An economist’s view: Implications of the midterm elections on SMBs

With the 2018 midterm elections resulting in a Democratic-controlled House and Republican-led Senate, some CEOs are wondering: What does a split Congress mean for small and midsize businesses? We spoke with Alan Beaulieu, president of ITR Economics, to discuss the implications for tariffs, taxes, trade and the economy. He affirms that the impact will be minimal for most small and midsize businesses. In fact, his firm has not revised its economic forecast for the short term. Beaulieu offers these takeaways for CEOs going forward.

Tariffs

Expect tariffs to stick around. “We don’t expect them to go away in the near term,” says Beaulieu. “Learn to deal with the tariffs that you have. Accept it as the status quo.” Given the current political climate, it’s possible that some countries will stay the course in their efforts to impose tariffs. “Nationalism lends itself to tariffs,” he says. “The thinking is, ‘I need to protect my country.’ Every country that is feeling more nationalistic is going to feel a need to protect their own.” While it is possible that we will see the amount of tariffs relaxed, it does not appear likely that we will return to a no-tariff world anytime soon.

Recognize that a softer economy may trigger a reduction and selection of tariffs. Right now, the scope of tariffs is broad. However, “we feel there will be a reduction — but not an elimination — of tariffs because we’re heading toward a softer economy in 2019,” says Beaulieu. In other words, the scope of tariffs — and costs associated with tariffs — may shift in the new year.  Because tariffs carry a cost, that cost becomes more difficult to bear in a slower-growth environment.

Raise your prices, but don’t let tariffs be the only reason. “If you want to raise prices, look for a value proposition that allows you to raise prices,” says Beaulieu. “That means more than just having tariffs. In addition, companies need to look for ways to drive efficiencies in their operations.” This can help differentiate themselves and justify price increases.

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Taxes

Get used to your taxes. “They won’t change,” Beaulieu says. “Nobody has the political power to change them, at least not in the near term.”

Understand that a split Congress will reinforce the status quo. In other words, neither Democrats nor Republicans will easily pass a new tax agenda. “If you were worried about the Republicans having a strong agenda, that will be blocked,” says Beaulieu. “If you were worried about the Democracts having a strong agenda, that will be blocked. It’s going to be pretty quiet.”

Trade

We have not won the trade war. Beaulieu cautions that China has a lever they could use in a trade war. “China could stop buying U.S. Treasuries, and that could be painful for us,” he cautions. “Whether or not they buy treasuries is a big deal.”

Economy

Anticipate a more stable economy. “Sometimes, gridlock is a good thing for the economy,” says Beaulieu. “If you look back at the Clinton administration, when we had a split Congress, we had great prosperity in this country. Congress wasn’t able to muck it up in a well-intentioned effort to help constituents or segments of the economy.”

All in all, Beaulieu states that the biggest impact is that uncertainty has been removed and we can expect some stability in the political arena for the remainder of 2019 and into 2020.

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