Voters demanded economic relief. Trump and Democrats face tough choices on how to deliver
WASHINGTON (AP) — Voters have sent a strong election-year message to the new Democratic congressional majority and President Donald Trump: Repair the damage inflation has done to the economy.
Trump, who campaigned on the idea that a Democratic victory in the midterms would trigger a 1929-style economic depression, has maintained that the economy is booming. Since his party lost in Tuesday's voting, he has claimed he is willing to work with Democrats in the House and Senate, though that's not something he has done much of in the past.
“I’ll get along, probably, with the Democrats, unless they want to be destructive,” Trump told reporters last week.
After Friday’s strong jobs report showed employers adding 165,000 jobs and the unemployment rate dipping to 4.1%, Trump was defiant. “Democrats may control Congress, but I will NEVER stop fighting for you, and I will VETO anything that hurts America,” he said in a text message to his supporters.
Democrats are seeking to check Trump's power and are preparing for early fights on government spending. Other challenges include chronic budget deficits, tariffs, artificial intelligence and difficult choices about a Social Security system that could run short of money in as little as six years.
But as long as rising prices keep making middle-class lives less affordable, Democrats and Republicans alike face the risk of angering and alienating voters in the next election cycle.
“Until inflation and interest rates are under control, the likelihood of change elections is going to be high on an ongoing basis,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget.
Trump's tariffs and the war against Iran that he launched in February contributed to the consumer price index climbing to 3.7% annually. The president also tried to bully the Federal Reserve, an independent body tasked with keeping inflation low, to slash its benchmark interest rate in ways that could have worsened inflation.
The gridlock of a Republican White House and Democratic Congress gives the Fed more room to maneuver, possibly smoothing the central bank's ability to return inflation to the 2% target it has failed to reach for 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.
The Democratic Senate could block Trump's ability to fill potentially open spots on the Fed board, Holtz-Eakin said, removing “Trump's incentives to meddle with the Fed” and clearing a path for Fed Chair Kevin Warsh “to follow his instincts and aggressively reduce inflation.”
Trump has maintained that the costs of oil, gasoline and diesel will all plummet once the Iran war ends. The problem is he refuses to say when or how the war will come to a conclusion.
John Cochrane, an economist at Stanford University's Hoover Institution, stressed that the Fed's efforts to combat inflation would be helped if the federal government reduced budget deficits.
“It takes monetary and fiscal restraint,” he said.
The U.S. government keeps amassing debt as tax revenues fall short of burgeoning spending on Medicare, Medicaid, Social Security and other programs. Paying the interest on the national debt now tops $1 trillion annually and exceeds spending on the military. The problem could spiral because investors have pushed up the interest rates charged on government debt over the past year.
Neither the White House nor Democrats ran on spending cuts. The president wants an additional $500 billion a year for the military, while some Democratic candidates have pushed for restoring Affordable Care Act subsidies that lapsed under Trump.
Since August, Treasury Secretary Scott Bessent has repeatedly said the administration would put forward a plan to trim the roughly $2 trillion annual budget deficit. Bessent is working with White House budget director Russell Vought on cuts they're branding as a “fiscal consolidation plan,” to be released after the election.
Deficit reduction would likely require some combination of tax increases and spending cuts, Goldwein said. But he said that the lowest hanging fruit would be to trim Medicare expenditures in ways that save money for both the government and patients.
“It’s not rocket science,” he said. “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.”
When Harvard University economist Jason Furman thinks about the most important economic issues facing the United States, AI is at the top of his list.
“It’s the most screamingly obvious investment boom this country has ever had, or, possibly, second to railroads” in the late 19th century, Furman said.
Using AI, Furman has built an economic analysis tool called Econvitals that replicates some of the work done when he was chairman of the White House Council of Economic Advisers in Democratic President Barack Obama's administration.
Econvitals parsed construction spending data on Tuesday and found an 80.6% increase in data center construction over the past year, while spending on building homes, schools, factories and offices had fallen.
The stock market sold off last week on concerns that Democrats could restrict the construction of data centers and impose guardrails on AI. But the American economy still needs the technology to keep fueling growth now and into the future.
Trump has been vociferous in promoting the sector and has taken a hands-off stance on regulating AI, insisting that existing laws and voluntary agreements signed by tech companies are enough. He has shrugged off public concerns about the risks of job losses and large-scale cyberattacks, but a majority in The AP Voter Poll, a sweeping survey of the American electorate conducted in all 50 states, say AI does more harm than good for the economy.
The dilemma is that AI is helping to propel demand in the economy and sustain the stock market. If those slipped, there could be less consumer spending, lower growth and many in the U.S. feeling even worse off financially.
“Every time you have a single strength in an economy you are also having a big vulnerability,” Furman said.
Senators who won six-year terms last week will face the politically fraught challenge of working with Trump's successor to find ways to save Social Security, which is projected to be unable to pay full benefits at the end of 2032.
Removing the cap on payroll taxes and increasing the retirement age are among the possible lifelines for sustaining the program that provides income to older Americans and those with disabilities. But any changes would likely need to be bipartisan to get enough votes to clear the Senate because Social Security overhauls cannot be made by party-line votes through the reconciliation process.
Sen. Elizabeth Warren, D-Mass., said she saw an opening earlier this year to fix Social Security when she overheard Sen. Bernie Moreno, an Ohio Republican, talk about the need to lift the cap on payroll taxes. “I reached out to him in a matter of days,” she said in an interview this summer. The two senators went public with a plan that is still being formulated as legislation.
Warren, who worked with the Republicans on a law this year to encourage the construction of more homes, said other bipartisan efforts had failed because Republican lawmakers had been afraid to cross Trump.
But with Social Security, there is a need to act now. Experts say “the checks that go out to seniors will drop by nearly a quarter” after 2032, Warren said.
“Think what that means, literally, to millions and millions of Americans, who depend on those Social Security checks, or who have parents who depend on them. And Congress is doing nothing,” she said.
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