In theory, there are four possible outcomes for today’s elections: a Republican sweep, a Democrat sweep, a Democrat Senate and a Republican House or a Republican Senate and a Democrat House.
From the perspective of financial markets, the range of outcomes could probably be further reduced to two, namely, either the Republicans sweep or they don’t. Control of the Senate is important for confirming Presidential nominees. However, for most economic policy issues, control of one house of Congress is sufficient for the Democrats to block the President’s agenda – should they choose to do so.
And whether the Democrats take the house or not probably does make a difference.
Sad to say, the election campaign for 2020 will start on Wednesday and the Administration will want a booming economy in the lead up to that election. With a Republican sweep, the President may well want to pursue further fiscal stimulus in the form of “Tax Reform 2.0”, a big infrastructure bill, more money to shore up or replace the Affordable Care Act and greater spending on defense. If this occurs, it would further widen the deficit. However, there is little evidence that the public cares about the deficit.
Such a policy track could lead to stronger economic growth in the short run. However, it would also likely contribute to higher inflation, higher interest rates and a stronger dollar, with a greater risk of recession when the new stimulus wore off.
If the Democrats win the House, some of this may still occur. The Democrats would have a hard time opposing middle-class tax cuts, more money for health care or an infrastructure bill. However, they would have a strong political interest in not helping the President goose up economic growth in 2020 and so could add provisions to any bills to make them less effective or less palatable to the Administration. In this case, growth might be slower in the short run but the economic expansion might persist longer.
Of course, partisans on both sides would say that these mid-term elections are about far more important issues than short-term economic stimulus and they would be right. However, it is also, finally, worth reflecting on one sad and startling statistic about Tuesday’s election.
Since 1948, the average turnout of eligible voters in a mid-term election has been just 42%. Most Americans have in fact fallen into one of two groups, which I will call the CBBRs and the CBBVs, or, to spell it out, those that couldn’t be bothered to register or those, having registered, who couldn’t be bothered to vote. On Tuesday, even with a surge in turnout, these people will likely represent a majority of the eligible population.
While Americans give many excuses for not voting, one general rationale is that they don’t like the choices – the left is too far to the left and the right is too far to the right. Ironically, however, by their non-participation, they actually strengthen the hands of the extremists on both sides. If government policies undermine the economy either by over-regulating it, over-taxing it, over-heating it or fostering bubbles and greater inequality, it will not be so much the fault of the voters as that of the CBBs, those who couldn’t be bothered to participate.