Though I am a classical liberal, advocating for free market policies, sound money, fiscal discipline and smaller government – Ronald Reagan-era concepts - I know that neither party has a monopoly on bad ideas. I believe that if Donald Trump had stuck to more of his campaign promises, especially those that caused inflation, the Republicans might have prevailed. Afterall, he inherited majorities in the House, the Senate, the Supreme Court and was elected by a rare majority of the popular vote. His administration also benefited from the AI data center investment cycle.
I’m reminded of President Herbert Walker Bush (Sr.) whose campaign slogan was “read my lips, no new taxes” but who raised taxes as soon as he was in office. He failed to do what he promised voters so he was a one term president.
And so did Trump. He promised to cut government spending and to stay out of “foreign wars.” His short dalliance with austerity called “DOGE” failed to move the needle on the skyrocketing deficit – which has become a big problem. Then he started a trade war which evolved into a real war. Inflation, lying dormant, took flight, again.
A wise man once said that inflation is a politician’s widow maker, and Donald Trump is another casualty. People vote their pocketbooks and the average American is getting squeezed. Wages are not keeping up with the real cost of living.
You’ve heard of the “K” shaped economy. While the wealthy, upper part of the K are partying like it’s 1999, the lower half are suffering from the high and rising cost of living. A majority of voters are in the lower K. This election was less an endorsement of Democratic policies and more a cry of anger against incumbents, “the establishment.”
It is important that we citizens are wise, not merely partisan. To me, that means distinguishing good policy from bad policy no matter who’s policy. People blame the war for this inflation, but they are only half right. Trump’s tariffs are as much to blame.
Milton Friedman famously said inflation is too much money chasing too few goods. Government bailouts after the GFC and Covid pumped trillions of dollars into the economy. We have a $2t annual budget deficit. This is too much money! How do we get too few goods? Tariffs. They are taxes and when you tax something, you get less of it. Less goods and services available to purchase mean higher prices.
The day after the midterms, interest rates are down, and the energy complex is acting like the war is over. Since Republicans are now on TV blaming their loss on the war, it might be. It was in Iran’s interest to fight and not compromise knowing that the Republicans would pay the price at the ballot box. Now they might be more willing to do a deal. And U.S. politics are clearly against the war. That would be good news for the consumer.
No matter what happens now, government spending will not slow down but AI investment will. The Democrats not only won in the U.S. legislature but at the local level in many jurisdictions including Texas where so many data centers are under construction. Layoffs – driven by AI efficiencies – are picking up. Political sentiment against data centers is on the rise, negatively effecting America’s growth engine.
So…oil prices falling will be a relief for the consumer as will the dip in interest rates. Government spending will not moderate so ultimately, interest rates are likely to go higher over time. Data center development could slow, leading to a slower U.S. economy.
TFL
