The Economic Effects of the Midterm Elections

A Shocking Election

Contrary to pretty much every pundit’s prediction, the past midterm election on November 8 did not result in a “red wave”. Recent history shows the president’s party losing big in the midterms, but Democrats avoided that fate this time. Although the GOP gained control over the House of Representatives, they only surpassed the Democratic party by 7 seats (a much larger GOP House majority was expected). Furthermore, they were unable to gain control in the Senate, losing by one seat. A leading cause of this was that Trump-endorsed Republican candidates alienated many centrist voters who were looking for moderate candidates. On the other hand, the younger population came out for the Democratic party. Some key races were John Fetterman flipping a Republican-held Senate seat in Pennsylvania and Catherine Cortez Masta holding a Democratic Senate seat, beating a Trump-backed Republican in Nevada.

Senator-elect John Fetterman, whose victory aided Democrats in achieving a Senate majority

Stock Market Effects

Usually, the stock market is affected by each midterm election.  The crux of stock market performance following midterms relies on a simple characteristic: divided government. When the government is divided, it is more stable and less likely to spend more. Investors like this because they love stability (obviously), and when the government spends less money, the federal debt limit does not have to be raised. At this time, the S&P 500 has declined by nearly 17% since the beginning of this year, so a new election brings hope to the people that it will increase market performance. 

Democratic Economic Priorities

Based on the current election results, it can be inferred that major legislative breakthroughs will be rare due to congressional gridlock. Additionally, with such strong political polarization, it will be difficult to pass generous federal budgets and address the federal debt ceiling. In the current 117th Congress, Democrats have the majority, and in the past few months, they have passed key bills that impacted the American economy significantly - one of which being the Inflation Reduction Act.

This bill was signed into law by President Joe Biden on August 16. The goal of this act is to increase stability in small businesses by lowering energy costs and improving energy efficiency as “tax [credits] up to $5 per square foot” can be received, as well as “[lowering] prescription drug costs [and] health care costs.” To make this possible, businesses and families earning above $400,000 annually will pay higher taxes. In addition to this, another “historic” act passed this year was the Infrastructure Investment and Jobs Act, which will expand access to clean drinking water, establish reliable internet speeds, improve and encourage green transportation, and more. However, with Democrats losing the House majority in the 118th Congress, passing bills with progressive ideals is unlikely. 

Republican Economic Priorities

On the other side of the aisle, with a new House majority, the GOP aims to make the Tax Cuts and Jobs Act (TCJA) of 2017 permanent. This act was originally enacted during the Trump Administration to reduce costs for corporations and families. With lower taxes, consumer purchasing power is stronger as individuals have more money in their pockets to spend, so the economy improves in the short run. Furthermore, when businesses have to spend less money on taxes, they can reallocate those costs to improve their efficiency by investing in capital, such as better training for employees and improved equipment, which results in increased profits. If this trend occurs across America, economic growth will occur in the long run.

However, in the short run, this is not advisable as we are currently experiencing high inflation. Lowering taxes is an expansionary fiscal policy, as people will spend more money. We want the opposite; higher taxes will force people to spend less money, reducing overall demand in the economy and gradually lowering inflation.

Differing Views for the Future

All in all, the election results of the recent midterm have shocked everyone as the results did not follow the common pattern seen in recent history. As many investors wanted, the government is now divided, so the market will stabilize, and spending will increase. However, because of this split, both parties will have a difficult time trying to pass their policy agendas. The Democratic party aims to increase taxes for the wealthier families in America to provide improved infrastructure and create new jobs, whereas the GOP’s goal is to reduce taxes to incentivize people to work and increase consumer purchasing power so more individuals interact with the market, creating economic growth. Only time will tell which vision will become reality.