1. Skip to content
  2. Skip to main menu
  3. Skip to more DW sites

Democrats may stall Trump's economic plans

November 7, 2018

Trump has warned that if Democrats won power in the midterm elections, the US economy would see higher taxes, endangering jobs as a result. But cohabitation means legislative stagnation is more likely.

https://p.dw.com/p/37nGG
Worker in front of a US flag
Image: Getty Images/B. Pugliano

The Democrats' legislative priorities are not likely to change the $20 trillion (€17.4 trillion)  economy very much, mainly because that's the way cohabitation works. But if nothing else, Democrats can stop or slow down some of Trump's more extreme plans. Ironically, this could in turn offer Trump a convenient scapegoat if he runs in 2020 and if the economy slows, as expected, after the impact of tax cuts wears off.

Bigger questions perhaps surround the overall direction and impetus of the Trump project from an economic perspective and also the direction of the world's largest economy. When the US sneezes, after all, we all in the rest of the world catch a cold.

Growth

The US economy is experiencing one of its longest periods of growth in its modern history, up about 3 percent this year, fueled mainly by low interest rates and deficit-funded tax cuts at the end of last year. Economists point also to the economic cycle and the medium term after-effects of Barack Obama's policies.

But as the economy grows, fears of overheating mean the Federal Reserve could raise interest rates again in December, its fourth hike in 2018 and the most since 2006.

Annual growth is widely expected to dip back to its long-term average of near 2 percent by 2020 and some economists believe it is possible the economy could go into a recession within a few years.

The S&P 500 was down 7 percent in October, the worst month for US stock markets in seven years. with some suggesting this could be a harbinger of the end of this long period of growth.

Trump may press on, says AmCham boss

It's possible markets wont react much at all because investors have already priced in gridlock. That said, gridlock does not necessarily have to be the order of the day going forward, according to Frank Sportolari, President of the American Chamber of Commerce in Germany (AmCham).

"President Trump has shown that he is very pragmatic," he told DW. "He wants to deliver on his promises and quite honestly, I would not be surprised if he were to find a way to work on some compromises with the Democrats, to obtain some of the things he is looking for that he can then sell as a success."

Fiscal issues

So what are the prospects for the various policy areas?

Budget and deficit issues will now resurface as the politics becomes more divided.

Trump is widely expected now to work with the Democrats in the House on a new $1 trillion-$1.5 trillion infrastructure bill, which has bipartisan support and is estimated could add 0.2 percent to GDP growth in 2020, allowing growth to reach 1.8 percent, even as the deficit spikes over the next few years pay for the tax cuts of 2017.

But there is likely to be damaging disagreement over how to pay for the bill and a Democrat House will be reluctant to support legislation that might advance Trump's re-election chances in 2020.

Meanwhile, more fiscal stimulus could cause the economy to overheat, which might lead to a harder end to the current economic cycle.

Donald Trump unterzeichnet Executive Order
Image: Reuters/K. Lamarque

The Democrats may also be able to end Republican hopes of repealing Obamacare, which will impact spending.

Revenues

Tax or borrow? Trump suggested two weeks ago that he was looking into a 10 percent tax cut for the middle class. The GOP has since talked down that suggestion. Meanwhile, the amount of US treasuries on the market by next year will be double the amount in 2017, according to Deutsche Bank. The tax cuts were mostly responsible for the budget deficit in 2018, which increased 17 percent to a six-year high of $779 billion. Further debt increases could lead to the US running a risk of a downgrade of sovereign debt.

Unless the Democrats can partially repeal last year's tax cuts or pass a new tax on higher income groups, further spending will have to be deficit-financed.

If gridlock reaches the levels it did in 2011, government shutdowns or crises over the debt ceiling are likely. In 2011, when the US Treasury came close to a technical default on its debt, the S&P 500 dropped by 20 percent.

Monetary policy issues

Tensions in Fed-White House relations could ease, as Trump's outbursts about higher interest rates will have less clout. But don't count on it.

In the long term, continued stimulus will likely lead to the Fed continuing to raise interest rates so that Trump does not overheat the economy.

Interest rates are rising partly as a result of the economy doing, partly because of more new debt issues and partly as a result of the Federal Reserve.

'Trumponomics' — losers and winners in Virginia

The US midterm elections are not historically a big mover in the currency markets, but the dollar has been driven as much by politics as monetary policy since Trump arrived in the White House.

The currency rallied to a 14-year high at the beginning of last year, with Trump's fiscal stimulus measures expected at the time to filter through to higher US growth and more interest rate hikes.

Mixed control of Congress will probably cause the dollar to weaken, due to continued widening of the fiscal deficit and contracting of global liquidity.

Trade and tariffs

In his trade war with China, the president has largely managed without Congress involvement, though his updated trade agreement with Canada and Mexico will need congressional approval.

"The midterms will not soften US policy towards China," Loren Loren Puette, director of ChinaAg.org, told DW. "Accordingly, the US-China trade war will likely continue into 2019 barring some unforeseen breakthrough between the two sides."

Congress has little direct influence on trade policy in general, Gabriel J. Felbermayr, Director of the ifo Center for International Economics in Munich told DW. "To take the huge powers in trade policy away from the president, supermajorities would be needed, and this is not in sight," he said.

Democrats are also traditionally not less protectionist than the GOP. In particular, on China, there is bipartisan consensus on the broad orientation of policy. So, no softening there. "Rather, I expect more attempts to involve the EU in an anti-China coalition,” Felbermayr added.

US-EU trade issues

The Republicans' loss of majority in the House is likely to soften the US approach towards the EU: despite the president's fast-track authority, any deal requires consent of Congress, and this has become tougher now.

"The new House is likely to be a bit more EU-friendly than the old one," Felbermayr said. "Moreover, the president absolutely needs the House if he wants to financially compensate domestic losers from a trade war such as farmers. Any EU retaliation will fall heavily on this group. In sum, auto tariffs on EU imports have become somewhat less likely."

Sportolari of AmCham says he is "a little disappointed" with how the EU have dealt so far with Trump's actions on trade and believes more is needed from Brussels to progress the situation.

"The American Chamber was in Washington back in September, we had a meeting with Wilbur Ross, he told us clearly what the expectations were from the US side," he said. "I won't say that in Europe that we need to agree with all of that but we certainly need to be working intensly on strengthening what is the most important trade relationship that exists in the world today."

Impact on emerging economies

Most believe it is too early to have a clear idea of the implications of the US midterm election results on emerging markets. "The result indicates far more headwinds for Trump internally, so typically the reasoning would be a larger focus on the foreign policy side," Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

But, she added, Trump is far more unconventional and erratic than any president in history. "I had the impression that Trump in the past did not show a substantially higher focus on foreign policy if internal criticism increased," she said, adding that from a market perspective, a cautious wait and see approach is for now warranted. A key event in this respect might be the G20 meeting at the end of this month and in particular how the trade conflict with China develops in the immediate future, the analyst concluded. 

Why no one can win a trade war

 

Head shot of a man (Jo Harper) with grey hair and brown eyes
Jo Harper Journalist and author specializing in Poland