The Midterms Changed Washington. Will They Change the Economy?

Bloomberg Audio Studios.

Podcasts. Radio.

News.

I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that covers everything in the economic world of Donald Trump. I'm in Washington, D.C., recording this on Wednesday morning, just after those historic midterm elections last night.

First, Americans want Washington to bring down the cost of living. Second, Americans want us to clean up corruption in government. And third, they want us to check on Trump's chaos at home and abroad.

That was the newly incoming Democratic Senate majority leader, Chuck Schumer. And it's fair to say a blue wave several feet higher than most people have predicted has blown across the country. That's going to produce a very different Congress and Senate in the new year. We're not going to add here to the mass of folks picking through the results. But after a campaign that was dominated by a lot of negative sentiment about the economy, about the cost of living, I did want to think about what next, where next, what's in store for the U.S. economy in the final two years of President Trump's term, what's in store for economic policy, economic policy. ideas, either in the White House or the newly empowered Democratic majority in Congress. It's exactly

the kind of conversation we've always had on this podcast, but it also feels like the right way to bring this particular chapter of the show to a close. Since Donald Trump's re-election, this podcast has been called Trumponomics, following the impact of his economic policies, not just here in the US, but around the world. You might have noticed more recently, we've said it's about everything in the economic world of Donald Trump. And that world clearly extends well beyond what President Trump is or is not doing, and well beyond the USA. So from next week, we're officially widening the lens and going back to the original, humble name of this show, Stefanomics. New episodes will continue to drop every week, right here in this feed. Understanding the

forces driving the global economy and and asking what on earth is going to happen next. So stay subscribed and share with friends. But before we do that, for our final episode of Trumponomics, I wanted to bring back someone who has helped us think through quite a lot of the big changes in American economic policy over the past two years. Oren Kass first joined us early in the Trumponomics era, back in 2025, and returned a few times since then. He's the founder and chief economist of American Compass and the author of The Once and Future Worker.

He also served as a domestic policy director for Mitt Romney's 2012 presidential campaign. Oren, so glad to have you back on this morning where we're all slightly bleary from a late night.

Always a pleasure. Appreciate the chance. And I've got my iced coffee, so we're ready to go.

Good, good. And Josh Wingrove, another regular who was also working very hard last night, scribbling away as our senior White House reporter and Washington correspondent. Josh, thank you so much.

What a night. What a night.

What a night. Oren, I'm assuming that people will be listening to this after having heard a lot of post-match analysis of the results. But as I said at the top, I wanted to think about the economy over the next two years, big picture, what's it going to look like? And what are the sort of minefields or potential challenges that come with that economic landscape? for politicians on both sides of the aisle.

It's really interesting that it feels to me like we're reaching something of a kind of final climactic stage of this conflict that has really been running for essentially a decade in the United States, where a lot of the top line economic data that you tend to focus on, unemployment rate, GDP growth, stock market, these all look pretty good.

And yet the American people are saying, we are very unhappy. And policymakers whose traditional toolkit has been things to make GDP go up and make the stock market go up and make the unemployment rate go down have really been out of answers. And the affordability fight then is the ultimate manifestation of this. We saw the Biden administration didn't really know what to do about it. We've seen the Trump administration come in, not really know what to do about it. We're about to see Democrats come into Congress and and not really know what to do about it.

Because the reality is, first of all, you don't actually want prices to go back down. If you don't like inflation, wait till you get deflation. But when people talk about affordability there, yes, there are absolutely higher prices at the grocery store and so forth. But in many respects, I think they're speaking to a much deeper disconnect between what they want from an economy, what they want in their lives, and what they're getting. And until one political party or the other figures out how to speak to that and address it, I think we're going to continue to see whoever's in office thrown out at every opportunity.

Josh, does that feel right to you?

Yeah, I think Democrats, the ones who are paying attention, know that these voters are borrowed, right? This was not a sweeping endorsement of democratic policy. This was a resounding protest of the president and the status quo. And the takeaway from that is that whether both parties will put their eye on the ball of the economy again. And I think for both parties, there are a lot of questions about whether that'll be the case. Democrats, of course, famously get distracted by other issues sometimes. And I think there'll be some members of the party that want to do other things, including, for instance, and we talked about this in recent days across Bloomberg, the question of impeaching the president that would take the eye off the ball

of sort of bread and butter type economics. But I think one takeaway for the Dems is that there was a scenario where they had a very small House majority and the DSA members and the progressives would hold disproportionate sway and that would really trap Speaker Jeffries as he tried to maybe get some sort of bipartisan deal done.

