WASHINGTON – Recent elections have sent a clear message to both the new Democratic congressional majority and President Donald Trump: it’s time to fix the economic damage caused by inflation.
Trump, who previously warned that a Democratic win in the midterms would lead to an economic disaster reminiscent of the Great Depression, has insisted the economy is thriving. Now that his party has lost ground, he claims he is open to working with Democrats in Congress, a shift from his usual approach.
“I’ll get along, probably, with the Democrats, unless they want to be destructive,” Trump stated to reporters last week.
In the wake of a strong jobs report, which indicated that 165,000 jobs were created and the unemployment rate fell to 4.1%, Trump remained defiant. “Democrats may control Congress, but I will NEVER stop fighting for you, and I will VETO anything that hurts America,” he told supporters via text message.
Democrats are gearing up to challenge Trump’s authority and are preparing for early confrontations over government spending. They face hurdles such as ongoing budget deficits, tariffs, the impact of artificial intelligence, and the looming crisis of a Social Security system that could deplete its funds in as little as six years.
As inflation continues to affect the affordability of life for middle-class Americans, both parties risk alienating voters in future elections. “Until inflation and interest rates are under control, the likelihood of change elections is going to be high on an ongoing basis,” warns Marc Goldwein, a senior vice president at the Committee for a Responsible Federal Budget.
Many Americans are calling for lower prices. Trump’s tariffs and the February war against Iran have contributed to an annual consumer price index increase of 3.7%. He has also pressured the Federal Reserve, which is responsible for keeping inflation low, to reduce interest rates—a move that could exacerbate inflation further.
The political stalemate between a Republican president and a Democratic Congress could actually provide the Federal Reserve with more flexibility to manage inflation, possibly helping the Fed return to its target of 2% inflation, which it has not achieved in nearly six years.
“I think that one of the surprise winners Tuesday was the Fed,” said Douglas Holtz-Eakin, an economist and president of the center-right American Action Forum.
With a Democratic-controlled Senate, Trump may find it difficult to appoint new members to the Federal Reserve board. This could reduce his influence over the Fed and allow it to more aggressively pursue measures to lower inflation.
Trump has claimed that prices for oil and gasoline will drop once the conflict in Iran concludes, but he has not indicated when or how that might happen.
John Cochrane, an economist at Stanford University’s Hoover Institution, emphasized that the Fed’s inflation-fighting efforts would be more effective if the federal government tackled its budget deficits.
“It takes monetary and fiscal restraint,” he stated.
Currently, the federal government is borrowing around $2 trillion annually, as tax revenues fall short of rising expenditures on Medicare, Medicaid, Social Security, and other programs. The interest on the national debt has now surpassed $1 trillion each year, exceeding military spending. This situation could worsen as investors increase interest rates on government debt.
Neither the White House nor the Democrats proposed cuts to spending during the election. Trump is advocating for an additional $500 billion yearly for the military, while some Democratic candidates are pushing to restore Affordable Care Act subsidies that were eliminated under his administration.
Since August, Treasury Secretary Scott Bessent has indicated that the administration would present a plan to reduce the approximately $2 trillion annual budget deficit. He is collaborating with White House budget director Russell Vought on cuts they are calling a “fiscal consolidation plan,” which is expected to be revealed after the election.
To effectively reduce the deficit, a combination of tax increases and spending cuts may be necessary. Goldwein suggests that the most straightforward approach would be to cut Medicare spending in ways that benefit both the government and patients.
“It’s not rocket science,” he remarked. “The most important thing you can do is reduce healthcare costs and find policies that lower the costs of Medicare, which will reduce deficits and interest rates.”
Artificial intelligence (AI) has been identified by Harvard economist Jason Furman as one of the most crucial economic issues facing the U.S.
“It’s the most screamingly obvious investment boom this country has ever had, or, possibly, second to railroads in the late 19th century,” Furman stated.
Furman has developed an economic analysis tool called Econvitals using AI, which replicates some of the work he did as chairman of the White House Council of Economic Advisers under President Barack Obama. Econvitals analyzed construction spending data and found an 80.6% increase in data center construction over the past year, while spending on homes, schools, factories, and offices has declined.
The stock market faced a downturn last week due to concerns that Democrats might impose restrictions on data center construction and regulate AI. However, the economy still requires this technology to sustain growth now and in the future.
Trump has been a strong advocate for the AI sector, adopting a hands-off regulatory approach and asserting that existing laws and voluntary agreements among tech companies are sufficient. Despite this, a majority in a recent AP Voter Poll indicated that they believe AI does more harm than good for the economy.
The challenge is that while AI boosts demand in the economy and supports the stock market, any decline could lead to reduced consumer spending and slower growth, leaving many Americans feeling financially strained.
“Every time you have a single strength in an economy, you also have a significant vulnerability,” Furman explained.
Lastly, newly elected senators are faced with the urgent task of collaborating with Trump’s successor to find solutions for Social Security, which is projected to become unable to provide full benefits by the end of 2032.
Potential solutions include lifting the payroll tax cap and increasing the retirement age, but bipartisan support is likely essential to pass any reforms, as changes to Social Security cannot be made through party-line votes.
Senator Elizabeth Warren
