A boosted economy helped bolster Republican successes in the mid-terms. By 2020, the tide will have turnedby John Rapley / November 19, 2018 / Leave a comment
“It was a big day yesterday, incredible day,” said Donald Trump at a chaotic press conference the day after the mid-term elections. “I thought it was very close to a complete victory.” True or not, though, it’s probably as good as it’s going to get for the President. Mr. Trump’s economic policies gave Republicans a strong tailwind going into this election. But the wind he sowed will come back as a whirlwind—quite possibly in time for the next election cycle.
While the Electoral College and Senate are biased towards small and rural states, which is where Mr. Trump’s strength lies, his electoral strategy has narrowed his course to victory. His explicit appeal to his base has withdrawn the Republican Party into a defensive laager that will, given current demographic trends, further contract. He held small towns and rural areas, but lost the suburbs, weakening the fragile coalitionhe built between blue-collar populists and suburban conservatives.
But more worryingly for Trump, that economic wind which filled Republican sails this year will have likely reversed direction by 2020. Few economists thought it clever to cut taxes at the peak of the business cycle. Adding fuel to a fire would only stoke inflation, jeopardising the boom.
But the President and his advisors insisted the flood of money released by tax reform would be invested, driving up labour productivity and thereby keeping a lid on inflation. In reality, corporations used most of the cash to pad profits and buy back shares.
That produced the surging stock market the President so keenly trumpeted during the campaign. But beyond that, there’s been scant new investment—at least not beyond what one would expectat this point in the business cycle. In fact, in the most recent quarter, investment actually slowed back down.
Inflation, meanwhile, is rising. Flush with cash, consumers are bidding up the prices of goods and services. Moreover, the administration’s policies may lock this inflation into the economy. Firms are reportinghigher input costs as a result of Trump’s tariffs and trade skirmishes.
To make matters worse, his aggressive crackdown on immigration amid historically low unemployment has aggravated labour shortages,nudging labour costs upwards. Although consumer inflation still remains low by historical standards, it has been moving relentlessly upwards for the last…