Of course, they blew it out of the water and now they've got in the 70s, last I checked, some House majority. So that has gone away. I think it's a license for Democrats to act authoritatively from the center or the center left as opposed to the progressive left. And that does create a lane. And for Republicans, I think Trump, it just comes down to the war. It really felt like the bottom started coming out when diesel shot up as opposed to gasoline, which would have been a high and fluctuating for some time. Now we're saying words we never thought we would say, like Democratic senator from South Carolina. It's just jaw-dropping results all across the country.

And we'll see. I think the president remains disinterested in tearing up what he believes his legacy is. And that is going to create, I think, narrower lanes than might otherwise be the case to act on affordability. We should also note that many of the president's trademark policies are little ticking time bombs that expire when he leaves office.

And so this Congress and the next one will have this question hanging over their head of how much of Trump's policies, tax cuts in particular, that they want to extend.

We've set the table to some extent. Oren, one of the reasons I wanted to have you on today is you were associated with a certain, many would say, more pro-worker Republican approach to the economy, which I think was part of the way that Donald Trump and others got elected. If he was going to try and be true to that, to the part of the economic populist agenda that was popular or remains popular, what should he be trying to do?

The answer is the same as it was when he took office. I was looking back at a piece I'd written on the eve of his first State of the Union saying, look, here's what you'd say and acknowledging it's probably not what he's going to say, which is he should be talking about an agenda of building. He should be focusing intensively on workforce development and helping more Americans prepare for skilled work in construction, in manufacturing, in resource development, all areas where there's huge opportunity and a shortage of workers.

He should be actually pursuing reindustrialization systematically, not in a slapdash way and putting in place very clear permanent programs that are going to give people confidence to invest in the U.S. I think there's a sort of segment of tax policy focused on encouraging productive investment that would be terrific.

But to Josh's point, focusing the entire first year on massive tax cuts for upper income household obviously wasn't going to do it. I think he could focus much more on immigration from a tight labor market perspective and not performative marching of people past the cameras, but actually enforcing the law at the work site, maybe even march a few CEOs before the cameras instead. And so that agenda has always been there. It is still there. That Trump has not chosen to pursue it to this point, I think, fairly raises questions whether there's any prospect of him doing it now. And on top of that, I think the one thing we haven't spoken to as much that is a strikingly high profile issue now is corruption. I can't,

in my memory, ever seen the kind of numbers of not it being the thing that the politicians want to talk about, but scoring as the single most issue crucial to people's vote that they care about. And again, there are many ways to run an administration to govern that do not raise those sorts of concerns. And I would highly encourage the White House to pursue them. These are all things in their control, but they would have to make those choices. And then the last thing to say is ending the war on Iran and just admitting that this has not worked and waiting longer is not going to make it work better.

Just on the first part of what you were saying about the rebuilding and the focus on skills and the manufacturing at home, you can debate how tariffs have affected some of these industries, but tariffs are now hugely unpopular, much more unpopular than when he took office. So even that piece, Oren, feels quite a challenge.

Respectfully, I don't think there's any question that conditions of those industries have improved significantly. We've gone through this interesting sequence where right after the tariffs, especially with Liberation Day, were put in place, all of the skeptics said, look at the PMIs, which are these procurement manager indices that sort of measure real-time sentiment within the industry. And those were low. Those have now risen repeatedly and consistently and are now at very high levels, suggesting a growing and optimistic manufacturing sector. Then it was, oh, look at employment.

Employment's going down in manufacturing as if people were going to turn around and just start hiring immediately for production lines that didn't exist. Now employment has been going up consistently for really since the beginning of the year. And so they're on to looking for new metrics to complain about.

So I don't think the story there is one of the arrow not pointing in the right direction. I think conversely, when you look at the pricing side of it, tariffs didn't have the kind of inflationary effect. people were concerned about. No one was talking about inflation out of control. I clipped a headline when the war started. It was after inflation, once again, a concern with war underway. I think that absolutely would remain a part of a coherent agenda. It would be important to talk about it and talk about what the goals are and highlight the positive data and celebrate the successes if you want to get credit for it.

