Could the US Midterm Elections Affect the Economy?

The US midterm elections are coming up on November 8. All 435 seats in the House of Representatives and 35 of the 100 Senate seats are up for grabs. Earlier this week, we published an Economic Viewpoint External link. This link will open in a new window. on the economic stakes of the election.

As we discussed in our note, recent polls suggest the House could shift to Republican control, and the Senate could move from a 50‑50 split to a Republican majority. If this comes to pass, Congress will likely block most of President Biden’s agenda. And while the rising cost of living has hurt Democrats and overshadowed social issues this cycle, the president’s party typically struggles in the midterms.

So what would be the economic fallout of divided government? For one, you probably won’t see much federal action on the economy. But if you think government inaction on the looming recession is cause for concern, you’d only be half right.

Given current economic conditions, federal government policies that would help the economy avoid or quickly emerge from a recession would not be optimal. The Federal Reserve (Fed) is aggressively raising interest rates to bring supply and demand into balance, which will in turn bring price growth back closer to the 2% target. Unfortunately, this will hurt the job market, the housing market and asset prices. If the government tried to soften the blow, the Fed would have to tighten monetary policy even further.

In fact, the government has already done just about everything it can. Congress and the Biden administration have enacted legislation that should eventually start to shore up domestic supply. These include the Infrastructure Investment and Jobs Act of 2021, the Inflation Reduction Act passed this summer, and the CHIPS and Science Act signed into law in August. These multi-year programs won’t have an immediate effect on inflation, but they’re proof that government can boost supply and support the economy over the long term without exacerbating demand and inflation in the short term. They also show that compromise is possible in Congress, as both the infrastructure plan and the semiconductor plan passed with bipartisan support.

But if the US economy tanks, the government may have to step in again. If we see several quarters of severe economic contraction along with a spike in unemployment and a sharp decline in inflation, the government could take action in tandem with Fed rate cuts. As 2008 and 2020 taught us, Congress and the White House can work together when they have to. Granted, there seems to be better cooperation when there’s a Republican president and a Democratic-controlled Congress.

What would be more unfortunate is if divided government and political gridlock make things worse. Consumer confidence is very low in the United States right now, and markets are already shaky. Manufactured crises over government funding or the debt ceiling would be bad news and potentially hurt the economy. Let’s hope Republicans and Democrats don’t fall into those traps.