Economy threatens House Republicans in midterms

OPINION:

The Trump economy is delivering growth and investment in artificial intelligence, the stock market is booming and real wages are rising, yet many voters are unhappy.

If the Democrats flip the House, then President Trump will be constrained. Still, his overall economic legacy won’t be easily displaced.

Democrats could subject U.S. Immigration and Customs Enforcement to tougher guardrails but couldn’t do much to limit its funding. Senate Republicans, wary of their own electoral hides, have the president’s back.

The polls should tell them that dissatisfaction with the president stems mostly from his failure to curb inflation, not how he deals with immigrants.

Senate Democrats wouldn’t have the votes to repeal Mr. Trump’s tax and spending cuts, and only about half of his tariffs are subject to the current challenge in the Supreme Court.

If inflation and the job market improve over the next nine months, then the Republicans have a fighting chance in the midterms. Don’t count on that posse arriving.

Mr. Trump’s fiscal policies are largely a wash. His personal and business income tax cuts and new net spending increase the federal budget deficit a bit more than his tariff revenue potentially reduces it.

The economy doesn’t need more juice. After a tough first quarter last year, it has been growing at better than 4%.

A new chairman at the Federal Reserve will seek lower interest rates but will be frustrated. Since September 2024, the Fed has cut the federal funds rate, the rate banks charge one another to borrow funds overnight, by 1.75%. The bellwether 10-year Treasury rate, which is the benchmark for many business and longer-term consumer loans, is up about 0.5%.

The culprit is big federal deficits. Those have increased from 3.1% of gross domestic product in 2016 to about 6% this year.

At 1.4% of GDP, the Treasury’s borrowing needs tax the capacity of domestic and international capital markets, with China, Japan and the European Union borrowing more.

If Mr. Trump wants lower interest rates, then he and Congress need to raise taxes, cut spending and borrow less.

Even with lower interest rates, Mr. Trump’s tariffs and immigration policies would get in the way.

The tariffs are hurting American farmers — higher prices for fertilizer, equipment and other farm essentials — while those specifically aimed at China have halved soybean exports to the Middle Kingdom. China is now sourcing farm products more from Brazil and Argentina to insulate itself and punish Mr. Trump.

We hear a lot about tariffs disrupting supply chains, but other new taxes do that as well.

Governments must be funded. With modern social safety nets, broad-based revenue sources such as income and sales taxes are the norm unless a government sits on massive, cheap-to-produce natural resources and takes a cut (think Saudi Arabia).

The trick is to impose taxes in the least distorting way.

With tariffs, the rates should be higher on final goods than primary goods, or the same across the board, except perhaps for the things you can neither make nor grow in sufficient supply at home. For Americans, that’s coffee and, increasingly, beef, owing to droughts in the West.

Fifty percent tariffs on steel and aluminum and 22% tariffs on automobiles are the exact opposite of that.

Apparently, the administration isn’t thinking strategically about tariffs.

Manufacturing construction spending, a proxy for additions to factory capacity, and employment increased with President Biden’s industrial policies but are falling with Mr. Trump’s tariffs.

Pledges by countries and companies to invest billions of dollars in new factories may someday yield more jobs, but those won’t happen by November and will materialize only if leaders believe their deals will stick.

With Supreme Court challenges putting many Trump tariffs in harm’s way, those commitments become questionable.

Mr. Trump’s immigration policies add additional constraints.

Indigenous population growth and the legal immigration that his regime permits likely allow us to add about 50,000 new workers each month.

That’s a lot fewer than in the past, and it limits growth in industries such as agriculture, new home construction, health care, hospitality and high tech, where immigrant workers fill key roles.

In turn, that pushes up unemployment across the economy, especially among white-collar workers displaced by artificial intelligence.

Those stranded workers would be better able to find work if Mr. Trump permitted more immigration for the kinds of workers in short supply.

Beth Hammack, president and CEO of the Federal Reserve Bank of Cleveland, said she has been hearing from business leaders that higher input costs, including tariffs, may soon impel large price increases.

This year’s economy won’t look very different from last year’s: inflation around 3% and many white-collar college graduates in lengthy job searches or fearing losing the job they have.

We all know the parties of incumbent presidents generally lose seats in Congress in midterm elections. Unpopular presidents magnify those losses.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.