And that's obviously not something the administration has been doing.

Josh, when you think of this new leadership coming into Congress and the Senate, if you accept that this is a borrowed vote, that people are still just angry about the cost of living, don't feel like politicians of either side are really delivering for them. What are the key areas where Democrats could be trying to build a bit more actual popularity and win back some of that sort of economic populist agenda?

Yeah, it's a good question. Another way of asking this is what are they going to do? What are their options? What levers do they have? And I was talking with Jim Messina, who Oren, remember, of course, was involved in the Obama campaign in 2012. He identified extending or expanding Affordable Care Act tax credits for as an early low-hanging fruit scenario. I think we'll see Dems pursue that. I think what might be lost in particular, if you're listening to this from outside the United States, is how significant many of the gains were in state-level races. Democrats really ran the table in a lot of states. They got new trifectas in terms of the House, Senate, and governorship.

In many key states, they broke Republican supermajorities. It's a huge sea change. And if you aren't paying close attention to America, you might miss how much influence state lawmakers can have over many of these pocketbook issues. And so I think we'll see Democrats at the state level moving pretty aggressively on some things that are within their bailiwick as well. On the corruption piece that Oren, I think, so rightfully mentions, some of the most successful Democrats last night married the corruption and affordability into one issue. Senator Ossoff, who won by, just a staggering number in Georgia, did that in particular. And Georgia's an interesting example of that.

Just a week ago, a week and a half ago, the head of Audi was standing in Georgia, pledging a new auto plant for the state with Trump that Trump was seizing on to try to get a boost. And they were bartering tariff deductions that still to this day haven't been specified that would apply to all the sectors.

And so we've seen Trump, even aside from the headline questions of tariffs, very willing, and frankly, increasingly willing to put water in his wine on tariffs and water them down and strike deals. As of now, we sit here, it seems in the next month or so, for instance, that he will make major changes to the tariff regimes for Canada and Mexico, as well as for auto imports.

And so there is low hanging fruit. Some of it Trump doesn't need Congress to do. But the question is, if you're Mark Carney, or if you're Claudia Scheinbaum, how much are you willing to give up for a now not only lame duck president, but historically lame duck president that just got his clock cleaned in the election to get a deal. Not really clear.

Lauren, how do you see that trade agenda? Chris Kennedy, a geoeconomics analyst who was looking at this, thought there wouldn't be as much energy behind the trade agenda, but he also thought things like tightening up those sort of rules of origin constraints, which have allowed a lot of Chinese value added to still be entering the U.S., but via Mexico, via other places. Listening to Josh, it sounds like we could be seeing more of a pivot away from that from the White House. What would you predict or even advise?

I think to Josh's point about, for instance, the auto tariffs, that strikes me as much more consistent with what Trump has been doing all along. In pharma already, he established a structure where you can have lower tariffs now if you're in the process of moving production into this country. I think that's very similar to what you see him doing now potentially with autos. I think when it comes to Mexico and Canada, the funny thing is that the administration is now in a very different position with the two of them. They're quite far along in negotiations with Mexico and at an absolute standstill with Canada. I guess I don't necessarily foresee that changing. It is a function of very different postures on the part of Mexico and

Canada and from the U.S., a perspective that not only has it held since 2008, day one of all this, but that it is increasingly winning over allies on, which is the need to hold the line on China. The funny thing about Canada saying it didn't like the US posture and was going to run to the EU instead is that the EU is in the process of switching over to the US posture and saying it too needs to impose tariffs on Canada. So I think there's a real risk in general, as you described at the outset, the post-match analysis There's a real risk in confusing post-match analysis for the actual state of the world. And I think everybody is going to use the next week to take whatever their preferred position was on Monday and explain

how Tuesday proves it right on Wednesday. But the reality, and this goes to Josh's point about the historical nature of the result, is that the Republicans don't get to the point where we still don't know the outcome in Mississippi because Trump took this or that approach to tariffs, right? This is a sort of broadside repudiation of the way Trump and the administration have governed, and hopefully they will take that to heart. It doesn't change the reality that Chinese overcapacity is a massive economic problem for all Western economies, and they're all going to figure out what to do about it. And so I would expect to see relatively more continuity on that sort of thing. In my mind, the really interesting question is the Democrats actually now have

some power of their own. What are they going to do, right? It was very easy in the minority to talk a big game about how they are now the free traders. Do they actually want to stake their own posture on we're the ones who support free trade with China? I suspect we'll see less of that when their votes count for something than when it was merely a matter of kind of complaining.

