United States: Implications of the Midterm Elections for Economic Policy

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1 KEY INSIGHTS November 15, 2018 United States: Implications of the Midterm Elections for Economic Policy By: Robert F. Wescott, Ph.D., and Colleen Handel Key Insights The 2018 midterm elections in the United States resulted in a split Congress, with Democrats gaining control of the House and Republicans retaining control of the Senate. The outcome of the 2018 elections reflects schisms within the U.S. regarding president Trump and major issues facing the nation, with voting preferences diverging based on voters geography, race, gender, and age. Policy gridlock is expected with divided government, though certain policies could unite both chambers of Congress in a bipartisan effort, including infrastructure, prescription drug pricing, and a farm bill. The results of the 2018 midterms reveal that Democrats regained footholds in states that Trump depended on for his win in 2016, which could hurt Trump s prospects for re-election. The U.S midterm elections resulted in a split Congress, with Democrats gaining control of the House and Republicans retaining control of the Senate. What Happened? On November 6, 2018, Americans turned out at the polls to vote for members of Congress and state and local governments in the midterm elections. The midterms were widely considered to be a referendum on President Trump s first two years in office, and voters supporting both political parties were highly motivated to vote. According to estimates from the United States Elections Project, more than 49% of the voting-eligible population participated in the 2018 midterms the highest voter turnout for a midterm election in more than a century. 1 The 2018 elections determined all 435 seats in the House of Representatives and 35 of the 100 seats in the Senate. Key Election Results. Ultimately, the midterms resulted in divided government, with Democrats gaining control of the House and Republicans retaining control of the Senate. In general, so-called red Republicans areas of the country became redder after the midterms, and blue Democratic areas of the country became bluer. While a few races remain unresolved, Democrats are poised for a net gain of roughly 37 seats in the House, shifting their current seat minority position to about a seat majority position. Democrats did particularly well in suburban districts, with about three-quarters of their pickups coming in such districts.

2 Meanwhile, Republicans were able to keep their Senate majority and will likely strengthen their control by two seats, increasing their current majority to a majority. Republicans picked up seats in Indiana, North Dakota, Missouri, and likely in Florida four states that President Trump carried in 2016 while Democrats were successful in flipping Senate seats in Nevada and Arizona. A runoff election will be held in a couple of weeks to determine the winner of a Mississippi Senate race. American voters indicated that health care and immigration were the strongest factors impacting their vote in the 2018 midterms. Takeaways from the Vote. The outcome of the 2018 elections reflects schisms within the U.S. regarding president Trump and major issues facing the nation. Notably, health care and immigration eclipsed the economy as the top factors that voters reported affecting their choices in the 2018 midterms, marking the first time in more than a decade that a factor other than the economy has topped the list. 2 Voting preferences diverged based on voters geography, race, gender, and age: Geography. The rural-urban divide in American politics has become starker than ever. Of the 32 most densely populated House districts, all 32 voted for the Democratic candidate. Conversely, of the 59 most rural House districts, all but 9 voted for the Republican candidate. Notably, Democrats won control of virtually all major metropolitan areas in the midterms, including traditionally Republican-leaning metro areas in Texas, like Houston and Dallas. Race. Racial divisions continue to manifest in voting preferences, as Democratic candidates for House seats achieved an 81-point margin over Republicans among black voters, a 54-point margin among Asian voters, and a 40-point margin among Hispanic voters, while Republican candidates obtained a 10-point margin over Democrats among white voters. 3 Gender. Gender appears to increasingly divide voters as well. The 2018 House elections saw the gender gap expand to 13 points, its widest level in at least a decade, as nearly 60% of women who voted for one of the two major parties voted for Democratic candidates, but only 47% of men did the same (see Figure 1). In comparison, the gender gap has been less than 10 points in each House election between 2008 and Two-thirds of year-olds voted for Democratic candidates over Republicans in 2018 compared to just over half in Age. While all major age groups voted more Democratic in the 2018 midterms than they had in the 2016 elections, the Democratic share of the two-party House vote (i.e., the share of votes for Democratic candidates among votes for all Democratic and Republican candidates) shifted dramatically among younger voters. Two-thirds of year-olds voted for Democratic candidates over Republicans in 2018 compared to just over half in In contrast, the Democratic share of the two-party House vote among voters over 64-years-old was less than 50% in the 2018 elections. 4 2

