Reminder from FTChinese.com: If you are interested in more FTChinese.com content, please search for “FTChinese.com” in the Apple App Store or Google App Market to download the official app of FTChinese.com.
On the second Tuesday in November 2022, the midterm elections in the United States will be held as scheduled. In the midterm elections, all 435 seats in the House of Representatives, 35 seats in the Senate, and 36 governors in 50 states face re-election.
Republican “red tide” fades
According to the results of the vote count on the evening of November 10, New York time, the Republicans currently lead the Democrats with 198 seats in the House of Representatives with 211 seats, and have advantages in several other unresolved constituencies. According to the rules, the majority party needs to win 218 seats, and it is not a problem for the Republicans to obtain a majority of seats in the House of Representatives, although the degree of advantage may be less than expected. Senate elections are far from being decided, with Republicans currently holding 49 seats and Democrats 48, with the remaining three seats up for grabs in three swing states: Arizona, Nevada and Georgia. At present, the Democrats are likely to win Arizona, and the Republicans are more likely to win Nevada. The situation in Georgia is a little more complicated. The state law stipulates that the winning party needs to have more than 50% of the vote. At present, both parties have less than 50% of the vote. The final estimate is to wait until December. vote) until someone gets more than 50% of the vote. Most commentators believe the current results are in stark contrast to the various polls leading up to the midterm elections, many of which showed a big Republican victory.
Since World War II, the parties that have entered the White House have often suffered “failures” in the first midterm elections, losing an average of 26 seats in the House of Representatives and an average of 4 seats in the Senate. This historical law is related to the political system of the United States. Voters have requirements for checks and balances. A political party controls both the White House and Congress, and its policies will inevitably be extreme, which often anger moderate centrist voters, who are the decisive force in determining the outcome of the election. There is another reason. The political party in the White House will be observed and criticized by the media with a microscope and a magnifying glass, while the political party in the opposition will appear to be less involved. This observer bias also makes who is ugly on stage, and voters therefore hope There are changes in the midterm elections. The current result is already a good one for Democrats, no wonder Biden is calling it a victory.
Domestic economic policy with no big deal
The American people tend to associate economic performance with the party in power, and vote for their party largely based on economic performance, but this is not supported by much data, at least in the last two decades. The most important influence of the two parties on the domestic economy is through fiscal policy. If we carefully study the fiscal expenditure structure of the federal government, we will find that the funds that the government can use flexibly are very limited. In the absence of an emergency (such as the COVID-19 pandemic), more than 60% of federal government spending is “mandatory,” including Social Security payments for retirees, seniors and low-income earners Health care expenditure, the expenditure for the welfare of low-income people, this part of mandatory expenditure is basically equivalent to transfer payment, which is relatively fixed. The federal government’s interest payments account for nearly 8% of total expenditures, and together with mandatory expenditures, these two parts already account for 70% of federal government expenditures. In the remaining 30%, military expenditures account for 20%, emergency project expenditures and health and public services account for nearly 4%, and expenditures that can be flexibly used by the government for “industrial and economic construction” are about 6%. The federal government’s expenditure accounts for about 20% of GDP, and the 6% of economic construction expenditure accounts for only about 1.2% of GDP. Regardless of how the money is spent wisely, or scaled up a little bit, I don’t see much impact on the U.S. economy.
This can also be seen in several major economic policies of the Biden administration. The Biden infrastructure bill was passed at the end of 2021 with a total amount of $1 trillion, but it will be implemented in 5 years, or $200 billion per year, and nearly half of the spending would be available even without the bill. The $100 billion in new infrastructure spending per year is not huge by any means compared to a $25 trillion economy, and this is already a very important achievement for the Biden administration. Another large-scale project is the “Clean Energy Act”, which was proposed in June 2022. The main content is to build new energy production capacity, energy conservation and emission reduction, power grid transformation, etc. In terms of the more important photovoltaic new energy, it is planned to reach 2024. Increase photovoltaic production capacity from 7.5G watts in 2022 to 22.5G watts, adding 15G watts in two years. I took a look at the production capacity construction costs of domestic A-share photovoltaic companies. It is estimated that 1G watt capacity (including the entire industry chain) requires an investment of 1 billion yuan, and 15G watts of new capacity requires an investment of 15 billion yuan, equivalent to more than 2 billion US dollars. Suppose the investment cost in the U.S. is twice as high, or about $5 billion. Similarly, there is a limit to the size of the economy that inflation cuts can really affect.
As for tax policy, although the change in marginal tax rate does not seem small, the absolute value impact on the distribution of income among different classes is still limited. As for the argument that high tax rates will affect the motivation of the wealthy to work, I am reminded of Keynes’s words, he said lightly: After people adapt, they will start to pursue money tirelessly again.
