The financial markets had a very strange take on the 2016 election.
It was clear, through the campaign, that a Trump win was considered a bearish event. When news happened that made Trump more likely to win, the markets fell. This was true as late as election night. Consider the MarketWatch headline from November 8, 2016 at 11:42 p.m.: “Dow futures plunge 750 points as Trump takes key battleground states.”
That sentiment would change a few hours later: Trump gave a quasi-normal victory speech, and the markets surged upward, beginning a love affair with the president that would continue through 2017. It seems investors realized all at once Trump probably wouldn’t blow up the world, but probably would cut their taxes.
But what does this mean for the markets and the 2018 election? If they ultimately liked a Trump win, will they dislike it if a Democratic Congress is elected to oppose him? And if they do, will that dislike reflect a negative outlook for the whole economy — or just for the financial interests of stockholders?
To discuss that, I reached out to four of my go-to economic policy experts, two from each side of the aisle. They had some disagreements, but there was a consensus: The markets have gotten most of what they wanted out of Trump, and they’re likely to keep it even if Republicans lose one or both houses of Congress. So, this election’s effect on the stock market is likely to be modest, and its effect on the real economy even smaller.
It’s not that the election won’t affect the economy at all.
Doug Holtz-Eakin, the president of the conservative American Action Forum and a former chief economist at George W. Bush’s Council of Economic Advisers, has one economic policy hope if Republicans hold Congress: that they will extend “expensing” provisions of last year’s tax bill. These provisions provide more favorable treatment to businesses that make capital investments, and they’re probably the most pro-growth aspect of the bill, since they provide a tax benefit only if a business makes new investments.
The lower corporate tax rate does less to encourage growth because it cuts taxes on new and old investments alike. But Republicans chose to make the lower rate permanent, while the expensing provisions are only temporary.
Dean Baker, senior economist at the liberal Center for Economic and Policy Research, worries a Republican Congress would make good on Mitch McConnell’s desire to cut entitlement spending. This would reduce personal income, especially for seniors, discouraging consumption and growth.
But overall, the fiscal picture is likely to look pretty similar no matter who wins: Big deficits for the foreseeable future, unless rising interest rates force a conversation about deficit-cutting. (Unlike Baker, I doubt McConnell is going to deliver Medicare cuts in the next Congress, much as he might like to, for the same reasons he failed to deliver them in this Congress.)
“If Democrats win, you’re more likely to see a deal of Trump spending for Democratic spending,” said Jason Furman, a professor at Harvard’s Kennedy School of Government who served as chairman of President Obama’s Council of Economic Advisers. “If Republicans win, you’re more likely to see tax cut version two. Which of those is more fiscal stimulus? Probably the Republican version.”
Tony Fratto, who was an economic spokesman in the Bush White House and Treasury Department, worries a divided government will bring back the “crisis budgeting” that defined much of the Obama administration’s relationship with Congress, most notably the debt-limit standoff that led Standard & Poors to downgrade U.S. sovereign credit. Adding Trump to that negotiating mix could further increase the risk that a standoff would lead to an accidental default.
But importantly, this is also a risk if Republicans narrowly hold the House of Representatives, with a smaller and more extreme caucus that would be hard-pressed to come up with 218 votes to raise the debt limit. Indeed, Holtz-Eakin says he thinks deals to continue paying U.S. government obligations might be easier to strike if the government becomes divided.
Trade is another issue where it’s unclear which outcome is better for economic stability. Baker — normally something of a free-trade skeptic, but not a fan of the president’s haphazard “trade war” approach — worries a Republican Congress will let Trump’s worst instincts on the issue run wild.
“To date, the costs to the U.S. economy have been very limited, that will likely not be true if Trump continues unchecked,” he said.
But Furman doesn’t see a big difference either way on trade, because the president’s legal authorities on the issue are so broad — Congress would have to pass laws to strip him of the power to do what he wants, and that’s not likely with either a Republican Congress or a split one.
Fratto is worried Trump will try to jam Congress into approving his revised, somewhat worse (in Fratto’s view) NAFTA deal by announcing he is withdrawing from the old NAFTA before the new one is even approved. But Holtz-Eakin notes Trump doesn’t even have final signatures on his new deal from Canada and Mexico, which still want Trump to lift the metal tariffs he’s so attached to, so he’s not sure there will even be an agreement to send to Congress.
All of which is to say: Who knows how the electoral outcome will change the trade outlook? Maybe Trump will be able to work with a split Congress, aligning with some trade-skeptical Democrats like Ohio senator Sherrod Brown, to get added support for his trade agenda, or maybe Democrats will be eager to deny him wins wherever they can. Or maybe he’ll just ignore Congress altogether and focus on his unilateral powers.
Then there is the elephant in the room: the Federal Reserve, which is likely to have much more effect on the economic outlook over the next two years than Congress will. Trump has correctly identified the Fed’s rate hikes as actions that are strengthening the dollar, raising the trade deficit, and possibly setting an upper bound on how hot the economy can get.
But short of a drastic action like trying to fire the Fed chair — and who would Trump even replace him with? — neither Congress nor Trump is likely to have much control over the Fed’s actions, though Baker worries Trump will try to assert control in increasingly disruptive ways.
All told, that leaves a relatively small set of macroeconomic impacts from an election that obviously has vast importance to the country and the public. It matters a lot who wins — but that doesn’t mean it matters a lot for America’s GDP.
“I think the difference will matter more for equity prices than for the economy,” says Furman. “Because equity prices depend on both the size of GDP and the share of GDP that goes to owners of corporations. I think the main difference between Republicans and Democrats is how low taxes will be and how low regulations would be. So, I would expect Republicans to be positive for equities but not for the right reasons.”
A previous version of this article incorrectly identified Dean Baker as the president of the Center for Economic and Policy Research. He is a senior economist at the organization.