And they're actually raising a bit of real money.

Yes.

They're raising a lot of real money. And Democrats have been silent on which ones they don't like and which ones they like. I think they've been pretty clear that sort of wanton nature of the 338 tariffs in particular, they don't like that. They don't like Trump sort of wielding it at the flick of a pen. But for example, since we mentioned it, Ossoff told me in this campaign, his campaign did, that they support targeted tariffs on key industries.

That sounds a lot like steel tariffs probably sticking around. And so I think a lot of people are putting in other countries and other capitals are putting eggs in the basket of, oh, Democrats are not a free trade party. Yeah, like maybe. It's very easy to be the free trade party trajectory-wise compared to Donald Trump by just taking off a little bit here and there, but still keeping a ton of it. The deficit is huge. Democrats want to do stuff. They're going to like that revenue. I just don't think all these tariffs are going away. And we saw this in 2020. Joe Biden campaigned against all this and basically left every one of Donald Trump's tariffs in place.

To Oren's point, you won't have heard it, but a couple of weeks ago, I actually had on this podcast about an interview with the German chancellor, where I actually said, you sound just like Donald Trump. It was coming out of a German chancellor's mouth, a description of the trade situation, which was very much, we judge fair trade by the size of the surplus. And there's a very large surplus and we'd want to get it down again.

But I had one other thing about that, because I think that's a really important point. It's the political leaders in Europe. It's also the economists. Paul Krugman recently said, we had to admit that he'd changed his own thinking on this, and he was struck by how many of his colleagues had as well. And I think that's something that you're going to see in a lot of areas. Again, the fact that the country is not pleased with the Trump administration is quite obvious. That doesn't tell you really anything about not just direction of trade policy, but what is going to make sense. on immigration policy, what is going to make sense when it comes to, as we were talking about, issues related to workers and labor and

so forth. The reality is all still there, and the unpopularity of what the Republican Party was before Trump is all still there. I think I saw Nikki Haley on TV last night, former South Carolina governor, saying this proves we just need to go back to economic freedom and tax cuts. And again, it's her prerogative to say that because that's what she wants. But I think certainly if the party tries to take that lesson and think, if only we were back in the George W. Bush administration, they will remember very quickly that it was the midterms of George W. Bush's second term that last looked exactly like this.

I guess we're back to that sort of sense of the political situation that Oren was painting at the beginning, a sort of none of the above feeling that's coming from voters. It strikes me, you're describing a world in which the economy is actually by the normal macro measures, doing better than you would think if you looked at the sort of economic sentiment from voters. And the really unpopular economic policies are the ones that both of you seem to agree are not going to change. Tariffs are unpopular, but they're also the things that the Democrats are probably not going to try and unpick. So, Oren, how much is the state of the economy going to affect how people feel in two years' time, given that there doesn't

seem to be much leeway for... policy moves to really be changing the dial on the way voters feel about the economy? I mean, is it going to come down to whether or not we have a stock market crash that significantly changes the trajectory of the economy between now? Is it going to come down to how much interest rates can come down? What happens to oil prices? All these things that may not be really in the control of either side of the aisle.

It's an interesting point that insofar as the macroeconomic measures look fairly good right now, we should keep in mind how far we have to fall. In other words, we could very well be in a recession in 2028. Unemployment could be 7% in 2028. Stock market could have crashed, et cetera, et cetera. And those are all sort of scenarios that are very much important, I think, to keep in mind to the downside. I think what everybody is waiting for to the upside is not some immediate change in the figures. And that's the key thing to recognize is there's nothing that the Trump administration can do or the Democrats could do in the next two years that is suddenly going to unwind everything that happened in the

last 40 that has left people feeling so unhappy, which means that the real task is for one side or the other to actually grasp that, which I don't think either does very well right now, and then actually speak to American voters about it and provide a positive aspirational vision for where they're going to go from here. And this is where I always point to the Reagan example, because Reagan comes into office in 1981 and actually induces a sharp recession. Volcker takes, technically Volcker takes the Fed rates way up. You have a very sharp recession. You have stock market down 40%. You have unemployment up to 10%.

