Following the midterm elections, pundits are scrambling to explain how Republicans failed to capitalize when many issues favored them. Heading the list were voter worries about high inflation, the weakening economy and rising crime.
How then were Democrats able to overcome such formidable obstacles? Politicians would do well to heed the insights of documentary filmmaker Michael Moore. He predicted not only Donald Trump’s win in the 2016 presidential election but also that Democrats would fare much better than expected in the 2022 midterms.
In an interview with The Guardian before the midterms, Moore addressed the issue of “political fatalism” that the party in power necessarily does poorly in midterm elections. He cited three examples in which political norms were wrong. First was the vote in Kansas this summer to keep abortion legal. Second was the win by a Native American Democrat in a congressional election in Alaska. Third was the defeat of a far-right incumbent for the board of education in Boise, Idaho, by an 18-year old high school senior and political activist.
Republican pollster Frank Luntz distilled what happened when he observed that voters are “tired of crazy” and long for a return to normalcy. Heading into the midterms, his main concern was there could be a dozen statewide races decided by less than 1 percentage point of the vote in which the losing Republican would deny the results. Now, the clear message voters sent to Republicans is to reject the election deniers if they want to regain the White House and Congress.
I concur with this assessment but believe there is a message for Democrats, as well. Namely, the big-spending proclivity of the progressive wing needs to be reined in if they wish to retain power.
The guiding principle that progressives such as Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) embraced is based on the concept of Modern Monetary Theory (MMT). It contends that government programs to build infrastructure and tackle climate change and social inequities are costless when there is slack in the economy and interest rates are near zero. Although President Biden campaigned as a centrist, he wound up embracing this principle after the Democrats unexpectedly gained control of both houses of Congress.
A 2019 article by The Economist posed the question: “Is Modern Monetary Theory Nutty or Essential?” It noted that eminent economists such as Paul Krugman and Larry Summers dismissed it as “Calvinball” (a game in which players may change the rules on a whim) or a new brand of “voodoo economics.” Yet, the concept was alluring to Democrats when the COVID-19 pandemic hit the following year.
According to economist David Shulman, the Democrats remembered the lessons of 2009, when the $800 billion fiscal package enacted was woefully lacking in dealing with the Global Financial Crisis (GFC). However, they failed to recognize that the pandemic was a completely different type of shock: While the economy plummeted when businesses were shuttered, it rebounded quickly when businesses re-opened. Consequently, they wound up fighting the last fiscal war by enacting programs that were four times larger. Together with a highly expansionary monetary policy, the seeds for a resurgence of inflation were sown.
With interest rates back to levels before the GFC, there is now less scope to pursue expansionary policies if the economy slips into recession. Moreover, the tripling of federal government debt to $32 trillion today implies a sizable increase in debt-servicing costs in the years ahead. In this respect, it would be crazy for Democrats to act as if this were normal.
Beyond economic considerations, there are political reasons for Democrats to embrace prudent fiscal policies. Namely, voters resent being taxed to finance programs, especially when they have no say in how funds are allocated. The obligation of the government is to ensure that taxpayer money is allocated both efficiently and fairly.
President Biden’s agenda was too big and too bold. While Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.) bore the ire of progressives for pushing back on the size of Biden’s programs, their stance has been validated in light of what has happened.
The looming issue is how the two parties can get away from crazy and return to normal. This is critical because the party that figures it out first has the best chance of winning in 2024.
The Republicans face a more difficult challenge than the Democrats for two reasons.
First, the process for nominating candidates in primaries is dominated by the extremes of both parties. Normally, to win general elections, most candidates will gravitate back to the center. But Donald Trump was different in that he governed by appealing to his Republican base throughout his tenure. This cemented his standing with rank-and-file Republicans but also made it more difficult for Republicans to win congressional elections.
Second, if the Republicans gain control of the House in the 2022 midterms, they will be in position to block further spending initiatives by Biden and congressional Democrats. In the process, it could make the Democrats seem less extreme. Ultimately, however, one would hope that Democrats will realize on their own that the days of fiscal profligacy are over.
Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”