3 Figure 1. Democratic Share of Two-Party House Vote by Gender, Share of votes for Democratic candidates among all votes for Democratic and Republican candidates 60% Women 55% The gender gap in voting preferences expanded to its widest level in at least 10 years. 50% 13 Points 45% Men 40% Sources: Cooperative Congressional Election Study; Washington Post Implications for U.S. Economic Policy. A key question is how the results of the 2018 midterms will impact U.S. economic policy. With divided government, policy gridlock is expected, which suggests little change at the intersection of politics and economics. Democrats will be unable to stop Republican efforts at deregulation, but they will be able to block any new Republican effort to cut taxes further for the wealthy or for corporations. Without the ability to pass major legislation, the Democratic House is expected to focus on hearings, subpoenas, and investigations into the Trump administration. Meanwhile, the Republican Senate will likely concentrate on approving President Trump s conservative judicial nominations. A split Congress increases the likelihood of a government shutdown and limits the prospects for additional fiscal stimulus. Gridlock could be good for business over the next two years as it denotes predictability. At the same time, however, a split Congress increases the likelihood of a government shutdown by making it significantly more difficult to approve a spending bill, and this alone could increase market uncertainty and undermine market confidence. Similarly, the prospects for additional fiscal stimulus such as tax cuts or expanded federal spending are limited under divided government, which could impede the passage of countercyclical fiscal policy should the economy slow. There are certain policies that may be able to unite both chambers of Congress in a bipartisan effort, including: Infrastructure. Members of Congress from both sides of the aisle have expressed support for infrastructure investment to improve America s crumbling roadways and deteriorating bridges. Indeed, America s poor 3

4 Certain policies could unite both chambers of Congress in a bipartisan effort, including infrastructure, prescription drug pricing, and a farm bill. infrastructure has earned a D+ rating from the American Society of Civil Engineers and is estimated to cost the average household $3,400 annually. 5 Since the midterm elections, Senate Majority Leader Mitch McConnell and House Democratic Leader Nancy Pelosi have already met to discuss potential funding for infrastructure development. 6 Prescription Drug Pricing. The House and Senate could also join forces to approve a bill that would reduce prescription drug prices. The Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act of 2018 would allow generic drug companies to sue brand-name drug companies in order to acquire samples of any drug, which would give generic companies the opportunity to prove that their medicine is as safe and effective as the more expensive drug. The Senate version of the bill has 30 co-sponsors split fairly evenly between the Democratic and Republican parties. 7 Farm Bill. A split Congress has improved the prospects for the passage of a bipartisan farm bill by the end of the year. Farm bills have traditionally set federal agricultural and food policies for five-year periods, including safety net programs for farmers. Prior to the midterms, Republicans had pushed to add work requirements for food stamps in the new farm bill. 8 However, with Democrats now in control of the House, food stamp stipulations could hold up the bill s passage, and with programs in the current bill already beginning to expire, Republicans will likely drop the proposed work requirements and accept a renewal of the 2014 farm bill in order to maintain assistance to farmers who have been negatively impacted by recent trade conflicts. Trade policy is one area where the President generally can act without congressional approval, meaning Trump can continue to pursue significant changes despite a divided Congress. Note that trade policy is one area where President Trump generally can act without congressional approval if he relies upon controversial national security arguments for blocking imports. Trump therefore can continue to pursue significant changes despite a divided Congress. However, the newly-negotiated NAFTA replacement, known as the U.S. Mexico Canada Agreement (USMCA), will require approval from both chambers of Congress before becoming law, and Democrats in the House could oppose the agreement or use their position to extract policy concessions. 9 Looking Ahead. The results of the 2018 midterms reveal key considerations for the 2020 presidential election. In the midterm elections, Democrats performed well and regained footholds in three industrial states that Trump depended on for his win in 2016: Michigan, Pennsylvania, and Wisconsin. If these states shift back toward their traditional Democratic roots in 2020, Trump s prospects for re-election would suffer. Another important impact of the midterms is the role that newly elected governors and state legislators will play in redrawing congressional districts following the 2020 census. Heavy Republican wins in 2010 led to creative state redistricting to gain 4

5 electoral advantages for the next 10 years, and Democrats may try to at least partially repay the favor. In the 2018 midterms, Democrats picked up full control of state governments in Colorado, Illinois, Maine, Nevada, New Mexico, and New York, which could alter the partisan balance in Democrats favor for the next decade. 10 However, Republicans won a high-profile governor s race in Ohio, and appear to have won the Florida governorship as well two important battleground states for Trump in Vesoulis, A (2018). The 2018 Elections Saw Record Midterm Turnout. Time. 2 Rooney, K., and L. Moyer (2018). Health care topped the economy as the biggest issue for voters now, here s why. CNBC. 3 Tyson, A (2018). The 2018 midterm vote: Divisions by race, gender, education. Pew Research Center. 4 Schaffner, B (2018). These 5 charts explain who voted how in the 2018 midterm election. The Washington Post. 5 The American Society of Civil Engineers Infrastructure Report Card: A Comprehensive Assessment of America s Infrastructure. 6 Mintz, S (2018). Infrastructure talk ramps up as election dust settles. Politico. 7 Bartz, D (2018). Privacy, drug price bills have shot in divided Congress. Reuters. 8 Parker, M (2018). For Farmers, Trade and Food Policy Are at Play in U.S. Midterms. Bloomberg. 9 Kalish, I (2018). Understanding the economic impact of US midterm elections. Deloitte. 10 The New York Times (2018). Democrats Knock Holes in Republican Wall of State Control. 5

6 U.S. Immigration Policy: Bitter Debates, New Restrictions, and a Lower Growth Trajectory