The 2018 mid-term elections are coming up in November.  We call them mid-term elections because we are using presidential elections as a base point.  They are often seen as a referendum on the president.

It must be realized that the mid-term elections tend to go against the party that occupies the presidency.  Since Trump is a Republican, the Democrats seem to be favored to gain seats in this year’s election.

In the case of Trump, I don’t think many, maybe even most, Republicans in DC like Trump.  But since the Republican grassroots tend to like Trump, the Republicans in Congress are forced to go along with Trump’s agenda.  They can’t be seen as opposing him too much, or else they risk their job, particularly in Republican primaries.

I don’t think the mid-term elections are completely a referendum against the president, even though they are viewed this way.  It is just that some voters want balance.  They don’t want one-party rule.  They want some opposition against the most powerful person, or at least whom they view as the most powerful person.  Some of this is conscious, while some may just be instinctively voting this way without deeply thinking through it.

In this respect, the voters are not completely wrong.  We typically are better off when there is not one-party rule across the presidency and Congress.  When Bill Clinton was president with a Republican Congress, there was actually some spending restraint.  On the other hand, when we had Bush and the Republicans controlling Congress, we got massive spending and deficits.  We also got massive entitlement expansion (Medicare prescription drugs) and war under Bush, but that was more of a bipartisan effort. Under Obama and the Democrat Congress, we got Obamacare.  Once the Republicans took over Congress, we didn’t get any more massive expansions in spending.

This certainly isn’t a perfect science, and the government can easily expand under any combination. But there is a tendency to have a little more gridlock when there is not one-party rule.  I view this as positive.

There have been some good things with Trump domestically so far.  The cut in taxes, particularly corporate taxes, is positive.  The repealing of regulations is positive.  However, the spending and deficits have exploded that much more under Trump, and his tariffs are a disaster.  On foreign policy, he has made some peace motions toward Russia and North Korea, but he has been bad in many other ways, including the continuation of wars in the Middle East.

For the mid-term elections, there are basically three possible outcomes.  One, the Republicans maintain control of both houses of Congress.  Two, the Democrats win both houses of Congress.  Three, the Democrats win a majority in the House of Representatives, but do not win enough seats to gain a majority in the Senate.

It is technically possible that the Democrats could win the Senate and lose the House, but this is highly unlikely.

Perhaps the best-case scenario for liberty is that the Republicans lose the House but keep a majority in the Senate.  This would provide some opposition to Trump, although the opposition might come on all the wrong issues.  Keeping the Senate for the Republicans would likely ensure better potential candidates for any more Supreme Court openings, but even here we can’t be certain.

So what about the economy?

In short, I don’t think it is going to make much of a difference what happens.  If Trump and the Republicans want to get more tax cuts through, they better do it now.  If the Republicans somehow are able to hold a majority in the House, I think it will be a slim majority.

Trump likes to take a lot of credit for the booming economy.  Many voters will credit or blame the president for the economy. I think this is incorrect on all fronts, as the Federal Reserve has a much bigger impact than the president. It also has to do with luck and the timing of the boom-bust cycle.

I understand why Trump is taking credit for the economy, especially given his ego.  But he is really going to regret it if the economy tanks.  It will be really hard for him to deflect the blame because he is trying to take credit for everything good now.

The mid-term elections may add some uncertainty, which the markets (i.e. investors) tend not to like.  But they can also get over uncertainty quickly, just as they did with the election of Trump in 2016.

I think whatever happens with the economy is basically baked into the cake at this point.  There have been malinvestments from the Fed’s loose monetary policy, particularly from 2008 to 2014.  Sure, little things can impact the timing of when the downturn finally comes and just how big of a downturn it is.  If Trump keeps piling on tariffs, it isn’t going to help the economy.  Still, I maintain that the Fed’s policy is the most important.  And even there, the Fed cannot necessarily prevent a recession, even if it reverses course on interest rates.

I may do another post about the mid-term elections before they happen, and maybe a post after the results.  But this is more of a curiosity.  I don’t think it will have a deep impact on the economy.  For that, I’d rather watch the yield curve.