More on the implications of the 2014 US midterm elections

In my last post on what the US midterm elections mean, I wrote that the election was a referendum on the President’s leadership and that he had failed that referendum. It is not the President’s policies per se that have caused voter disenchantment. It is the underlying weakness of the economy for the US middle class. I also concluded that the Republican accession to power in both houses may be negative for consumer demand. Let me give you examples on both these scores.

First, on the disenchantment factor. There are now 29 states in the U.S. that have a minimum wage higher than the federally-mandated $7.25/hour minimum wage across the country. In four states, the minimum wage was on the ballot. And in each case, voters voted in favour of increasing the minimum wage.

Here’s Forbes on the issue:

If there was upsets and contention in much of midterm voting, there was one topic on which the electorate was largely united: raising the minimum wage. Alaska, Arkansas, Nebraska, and South Dakota all had ballot measures on raising state minimum wages above both their current levels and the federal $7.25 an hour figure.

All four states passed the measures, most by significant margins. More than two-thirds of voters in Alaska agreed to raise minimum wage to $9.75 by 2016. Sixty-five percent of Arkansas voters set the state on course to adopt an $8.50 figure by 2017. In Nebraska, 59 percent said the number should be $9 an hour by 2016. Only South Dakota stood out with a slimmer margin; 53 percent voted to raise minimum wage to $8.50 an hour next year. In Alaska and South Dakota, minimum wage is now pegged to inflation, meaning that it will rise as the cost of living does.

In each of these four states, voters elected Republicans to office, significantly in Arkansas and Alaska, which were contestable Senate contests. Yet, the overwhelming majority of the electorate voted for an economic measure that is part and parcel of President Obama’s economic message. Moreover, polls show that, despite big opposition by business leaders, 69% of Americans favour increases to the minimum wage.

Yes, the President has had a tough run away from the economy with everyone focused on ISIS, Ebola, the NSA, and so on. However, he polls low on the economy despite championing positions like the minimum wage, which is favoured by the electorate. The clear takeaway, then, in conjunction with polling data showing Americans dissatisfied with the economy, is that the economy is not doing well in the eyes of the middle class and voter’s took it out on the President party as a result.

Regarding the threat to consumption growth, I saw Eric Cantor’s replacement Dave Brat on CNN this morning talking about his electoral win. When asked whether the mandate he has been given was to work across the aisle and compromise, Brat answered that Americans did want compromise but only in one direction – toward smaller deficits and less government debt. What that effectively means is that people like Brat in the Republican party will be pushing an agenda for budget cuts and balanced budgets, reducing net flows to the private sector and effectively reducing private income.

Now, let’s remember that the US federal government deficit has declined to 2.8% of GDP, marking the largest net change toward surplus in the U.S. government’s fiscal position in at least 46 years. By other measures, the net change toward surplus has been the greatest since the Eisenhower Administration of the 1950s. It is clear that this fiscal tightening has been a net drag on growth, and both Ben Bernanke and Janet Yellen have said so. So what Dave Brat is saying is that he wants even more of this and that he is not willing to make any deals with Democrats unless the net transfers from the federal government decrease.

In a situation in which households are still highly indebted, voters are passing minimum wage bills and nominal labor costs are growing at about the rate of inflation, this agenda potentially sets the U.S. up for Eurozone-style anemic economic growth rates – or worse.

The stock market is rallying on the election news as if this is a good thing. But I am much more cautious about the implications of the 2014 U.S. midterm elections for the economy and for markets.