WASHINGTON (AP) — Voters sent a strong election-year message to the new Democratic majority in Congress and president Donald Trump: Repair the damage inflation has done to the economy.
Trump, who campaigned on the idea that a Democratic victory in midterm would trigger an economic depression similar to that of 1929, argued that the economy was booming. Since his party lost in Tuesday’s vote, he has said he is willing to work with Democrats in the House and Senate, even though it’s not something he’s done much of in the past.
“I’ll probably get along with the Democrats, unless they want to be destructive,” Trump told reporters last week.
After Friday’s strong jobs report showed that employers added 165,000 jobs and the unemployment rate fell to 4.1%, Trump was defiant. “Democrats can control Congress, but I will NEVER stop fighting for you, and I will VETO anything that hurts America,” he said in a text message to his supporters.
The Democrats are seeks to check Trump’s power and are preparing for early fights over public spending. Other challenges include chronic budget deficits, tariffs, artificial intelligence and difficult choices about a social security system that could run out of money as barely six years old.
But as long as rising prices continue to make middle-class life less affordableboth Democrats and Republicans run the risk of angering and alienating voters in the next election cycle.
“Until inflation and interest rates are brought under control, the likelihood of electoral swings will remain consistently high,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget.
Americans want lower prices
Trump’s tariffs and war against Iran which he launched in February helped push the consumer price index to 3.7% per year. The president also tried to intimidate the Federal Reservean independent body responsible for keeping inflation low, to significantly reduce its benchmark interest rate in a way that could have worsened inflation.
The standoff between a Republican White House and a Democratic Congress gives the Fed more room to maneuver, which could limit its ability to bring inflation lower. The 2% objective which he has not achieved for almost six years.
“I think one of the surprise winners on Tuesday was the Fed,” said Douglas Holtz-Eakin, an economist and president of the American Action Forum, a center-right party.
The Democratic Senate could block Trump’s ability to fill potential vacancies on the Fed board, Holtz-Eakin said, removing “Trump’s incentives to meddle with the Fed” and paving the way for Kevin Warsh, Chairman of the Fed “follow your instincts and reduce inflation aggressively.”
Trump claimed that the costs of oil, gasoline and diesel would all fall. once the war in Iran is over. The problem is that he refuses to say when and how the war will end.
John Cochrane, an economist at Stanford University’s Hoover Institution, pointed out that the Fed’s efforts to fight inflation would be helped if the federal government reduced budget deficits.
“This requires monetary and budgetary restrictions,” he said.
The federal government continues to borrow about $2 trillion a year
The American government continues to accumulate debt because tax revenues fall short of growing spending on Medicare, Medicaid, Social Security, and other programs. Pay interest on the national debt now exceeds $1,000 billion per year and exceeds military spending. The problem could get worse because investors have raises interest rates charged on the public debt over the past year.
Neither the White House nor Democrats have come out in favor of spending cuts. The president wants 500 billion additional dollars per year for the military, while some Democratic candidates have pushed for restore Affordable Care Act subsidies which became obsolete under Trump.
Since August, Treasury Secretary Scott Bessent has repeatedly said the administration will present a plan to reduce the annual budget deficit by about $2 trillion. Bessent is working with White House Budget Director Russell Vought on cuts they are calling a “fiscal consolidation plan,” which will be released after the election.
Reducing the deficit would likely require a combination of tax increases and spending cuts, Goldwein said. But he said the simplest solution would be to cut Medicare spending in a way that saves money for both the government and patients.
“It’s not rocket science,” he said. “The most important thing you can do is reduce health care costs and find policies that reduce Medicare costs, which will reduce deficits and interest rates.”
AI could fuel stronger growth, but voters worry about the technology
When Jason Furman, an economist at Harvard University, thinks about the most important economic issues facing the United States, AI is at the top of his list.
“This is the most obvious investment boom this country has ever seen, or maybe second only to the railroad boom” in the late 19th century, Furman said.
Using AI, Furman built an economic analysis tool called Econvitals that replicates some of the work done when he was chairman of the White House Council of Economic Advisers during Democratic President Barack Obama’s administration.
Econvitals analyzed construction spending data on Tuesday and found an 80.6% increase in data center construction over the past year, while spending on construction of homes, schools, factories and offices declined.
The stock market sold last week on fears that Democrats could restrict the construction of data centers and impose guardrails on AI. But the American economy still needs technology to continue to fuel its growth, today and tomorrow.
Trump has been vehement in promoting the sector and has taken action non-intervention position on regulating AI, insisting that existing laws and voluntary agreements signed by tech companies are enough. He has ignored public concerns about the risks of job losses and large-scale cyberattacks, but a majority in the AP Voter Poll, a broad survey of the U.S. electorate conducted in all 50 states, says AI does more harm than good to the economy.
The dilemma is that AI helps propel demand in the economy and support the stock market. If these rates fell, there could be less consumer spending, lower growth, and many Americans feeling worse off financially.
“Anytime you have a single strength in an economy, you also face a big vulnerability,” Furman said.
Social Security must be saved
Senators who won a six-year term last week will face the political challenge of working with Trump’s successor to find ways to save Social Security, which is expected to be unable to pay full benefits at the end of 2032.
The removal of the social security contribution ceiling and the increase in the retirement age are measures among the possible lifelines to sustain the program which provides income to older Americans and people with disabilities. But any changes will likely have to be bipartisan to get enough votes to pass the Senate, because Social Security reforms cannot be achieved through party-line votes under the reconciliation process.
Sen. Elizabeth Warren, D-Mass., said she saw an opportunity earlier this year to improve Social Security when she heard Sen. Bernie Moreno, an Ohio Republican, talk about the need to lift the payroll tax cap. “I contacted him within a few days,” she said in an interview this summer. The two senators released a plan that is still being formulated into law.
Warren, who worked with Republicans on legislation this year to encourage the construction of more housing, said other bipartisan efforts failed because Republican lawmakers were afraid to thwart Trump.
But with Social Security, we must act now. Experts say “checks to seniors will decline by almost a quarter” after 2032, Warren said.
“Think about what this means, literally, for millions and millions of Americans who rely on these Social Security checks, or whose parents depend on them. And Congress is doing nothing,” she said.
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