When you get to the midterms, things don't look good at all. Reagan did not do well in the midterms. But by 1984, he's winning the biggest reelection, I think maybe since George Washington. And that wasn't because unemployment was still 7%. The stock market had barely recovered in real terms. But he had actually explained what was wrong, what he was going to do, and why, and what it would look like when things started turning around. And he did do those things, and people could see that things were starting to turn around. And that's the formula for actual success in American politics. And unfortunately, it's been a while since we've had leaders that could do that.

So Josh, if you think about people who can tell a story about the economy, about the future, and be speaking to some of these kind of pocketbook concerns, as we've talked about, but putting it on a higher plane and making people feel it's like part of a broader mission, some of the things that Oren have just described. Some of the people coming into Washington now sounded very different and won certainly different kinds of states, Kansas, other places.

They had a different message. Is there a chance that they will also be better able to take on this challenge that Oren has mentioned?

The thing about a wave is that you bring in people that didn't necessarily expect to be there, in many cases, maybe aren't particularly avowed of the orthodoxy of the moment in their party. I think Democrats have a lot of elbow room to redefine who they are. And looking at the people that won, there are a lot more either moderates or more, let's call it solutions oriented, not necessarily nonpartisan, than there are sort of fire throwers and that kind of thing. And I think this is true also, for the 2028 field, right? So many of the top Democrats who are going to run are not, with the notable exception, of course, of Representative Alexandria Ocasio-Cortez, who could run and be the progressive champion. But so many of them are

governors who've really, you know, governed from the middle, more or less, or senators who've done the same. And we should note on the other side, too, it's like, who's going to run for the Republicans in 2028? DeSantis yesterday was sending signals that he's not interested. Others have sent signals that 2032 might be their best shot. All expectations are we continue to hear that J.D. Vance will run.

Vance agrees with Trump on a lot of these things, right? He is an economic populist. That's where the overlap is between them that led the president to pick the vice president in the first place. And so I think we will see contested ground into the 2028 cycle on so many of these issues because Vice President Vance does not adhere to Republican orthodoxy or at least classical conservative Republican orthodoxy on so many of these lunch pail sort of bread and butter issues.

So I had two questions before we go because we're going to run out of time. The first one goes directly to that. In that environment that, Josh, that you've just painted, yes, corruption is going to be potentially a big focus and there's going to be a debate among the Democrats about how much to do investigations and other things.

Is it conceivable that alongside that you have in this kind of problem-solving spirit a serious effort to actually work with the White House to do something? Or are you much more likely to be in the realm of sort of symbolic things that are put before the White House and are then going to be vetoed?

I think Democrats need to at least appear that they're acting in good faith to get stuff done. Whether the president meets them there or not remains to be seen. But I think they will pursue these things. And there'll be interest from Republicans in doing some of it, I think. And that there are windows, including with the debt ceiling pinch coming mid-next year to get to some sort of a grand bargain at some time. Will they get there?

I don't know. On the issue of the war, that's trickier. The president doesn't seem to know how he wants to get out of it. I have a hard time imagining Democrats playing true hardball by threatening to withhold money for the Department of Defense. It just gets politically toxic. Maybe they'll go down that road.

Maybe.

But I think that ball is more in Trump's court.

Oren, do you think anything gets done? Or what are the areas where they could meaningfully collaborate if they were listening to what's needed and what people are asking for?

As we were talking about earlier, from the tariff perspective, I think more broadly, the reindustrialization agenda is quite bipartisan. We saw this with things like the CHIPS Act to bring back semiconductor manufacturing. think Democrats are broadly supportive of what the administration is trying to do on critical minerals or shipbuilding and so forth. And so I think there's a world, and frankly, those areas where not all Republicans in Congress were all that supportive. I think there's a world in which you could see a lot of progress, as we saw in the second half of the Biden administration, on those kinds of issues. I also think there's a budget deal to be had. The president and Secretary Besant

showed during the One Big Beautiful Bill negotiations that they were perfectly open to revenue increases. Hill Republicans were not. But if they're not the ones driving the train, a deal that does raise revenue, that does do something on the spending side, could be in both sides' interest. So those are the places I would be looking. And then I think just to Josh's point, I think the president just owns the Iran war. I don't think the Democrats don't have to worry that if they don't somehow end the war, they're going to end up being blamed for that. Conversely, if they do force an early end of the war, it'll be easy to point to them as somehow surrendering.

