What the Election ‘Wake-up Call’ Means for the Economy

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Kent Smetters and Megan Murphy on the mid-term elections

On Tuesday, the Republican Party’s electoral sweep — which enabled it to gain a majority in the U.S. Senate and win gubernatorial races in seven Southern states — revealed widespread voter dissatisfaction with President Barack Obama’s administration. However, to retain their momentum in the run up to the 2016 presidential elections, Republicans will have to demonstrate that they can deftly address pressing business and economic concerns including the battle over the minimum wage, job growth and corporate taxation, say Wharton professor of business economics and public policy Kent Smetters and Financial Times reporter Megan Murphy.

“This [Republican victory] wasn’t expected by almost any pollsters, even people who leaned right,” noted Murphy, who will head the Financial Times’ Washington, D.C., news bureau beginning next year. According to Smetters, the onus is now on the Republican Party “to do something” to fix the various issues facing the economy. “[Republican House speaker John] Boehner was complaining for years that everything gets stalled in the Senate. Well, that argument now goes away.” Smetters and Murphy talked about the policy challenges ahead for both parties on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

The Republicans clinched a majority of 52 seats in the 100-member Senate by retaining their existing 45 seats and gaining seven more. That could climb to 53 seats, if one factors in yet-to-be announced results for Alaska, which is expected to go Republican. (Results in Virginia may face a challenge.) Louisiana will have a runoff election in December. In the 435-member House of Representatives, Republicans have so far added 14 more seats to lift a majority they already had to 244 seats while results are still flowing in. The sweep extended to the state level, with Republican governors now in 31 states, while Democrats hold 17 states (two are undecided).

Unsettled Voters

In the run-up to the latest elections, the major issues were the future of the controversial Obamacare legislation (the Patient Protection and Affordable Care Act), job growth, wage levels and immigration reform. Another big issue was a proposal to extend the Keystone oil pipeline that runs from Canada to refineries in Nebraska, Illinois and Texas. Environmental groups have strongly opposed the pipeline expansion project, saying that it threatens environmentally sensitive parts of Nebraska.

In dissecting the results of the latest elections and how they might influence the 2016 presidential elections, Murphy said it is important to distinguish between “where we see a real change, and where this is just a one-off reaction [by] a very dissatisfied, unsettled voting population.”

Obama’s desire to raise the federal minimum wage from the current $7.25 an hour to $10.10 is one issue that will likely gain more attention. In Tuesday’s elections, voters in five states (Alaska, Arkansas, Nebraska, South Dakota and Illinois) backed moves to increase the minimum wage in phases. “That means voters are really looking at their individual pocket books,” said Murphy.

Added Smetters: “What’s particularly impressive about the minimum wage proposals passing in these red states [is that] they passed in really big margins; these weren’t even close. That has to be a huge wake-up call for Republicans — that’s a winnable issue for Democrats in the next elections.”

Smetters noted that he does not think raising the minimum wage is a smart idea. “It places a tax on low-margin companies,” he explained. “Apple and Google are all fine with the minimum wage because they don’t get taxed. From an economics perspective, it is not one of the best ways to target the poor. However, it is something that gets the [voting] numbers, so the Republicans are going to oppose minimum wage increases at the federal level. They have to be super articulate about what the alternative [will be].”

“There’s going to be a very different pro-business agenda than we’ve seen before.” –Megan Murphy

Murphy felt the Keystone pipeline project “is as good as done and is going forward,” now that the Republicans will have a bigger say in it. Bigger issues calling for action will be corporate tax reform, infrastructure spending, immigration reform and specific measures, such as repealing the tax on medical devices, she said.

Pro-business Season?

There’s going to be a very different pro-business agenda than we’ve seen before Twitter ,” said Murphy. She visualized situations where the Republicans would bring to the President legislation passed in both chambers of Congress and dare Obama to use his veto. “He’s going to have to either hold his nose and sign or take the political hit,” she added.

Smetters noted that Republicans might have to strike a compromise with Democrats on overhauling the corporate tax system, which has been driving U.S. companies to relocate to cheaper tax regimes in the U.K. and Europe. “Calls to wave the American flag [are] … just not useful ideas,” he said. The real issue is to change the tax code and replace the current worldwide tax with a territorial tax method, where U.S. companies are not taxed on their earnings across the globe, he added.

More broadly, Murphy saw momentum for economic recovery that needs more fuel. “We are certainly seeing the shoots of a recovery coming through in certain areas of the economy,” she said. “We are in a feel-better [stage] in terms of the data … but we are not yet into a feel-good stage of the economy.”

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What the Election ‘Wake-up Call’ Means for the Economy. Knowledge@Wharton (2014, November 06). Retrieved from http://knowledge.wharton.upenn.edu/article/what-the-election-wakeup-call-means-for-the-economy/

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