US mid-terms: Consequences for trade and fiscal policies

Dr. Mohamed A. Ramady

Published: Updated:

Most commentators have been fixated on the political outcome of the forthcoming US mid-term elections and whether President Trump could be impeached or not.

The cascade of political reporting is pointing to the Democrats winning control of the House, with some pollsters even whispering about a possible (blue) wave-like 40 or more seat majority.

Whatever the margin, many have no reason to doubt the high odds being given to the Democrats in flipping the minimum 23 seats needed to take control of the House, perhaps even with a “flood” tide majority, or that the Republicans will as widely expected retain their narrow majority in the Senate.

But contrary to a common assumption of consequences no more severe than a return to partisan gridlock, the outcome to the November elections could be hugely consequential in several key areas – trade and fiscal policies that might be adopted.

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An even more deeply polarized Congress, if that indeed is the result, may defy that conventional wisdom in two critically important ways. The first is on trade, and specifically the fight with China. Trade policy is far more existentially tied-in to the Trump White House than a mere mid-term card to be played out in a few months.

It is fundamental to the Trump presidency – and to his 2020 re-election prospects – and not only will the White House still hold the initiative next year, even with a Democratic House, but the president may find more support among Democrats than assumed even as they would like to open impeachment proceedings against him.

This is where the Chinese could be miscalculating the effects of a Democratic party led Congress. The second, and far less appreciated consequence of a divided Congress next year is there could be a high likelihood for another major round of fiscal stimulus.

Pent-up spending demands among Democrats is very likely to meet little serious resistance among Republicans with their own wish list of higher military spending. For a president with remarkably attuned populist instincts, more spending will serve his own ambitions in 2020.

Trade policy is far more existentially tied-in to the Trump White House than a mere mid-term card to be played out in a few months

Dr. Mohamed Ramady

Infrastructure ambitions

Indeed, a revival of infrastructure ambitions will be at the top of both the House Democrat and White House fiscal agendas. It goes without saying, but such a “fiscal accelerator” effect would carry enormous implications for the economy and the markets in running so contrary to the Federal Reserve assumptions for a fading fiscal stimulus by the end of next year.

A looming fight between the White House and the US Central bank on further American interest rate hikes is another matter for discussion.

It may be stating the obvious but while the president is not on the ballot paper, the elections are all about Donald J. Trump. Local or state specific issues will arise here and there, and some campaigns and voting will be driven by issues like the economy, the tax cuts, trade tariffs, immigration — insert your favourite hot button issue here.

The single most important political factor going into these elections is that no US president in the post-war period has so dominated the news cycle every single day or managed through sheer weight of personality to make all politics about him.

Democrats are essentially betting that the accumulative “Trump outrage” will be enough to override internal divisions within its wings and carry them to victory in the 2018-midterm elections.

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At minimum, the Trump factor should help pump up their get-out-the-vote efforts. Some 72 percent of Democrats, for instance, have indicated in multiple polls that they are “very motivated” to vote, and the Democratic turn-out has been high in the more than 30 states that have held congressional primaries so far this year.

The Trump passions is also working in the Republican GOP party favour in that the same polling shows some three-quarters of GOP voters highly motivated as well. Despite the rush of those headline shocks that would crush an ordinary politician, President Trump's approval ratings among Republican voters remains rock solid and has in fact barely moved all summer.

While the Trump support among his energized base may be holding, it is the independents, not each party's base voters whose swing votes often determine the winner in closely contested races; the Trump GOP appeal to those independents look to be hitting new lows, with every indication so far that they are breaking to the Democrats.

By most accounts, an assumed outcome of a (large) Democratic majority control of the House and a (narrow) Republican control of the Senate would normally mean a return to legislative gridlock and the familiar political dysfunction.

However, some believe that next year will mark a departure from the norms of a divided Congress in the past on two fronts, even amid twitter firestorms and the subpoenas flying across town.

Trade policy

The first is on trade policy, where the initiative remains in the hands of the president. And while the merits of the trade tariff threats and negotiations over NAFTA, with the EU, and with China are all being hotly debated, trade is among the few policy issues strongly felt by the president.

The declared aims of the Trump trade policies, to right the unfair slope of the prior trade deals and to bring “jobs back to America,” especially the higher paying manufacturing jobs, will in fact play pretty well among many factions inside a newly emboldened Democratic Party.

The reason is obvious - the blue-collar workers were historically the Democratic base, and there will be no small effort by the Democratic leadership to recognize the neglect of those voters in the Clinton 2016 campaign and to woo them back. So even as they object to every aspect of the Trump presidency, it may prove hard for Democrats to vote against policies pitched as helping the blue collar and the “hollowed out” Middle America.

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The second factor is very likely to be a second major round of fiscal stimulus under Democratic control of the House in the next Congress. Ever since 2009, the Democrats have essentially been unable to pursue their domestic social agenda through most of the Obama years.

That changed with the Bipartisan Budget Act of 2018 passed earlier this year, which added a mix of nearly $300 billion in Democratic-demanded non-defence discretionary spending nearly matching the Republican-driven increases in military spending.

The success with the two-year budget deal will prove to be the template of what is to come. There is certainly plenty of pent-up spending demand among the Democrats, especially among its newly energized progressive wing fired up with a winning rhetoric for a “stronger” Affordable Care Act, greater retirement security by “protecting” social security and an expanded Medicare, low cost or free college tuition support, and -- in an echo of Trump’s initial “trillion-dollar” infrastructure plans that fell by the wayside this year in the drive for the tax cuts -- the Democrats are highlighting a “robust” $1 trillion infrastructure spending program.

Budget priorities

A key factor is that the budget is no longer driven out of the White House in a detailed budget plan with legislative language sent up to Congress after the State of the Union Address. Instead, crucially, all the initiative on budget priorities lies with the House, not the White House.

This will ensure that political resistance to higher spending and ever-larger deficits will be largely absent next year due to the political near neutering of the fiscal hawks in both parties.

The recent surge in more populist Democrats gaining against the establishment Democrat nominees has caused no amount of heart searching in this party. The Democratic leadership is more likely to find itself using the promise of favoured spending programs as their primary means of “controlling” its progressive wings and diverting their passions away from demands to change the party establishment: the more the progressive demands are met through higher federal spending on favoured programs, the less likely there will be demands to change the system.

On the Republican side there has also been a seismic change. The shift within the GOP away from its traditional free market, small government, restrained budget mainstream to Trump populism is already evident in the way the president has successfully brought the weakened GOP leadership in line despite what were initially significant personal and policy differences.

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And if the president’s populist economic policy agenda is set next to the spending priorities being shaped by the Democratic Party, there is far more overlap between them than one would assume, with the remnants of the GOP mainstream being the outlier in the next Congressional session.

It is more or less an echo of President Clinton's famous “triangulation” to align a good part of his economic agenda to the GOP after their wave election victories in 1994 that left mainstream Democrats demoralised at the time.

As such, an embattled president is likely to offer only the mildest of resistance to the Democratic budget demands and in fact embrace much of it, especially the infrastructure programs as his own, in what will fit neatly with his own re-election ambitions in 2020.

US political watchers, while fixated with scandals, corruption, back stabbing machinations and revelations need to also look at the bigger picture.

Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co author of ‘OPEC in a Post Shale world – where to next ?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.

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