Midterm Elections Put Economic Policy in Focus
By Aiden Messett and Ryan Hanley – Staff Writers
Inflation has joined the list of hot button political issues that are usually emphasized during political campaigns. As many Americans place blame on the Democratic party for feeding record high inflation, many expected a “red wave” of Republican victories in Congress that failed to materialize.
A poll by the New York Times and Siena College found that the share of American voters who said economic policy is their greatest concern jumped from 36% in July to 44% the month prior to the midterm elections.
To understand how these midterm results will affect the performance of businesses, we must first address stereotypes regarding both party’s economic policies. While Democratic economic policy has always been associated with increased government spending and higher taxation, Republican economic policy has always been associated with a “hands off” approach, consisting of lower taxes, lower government spending, and less private sector regulation.
Although Republicans are often viewed as being more “business-friendly”, the data does not necessarily support this thesis. For instance, one could argue that the Democrats’ focus on increasing fiscal spending allows lower-income families to increase discretionary income and contribute to economic growth.
Likewise, Democrats favor explosive government spending during recessions to pump money into the economy quickly, therefore increasing the pace of economic recovery—a tactic that quickly brought the U.S. out of a severe recession in early 2020. In fact, the National Bureau of Economic Research found that, on average, Democratic presidents grew the economy by 4.4% each year, versus 2.5% for Republicans.
However, much of the recent inflationary pressure is being blamed on the Democrats with good reason.
While the economy was clearly making a strong recovery from the pandemic, Democratic policy makers continued dishing out generous stimulus checks and unemployment benefits which many viewed as unnecessary. Even with inflation hovering at nearly 6% late in 2021, the Biden Administration pushed a ~$1.2 trillion infrastructure bill through congress.
It is widely thought that government spending is often conducted inefficiently when compared to the private sector, which has led us to a dangerous fiscal deficit that may require higher taxes down the road.
That being said, projecting future economic policies is more difficult than merely observing which party holds power in congress. For instance, since neither the Republicans or Democrats have obtained a majority in both houses, legislature, including tax policy and spending bills, will be very difficult to pass through both houses of congress unless significant compromises are made.
For businesses concerned about the potential of higher taxes or increased labor regulation, a deadlock in government is viewed positively, because of the near impossibility of congress agreeing on impactful legislature that can create economic uncertainty.
Meera Pandit, global markets strategist at J.P. Morgan weighed in on the national topic of conversation.
“Through divided governments since WWII, the economy has grown at a 2.7% pace on average and market returns were 7.9%,” Pandit said.
It would appear that a consistent, predictable economic policy associated with divided governments has historically been good for business, regardless of the political party who may hold control in the executive branch.
While it may be easy to characterize one political party as being “business friendly” compared to their counterparts, the reality is that politics and economic policy are dynamic, inconsistent, and ever-changing topics.
The midterm elections may have eliminated some uncertainty for businesses worried about significant modifications in economic policy, but inflation remains near all-time highs and some of the best economic experts are uncertain in their projections.
Perhaps midterm elections have not given business owners the certainty they had been hoping for.