Based on the above analysis, I think the mid-term elections can be said to be nothing major in terms of domestic economic issues. As a result, midterm elections, and even presidential elections, have far less impact on U.S. domestic economic policy than is often thought. Doing economic policy in the United States is so boring, it’s no wonder that Nixon wanted to showcase his talents on the international stage.
Trump could cost Republicans another White House
Compared with the limited domestic economic policy, the US president has much more room for foreign trade and economic policies. This is because the president can make many decisions in the form of presidential decrees, and it may also be because members of Congress generally have more complex and professional international policies. The lack of familiarity with economic issues has somewhat diminished their influence. Although the mid-term elections will not affect the change of the White House, Trump’s performance in the mid-term elections has paved the way for the future U.S. foreign trade and economic policies.
Many critics believe that the midterm elections reflect the decline of Trump’s influence, and some pro-Republican media even think that Trump has done a disservice. Although the fundamentals of Trump supporters have not changed much, his influence has indeed declined judging from the election results. This is reflected in the fact that several Republican candidates he strongly supported either lost or narrowly won; while the Republican candidate he strongly opposed, Florida incumbent Republican Governor DeSantis (DeSantis), was re-elected by a large margin. . At present, the young DeSantis is considered a rising star in the Republican Party’s next presidential election, and it is this that Trump cannot accept. DeSantis has a chance at beating Democrats in the presidential election, but he has little chance of beating Trump in the party primary. And if Trump runs for the presidency again, whether the Democratic candidate is Biden or someone else, the chances of the former winning are very slim. That’s the conundrum that Trump brings to the Republican Party.
To understand this, we need to know that in a presidential election, it is the moderate voters in the center that are decisive. There is a high probability that the US economy will achieve a soft landing in 2023 (the author discusses it in a special article in this journal), and 2024 may be a year of peace with high employment and low inflation. From the perspective of the international situation, the Russian-Ukrainian war will likely not be delayed until 2024. At that time, both domestic and foreign affairs look very favorable for Democrats to keep the White House. The various lawsuits Trump faced, the abuse of power during the previous presidential term, the changeable domestic and foreign policies, and the constitutional crisis caused by the 2020 election made it difficult for him to gain the support of centrist voters. Between negatives and positives, I think Trump’s chances of winning the presidency in 2024 are slim.
With so much foreshadowing, we can return to the previous economic issues. Due to Trump’s reasons, the Democratic Party will likely continue to hold the White House in 2024, which will allow the current Democratic Party’s foreign trade policy to continue. We may continue to see the United States strengthen its trans-Pacific and Indo-Pacific economic alliances, strengthen technological alliances with Western countries, and friction in economic trade and technology licensing with China. This is what I think is the most important economic consequence of this midterm election.
The distribution goes to politics, the total goes to the Fed
On November 9, the S&P 500 fell by 2% as the Republican election was not as strong as expected. A Republican-dominated Congress is generally believed to help rein in government spending and cut taxes, which is good for the stock market. However, after the U.S. Department of Labor announced the October CPI data on the 10th, as inflation was significantly lower than expected, the market believed that the probability of the Federal Reserve continuing to raise interest rates aggressively dropped sharply, which led to a surge in the U.S. stock market, with the S&P 500 rising by an astonishing amount. 5.5%. The contrast between the two ranges, one up and one down, shows that the Fed’s influence far exceeds the power of partisan politics.
It can be roughly said that the main role of US party politics in the domestic economy is to distribute benefits, and from the existing data, even if the quarrel is in full swing, the actual share that can be changed is limited. More than 60% of the federal government’s expenditures are transfer payments. If we believe the second welfare theorem of general equilibrium theory, the economy will still be in an efficient equilibrium after transfer payments.
The more important aggregate issues of economic growth, employment and inflation are under the strong control of the Federal Reserve. The Fed’s increased independence stems from greater transparency and accountability, making it difficult for other departments to interfere with it. Looking back at the earlier Fed, charisma and political skill played an important role. The Fed before Bernanke, although they also committed to the goals of full employment and price stability, did not have a clearly set numerical target, especially on the issue of inflation, the Fed hopes to retain more discretionary space. With flexibility comes ambiguity and uncontrollability, and both Congress and the president can influence monetary policy in some form, as evident in both the Volcker and Burns eras. In recent years, the Fed has set clear goals and decision-making processes, and has gained strong credibility and independence through direct communication with the public, making it difficult for Congress and the president to interfere in its operations. The Fed, based on transparency and rules, has instead gained more influence and better economic performance.
In general, the economic consequences of the US midterm elections are limited domestically, but may be more significant and long-lasting in international issues.
Note: This article only represents the author’s personal views. The author is a doctor of economics and a financial practitioner.
This article is edited by Xu [email protected]