one issue facing the country, far surpassing the runners up. The November poll from the Economist and YouGov had 27 percent of adult Americans saying inflation was the top issue, followed by ten percent who named jobs and the economy and another ten percent who said health care. Climate change came in as the top issue for nine percent of Americans and abortion as the top for seven percent.
The national exit polls suggest the Economist poll seriously underestimated the importance of abortion. The exit poll has abortion as the top issue for 27 percent of voters, just behind the 31 percent for inflation. Far from being a distant fifth, abortion had the second highest share of people saying it was their top issue. There was a partisan divide, of course. Democrats were far more likely to say abortion was their top issue than Republicans, and Republicans were far more likely to say inflation was their top issue.
In the Economist poll, only 32 percent of the public said they approved of Biden’s handling of the issue of inflation, with 12 percent strongly approving and 21 percent somewhat approving (the numbers do not add up because of rounding, apparently). Fifty-four percent said they disapproved on Biden’s handling of inflation, with 40 percent strongly disapproving and 13 percent somewhat disapproving. This disapproval, however, did not weigh heavily on votes for Democratic candidates. Just 32 percent of voters said they cast their voters to oppose Biden, much lower than the 38 percent who said they cast their vote to oppose Trump in the 2018 midterm.
The Biden administration has argued that it should not be blamed for inflation because inflation is happening across the globe. They point to double-digit inflation in the U.K. as if that proves the policies of the Biden administration could not be responsible for inflation here. That’s a largely nonsense claim. The reason inflation is a global phenomenon is that leaders in so many countries followed roughly the same strategy of deploying huge amounts of fiscal stimulus and accommodative monetary policy to fend off a pandemic depression. This doesn’t exonerate the Biden administration from blame for inflation at home. It simply means our policymakers were as bad as everyone else’s when it came to showing restraint as the economy reopened in 2021.
The most likely result of the midterms will be Republican control of the House of Representatives. Control of the Senate may turn on Adam Laxalt’s fate in Nevada and what looks likely to be a runoff between Hershel Walker and Raphael Warnock in George. This is a recipe for divided government and gridlock. There will likely be very little room for cooperation on fiscal policy, which will have the beneficial effect of preventing budget deficits from climbing again. That could be mildly disinflationary.
Although gridlock gets a bad rap, divided government is actually the more common form of government in the post-World War II era. Analysts at J.P. Morgan say divided governments have seen average growth of 2.9 percent since World War II and stock market returns averaging 7.9 percent. That kind of economic growth looks unlikely next year. The economy is very likely to fall into a significant recession as the Federal Reserve continues to hike interest rates. The lack of a motive for cooperation on the fiscal side will probably prevent the federal government from cushioning the blow of an economic slump, although it’s possible that Biden could once again arrange to suspend student loan payments, which would be mildly stimulative (and inflationary).
This sounds a lot like what the country faced in 2010—but with a darker twist. After the Tea Party election, the economy was indeed at risk of a double-dip recession. Inflation, however, was quite low. In the 12-months leading to December 2010, the Consumer Price Index rose just 1.64 percent. This gave the Fed plenty of room to loosen monetary policy through quantitative easing. Indeed, in November 2010, as the Fed realized there would be no more fiscal expansion, the U.S. central bank announced its second round of quantitative easing. This caused inflation to double to three percent in 2011 and may have helped keep economic growth positive that year. With inflation still running near four-decade highs, the Fed will have few tools to ease the pain of a downturn next year.
As disappointing as the midterms may be to many conservatives, a bigger margin of victory probably would not have changed this economic picture much. Even a Republican “wave” would have created the same conditions for gridlock and fiscal constraint amid monetary tightening. Those seeking a silver lining can at least take some cold comfort that the results will make it harder for Biden to blame the coming downturn on a Republican majority.