The midterm elections are a referendum on the Trump economy – but the GOP can't count on a strong verdict

Key Points
  • The upcoming midterm elections offer a referendum on President Donald Trump as well as the economy under his administration.
  • Despite strong overall economic growth, not everyone has reaped the benefits equally.
  • Wage growth remains weak, and tax cuts have primarily helped the wealthiest Americans.
President Donald Trump holds a "Make America Great Again" rally in Evansville, Indiana, August 30, 2018.
Kevin Lamarque | Reuters

In 60 days, midterm elections offer a referendum on President Donald Trump – and the Trump economy. Republicans cannot count on a strong verdict.

That's because despite strong overall growth, its benefits have been strikingly uneven — and depend on the beneficiary.

Specifically, evidence so far shows those benefits:

  • For business owners, quite substantial.
  • For average workers, pretty slight.
  • For America's future growth, none at all.

This divergence helps explain a central paradox of the 2018 campaign.

In last month's NBC News/Wall Street Journal poll, American voters preferred Republicans over Democrats on handling the economy by 14 percentage points. Yet they preferred Democrats by 12 points on "looking out for the middle class." Overall, they backed Democrats for control of Congress by 50 percent to 42 percent.

The government reported second-quarter growth of 4.2 percent, the highest since 2014. That lifted hopes that 2018 will become the first full year of 3 percent growth since 2005.

Watch: Here's where Trump gets credit, and what could go wrong

Trump's economy: Here’s where he gets credit, and what could go wrong
Trump's economy: Here’s where he gets credit, and what could go wrong

Corporate profits surged 16.1 percent, boosted by economic growth and the Trump-GOP tax cuts. Larger nonincorporated businesses have also benefited from big new tax breaks.

Corporations have plowed much of their gains into share buybacks. That's a boon to shareholders.

Stock values have also gained from investor confidence in a pro-business administration that pairs corporate tax cuts with reductions in government regulations. Since Trump won the presidency, the Dow has risen more than 40 percent.

All that has produced a "very substantial, positive" boost to wealth creation, says Princeton economist Alan Blinder, a former advisor to President Bill Clinton. But since the richest 10 percent of Americans own more than 80 percent of stocks, that benefits the already-wealthy more than everyone else.

Americans with more modest incomes have derived lesser benefits through growth in their 401(k) accounts. Demand for workers is strong, driving the unemployment rate down nearly a full percentage point to 3.9 percent.

But wage growth remains as weak as it was during the latter years of the Obama administration, says University of Pennsylvania economist Kent Smetters, a former advisor to President George W. Bush. Depending on the statistical measure, inflation has either mostly or entirely wiped out worker raises.

And the tax cut hasn't provided big benefits for average Americans. A Tax Policy Center analysis shows that the top 20 percent of American earners will receive 65 percent of the tax cuts this year, while the middle 20 percent receives 11 percent.

For that middle 20 percent, the average cut is $18 a week. No wonder that, in a recent CNBC survey, just 34 percent of Americans said the tax-cut has increased their take-home pay.

With the economy constrained by meager productivity gains and diminished labor supply as baby boomers retire, forecasters projected long-term growth of just 2 percent as Trump took office. Justifying their tax cut, the White House and congressional Republicans argued it would enhance prosperity by stimulating investment and future growth.

Economists across the political spectrum see little encouragement so far.

Investment has picked up since the tax cut, but this is largely unrelated to the tax cut and will prove temporary.
Mark Zandi
Moody's economist

"Investment has picked up since the tax cut, but this is largely unrelated to the tax cut and will prove temporary," said Moody's economist Mark Zandi. Rising oil prices, reviving energy-related investment, have sparked much of the increase.

The same caution applies to growth, even if 2018 hits the 3 percent mark. Forecasters say short-term boosts from tax cuts and federal spending increases — which have sent the budget deficit soaring back toward the $1 trillion mark — will fade after 2019.

"The boost to growth we have seen is a transitory fiscal stimulus that has increased employment but not changed any of the underlying trends like productivity," said former Obama advisor Jason Furman, now at Harvard.

Some advocates of the Tax Cut and Jobs Act hope that, over time, provisions such as full, immediate deductibility of new capital investments will drive productivity up. "I still expect the structural reforms to matter," said Douglas Holtz-Eakin, another former Bush economist.

But he also cautions that Trump's tariff wars could wipe out those benefits. So could White House plans to curb legal immigration, which would further crimp labor supply. The drag of budget deficits grows with time.

Thus a wide array of analysts — from Goldman Sachs to the Federal Reserve to the Congressional Budget Office to the supply-side-friendly Tax Foundation — see America's long-term growth path unchanged.

"It will likely slow down below 2 percent," said Tax Foundation economist Kyle Pomerleau. "It is possible there will be lingering positive effects from the TCJA, but they will be small and not enough to make a sizable difference."