Congress faces decisions on deficits, AI regulation and Social Security
Democrats won majorities in the House and Senate in Tuesday’s midterm elections, and voters sent the same demand to the new congressional majority and to President Donald Trump: repair the economic 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 and has maintained that the economy is booming, said he is willing to work with Democrats in both chambers, an approach he has not often taken in the past. “I’ll get along, probably, with the Democrats, unless they want to be destructive,” Trump told reporters last week.
Friday’s jobs report showed employers adding 165,000 jobs and the unemployment rate dipping to 4.1%. Trump responded in a text message to his supporters: “Democrats may control Congress, but I will NEVER stop fighting for you, and I will VETO anything that hurts America.” The broader U-6 measure of unemployment and underemployment, which counts discouraged workers and people working part time involuntarily, stood at 7.9% as of Nov. 8, according to FRED.
Democrats are preparing for early fights over government spending. The federal government keeps borrowing about $2 trillion annually as tax revenues fall short of spending on Medicare, Medicaid, Social Security and other programs. Paying interest on the national debt now tops $1 trillion annually and exceeds spending on the military, and the Associated Press reported that 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. Trump wants an additional $500 billion a year for the military, while some Democratic candidates have pushed to restore 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 are branding a “fiscal consolidation plan,” to be released after the election.
Deficit reduction would likely require some combination of tax increases and spending cuts, said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. Goldwein said the lowest-hanging fruit would be trimming 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.”
John Cochrane, an economist at Stanford University’s Hoover Institution, said the Federal Reserve’s efforts against inflation would be helped if the federal government reduced budget deficits. “It takes monetary and fiscal restraint,” he said.
On prices, the Associated Press reported that Trump’s tariffs and the war against Iran that he launched in February contributed to the consumer price index climbing to 3.7% annually. Trump also pressed the Federal Reserve, an independent body charged with keeping inflation low, to slash its benchmark interest rate in ways that could have worsened inflation.
The Associated Press’s analysis said the gridlock of a Republican White House and a 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. Holtz-Eakin said the Democratic Senate could block Trump’s ability to fill potentially open spots on the Fed board, 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. He has not said when or how the war will come to a conclusion.
On artificial intelligence, Harvard University economist Jason Furman puts the technology at the top of his list of the most important economic issues facing the United States. “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.
Furman built an economic analysis tool called Econvitals that replicates some of the work he did as chairman of the White House Council of Economic Advisers in Democratic President Barack Obama’s administration. The tool 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 fell.
The stock market sold off last week on concerns that Democrats could restrict the construction of data centers and impose guardrails on AI. The American economy still needs the technology to keep fueling growth now and into the future.
Trump has promoted 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 despite public concerns about the risks of job losses and large-scale cyberattacks. A majority of respondents in The AP Voter Poll, a survey of the American electorate conducted in all 50 states, said AI does more harm than good for the economy.
The Associated Press’s analysis said AI is helping propel demand in the economy and sustain the stock market, and that 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 work 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, which provides income to older Americans and those with disabilities. Because Social Security overhauls cannot be made by party-line votes through the reconciliation process, any changes would likely need to be bipartisan to get enough votes to clear the Senate.
Sen. Elizabeth Warren, D-Mass., said she saw an opening earlier this year 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 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.
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.
Other challenges waiting on the new Democratic majority are chronic budget deficits, tariffs and artificial intelligence, and difficult choices about a Social Security system that could run short of money in as little as six years. “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 of the Committee for a Responsible Federal Budget. The Associated Press reported that 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.