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The economy and the election: Why are voters so upset?

Day of Decision Arrives with Senate Control on the LineDay of Decision Arrives with Senate Control on the Line
Voters cast their ballots in the U.S. midterm election at the Red Oak Fire Department in Red Oak, Iowa, U.S., on Tuesday, Nov. 4, 2014.Photograph by Daniel Acker — Bloomberg via Getty Images

The American people have spoken, and they’re more than a little pissed off.

This frustration manifested itself in Tuesday’s election results, in which Republicans took back the Senate. At the same time, exit polls showed that only 40% of those voters actually approved of the job being done by Congressional Republicans. In fact, Congressional Democrats got a slightly higher approval rating from voters overall, according to CNN, even as they lost seats in both the House and the Senate.

In other words, while it’s clear that the Republican Party won big on Tuesday night, the election wasn’t a win for either party in terms of convincing the American public that they have the answers for what ails us. What’s worrying American most? The economy. In exit polls, 7 in 10 Americans said they were “concerned” about economic conditions in America.

For those of us who pay close attention to financial markets and economic data, the fact that Tuesday’s protest election was primarily a product of economic insecurity might seem a bit strange. After all, the latest GDP figures suggest that economic growth might be finally kicking into a higher gear, job growth has been stronger in the past year than in any time since the financial crisis, and the Federal Reserve has finally begun the process of slowly removing its monetary stimulus from the system. Financial markets are just as perky as the economic data, with the Dow hitting another all-time high on Wednesday, and the price of gold—seen as as a safe haven from economic calamity—continues its years-long decline.

IAU Chart

The above chart shows the price of iShares Gold Trust, which has tumbled more than 35% since gold hit its peak roughly three years ago. So what explains the disconnect between the average American, who clearly is worried about the economy, and investors, who are fleeing safe havens for the risky climbs of the stock market? Ask gold enthusiasts, and they’ll tell you that the average American knows something that investors don’t:

Peter Schiff, radio host and chief strategist at Euro Pacific Capital, is one of the most vocal supporters of gold, and one can understand the attraction of his specious explanation of yesterday’s election results. It’s common sense voters of the American heartland, he’s positing, rather than the Wall Street types who influence financial markets, who really understand what’s going on in the economy. Schiff has argued in the past that the government is understating inflation, and that inflation is actually running at upwards of 8% or 10%, rather than the roughly 2% the government claims. Of course, since real GDP is calculated by subtracting inflation from nominal GDP growth, this would mean that the economy has actually been shrinking for years rather than growing slowly. It would also mean that there is a vast conspiracy on the part of government statisticians to paint a much different picture of the economy in terms of economic and job growth as well as inflation.

There is a simpler and more elegant explanation, however, for why the American mood and financial markets are headed in opposite directions. And that is that the “economy” is improving, but the lives of most average Americans aren’t. The median American can’t pay for a vacation with rising GDP figures, or send his kid to school because of a good jobs report. For his life to improve, he actually has to see improvements in his personal income. And despite all the great economic news we’ve had in recent months, average Americans aren’t seeing the benefits of those gains.

Neither political party has a solution to this conundrum.

Republicans argue that tax and regulation cuts will get the economy humming again, and bring back good-paying middle class jobs. There is some economic theory to support this claim, but history shows us that the Bush tax cuts did nothing to raise median incomes or halt the decades-long rise in income inequality that we’ve experienced.

Democrats argue for investing in education and infrastructure, and while these initiatives would surely bring some help, particularly to those the government directly employs, no stimulus project can in and of itself create the sort of broad-based gains in employment and income that Americans are thirsting for.

Viewed through this lens, it’s easy to see how the American public held their nose and voted for a party they don’t particularly like. They’re hurting financially and haven’t the faintest idea what sort of policies are needed to help. But they’re always willing to take a chance on change.