And I think that remains the millstone around the White House's neck until they decide to take a different course.

I think we will also see the president continue to scream about the Fed. But one takeaway from the results is that he can't confirm a new Fed governor. And so I think this takes a lot of the air out of the Lisa Cook thing and some of the other more extraordinary things that they've been trying to do to put pressure on the Fed a little bit, but he's still going to be complaining about it.

Oh, and it's interesting what you said about the willingness to have tax increases. We'll see if that works out. But Besant himself, and a colleague was just saying this to me, if you compare and contrast Scott Besant and the kind of his level of popularity on the Hill, shall we say, relative to even Steve Mnuchin, who actually in a similar circumstance was able to do deals on the Hill Do either of you think that Scott Besson is going to be the one to broker one of those things? Josh is shaking his head very firmly.

I think Scott Besson's brand of partisanship will be a little out of the era in the next couple of years.

Besson refuses to talk to us and also many other journalists who are dedicated to covering the economy. I should state that at the outset that we're possibly a bit biased currently.

In my experience, personality takes a backseat to political necessity in most cases. And so if it is in both sides' interest to get something done, I suspect they will work toward doing that.

I'll say this on Besson. He's not the top of the subpoena list, right? Hegseth is. I'm sure they'll go after Howard Lutnick. I'm sure they'll go after RFK Jr. So Pessin might be the only one with a calendar free available to do some of this stuff.

So last question, because this is the last episode of at least the podcast, Trumponomics, Oren, you were talking about the Reagan era. Reaganism has particular connotations. It's remembered in a certain way, rightly or wrongly. What of Trumponomics will survive and be remembered in 5, 10, 15, 20 years?

I think we'll look back on Trump as a transitional figure. I always say there is no Trumpism. There's just Trump. He is one of one. He, I think, to some extent, put the final nail in the coffin of an expired Reagan consensus. But I don't think you can infer a coherent ideology that he has provided to carry forward, I think we're about to enter a very sharp elbowed fight for what is the post-Trump future of the party. And there are those who want to carry forward the lessons of the Trump era and try to build something that's more pro-worker, more skeptical of free markets. And there are those who want to go exactly back to what the party sounded like in 2014 and May the best plan win.

Let the discussion commence. Josh, when you're looking back on your youth as a dedicated Washington correspondent for Bloomberg.

Way, way back.

Trumponomics.

The president has completely re-scrambled the egg in terms of coalitions in this country, in part by appealing to working class voters with his brand of economic policy, including targeted tax cuts, but also this reshoring effort. Again, he and Vance are in lockstep on that. I think an element of that will stay in the Republican Party and even will stay if Vice President Vance is the nominee and is not successful in 2028. And on the Democratic side, I think it's as fraud or even more fraud. They are in the middle of a true ideological evolution and deciding how big their tent is and what power they want to give to the progressive wing. And this result papers over that a little bit. Because of sheer number,

but the numbers in 2028 are probably not going to be this, at least in the House. And so it'll rear its head again. But I think both parties are moving towards a direction of more populist, if you will, types of conversations. But reality is biting, too. And the deficit in particular is looming. And I think that's going to constrain them doing things that they want to do, whether it's further tax cuts for Republicans or added entitlement programs for Democrats that they want to do, in particular those that target affordability measures.

Something that Stephanomics will no doubt talk about among many, many other topics, a much wider array of topics. Oren Kass, Josh Wingrove, thank you so much for joining me.

Thank you so much. Thank you.

Trumponomics was produced by Sam Asadi and Moses Andam with editorial guidance from Megan O'Neill from Bloomberg Economics. Sound design was by Blake Maples and Kelly Gary. And Amy Keene is the executive producer of Talk Podcast with Cheryl Brumley, the head of Bloomberg Podcast. To help others find the show, please rate and review us highly wherever you listen.

Thank you.

The Midterms Changed Washington. Will They Change the Economy?

Kapitelklicken springt direkt hin

Shownotes

Transkriptvom Podcast bereitgestellt · Zeitmarken springen hin