Today’s newsletter is all about the economic consequences of Democrats’ smashing midterm victory. I start with the ideological hue of the incoming Congress.

The startling rise of candidates backed by Sen. Bernie Sanders and New York City Mayor Zohran Mamdani, both Democratic socialists, may leave the impression that the incoming Congress will be hellbent on a far-left agenda of wealth taxes, Medicare for All and a Green New Deal.

Not so fast. Judging by the candidates who delivered their majorities, Democrats may be moving toward the center.

Third Way, a centrist Democratic advocacy group, figures that as of Wednesday afternoon, candidates endorsed exclusively by moderate groups—New Democrat Coalition, Blue Dog Coalition, or WelcomePAC—had flipped 26 districts, with four more highly likely. By contrast, candidates endorsed exclusively by Sanders’s political-action committee, Our Revolution, had flipped just three. Candidates backed both by a moderate group and Our Revolution flipped another three.

Meanwhile, in the Senate, center-left candidates flipped five states (South Carolina, North Carolina, Kansas, Ohio and Iowa), left-wing candidates just one (Maine). Centrists and leftists both claim Texas’ James Talarico as one of their own; his platform looks pretty moderate. Minnesota and Michigan, won by Our Revolution-endorsed progressives, were already Democratic.

Senate vote margins tell a similar story: Centrist Democrats outran 2024 Democratic presidential candidate Kamala Harris by an average of 21 percentage points; progressives by just 5. Moderates ran 5 points ahead of Democratic House candidates in their states; progressives ran 5 points behind, Third Way estimates.

Despite that tidal wave of moderates, many new faces in the Democratic caucus will hail from Democratic Socialists of America and other far-left groups, by virtue of having won primaries in deep-blue regions. The Congressional Progressive Caucus says its ranks have grown by 25 members.

The question for the party, then, is who sets its priorities. If it tilts left to satisfy the socialists and progressives, the foothold it just established in red and purple America could melt away at the next election.

An ominous headwind: AI has buoyed the economy and stocks this year, and judging by Wednesday’s rally, investors expect more of the same under a Democratic Congress. My advice: Don’t bet on it.

From President Trump to state capitols, Republicans applied a light touch, sometimes no touch, to AI. Texas, Georgia and Ohio account for more than 40% of all planned data-center capacity in the U.S., according to Evercore ISI. All three just elected Democratic governors skeptical of them. In Congress, Democrats could press for safety guardrails that could slow AI rollouts and increase their legal liability.

And then there is the intangible: Democrats don’t trust the tech bros behind AI, least of all Elon Musk, who spent almost half a billion dollars trying to defeat them. Silicon Valley went all in on Trump, donating to his causes, cultivating his support, his geographical rebrandings and even his preferred moniker for AI, “super intelligence.”That can’t help but color how Democrats approach the industry.

“The billionaires who own the social-media algorithms, who own the cable-news networks, who own the politicians fighting on our screens, they want us at each other’s throats,” Talarico declared at his victory speech this week. “Our unity is a threat to their wealth and their power.”But maybe not for growth: If AI is in trouble, why did stocks rally Wednesday? My colleagues say investors are betting on growth broadening beyond AI. Two major drags on the economy, and voters, are tariffs and the war with Iran. Congress can’t force Trump to abandon either, but may be able to strike deals contingent on him ending the war or rolling back tariffs.

Evercore estimates that new tariffs and spending cuts to Medicaid already in the pipeline could trim 0.6 percentage point from growth next year. But suppose Trump were to do a deal with Democrats that delays or undoes some of those cuts and boosts defense. That could deliver a tailwind of 0.4 to 1 percentage point.

Also, no new taxes: Republicans tried, to no avail, to make the election about taxes. That doesn’t mean higher taxes are in the offing. Democrats didn’t campaign on them. (In fact, they want to roll back tariffs.) The message from the states is that voters don’t want them either. The “no” vote on California’s temporary 5% wealth tax was recently ahead of the “yes” vote 55% to 45%, with 61% of the vote counted. Other state-ballot initiatives sent a similar message: an increased property tax exemption in Florida; a prohibition on statewide property taxes in Tennessee; a cap on income taxes in North Carolina; a supermajority in both legislative chambers to raise income taxes in Iowa.

The losers: our grandchildren. To listen to the president, Democrats could be dealing with one of two Trumps: a defiant Mr. Veto, or the dealmaker who shares common ground with Sanders. Here’s a prediction: If the dealmaker prevails, it won’t involve cutting spending or raising taxes.

Democrats’ vision of affordability doesn’t come cheap. Undoing cuts to food stamps and Medicaid and restoring Obamacare subsidies would cost $710 billion to $1.55 trillion over a decade, Evercore estimates. Trump wants $300 billion more for defense.

My colleagues recently chronicled how all the deficit hawks died out, just as our debts and deficits reached critical levels. In 2018, 140 political ads talked about the debt or deficit, according to ad-tracking firm AdImpact. This year, just 30 did. The deficit ranked No. 52 among topics in this year’s campaigns.

Unless the bond vigilantes speak up, it will be our children and grandchildren paying for today’s deals.

Maybe it wasn’t gasoline: The assumption that gasoline prices cashiered Republicans isn’t supported by one scholarly study. Christoffer Hentzer Dausgaard, a political scientist at the University of Copenhagen, compared county-level effects of high prices on household income with Republican vote share. Surprisingly, he found no effect. “I find no sign of ‘pocketbook voting’ in its simplest form, where voters punish the president’s party in proportion to what prices take out of their own budgets…That fits the classic finding that Americans vote more on the national economy than on their own finances.”

Voices from the polls: My colleagues fanned out across the country Tuesday to hear directly from voters on the economy. “We’re just fed up,” said Ron Berube, a 64-year-old Lewiston, Maine, resident, who voted for Sen. Susan Collins (R., Maine) in 2020 but this year voted for her victorious Democratic challenger, Troy Jackson. “A lot of people are sick of Donald Trump. They can’t afford it. They can’t afford anything.”More than two-thirds of voters in the state told the AP that Trump’s tariff policies have hurt the state’s economy.

Darin Gadd, a 59-year-old retiree from the military in Columbus, Ohio, backed Trump in 2020 and 2024. On Tuesday, he again voted Republican. But he is fed up with the president. Gadd works part time for his brother’s construction company and blamed tariffs for raising the cost of many materials. “A sheet of plywood used to be $4.50, now it’s $30-something,” he said.

Stephanie Hernandez, a 27-year-old retail manager in the Miami area, voted exclusively for Democrats on Tuesday, who she hoped would push to reverse what she considers Trump’s most harmful policies, including tariffs and immigration raids.

Hernandez said the retailer where she works has faced supply issues triggered by tariffs, resulting in some products becoming inaccessible.

“The tariffs would be something that I would like to obviously do away with.”Thursday Friday Thoughts on what you just read? Or on the wider world?

Please share them with me. Paul Kedrosky, who writes his own AI-centric newsletter, responds to Tuesday’s note on health insurance, the sleeper inflation issue: You treat rising insurance costs primarily as an inflation and compensation problem, while mostly ignoring why the U.S. system is so expensive, which plays into the hands of the U.S. health ecology’s predators. The American healthcare system is structurally incapable of controlling costs. Too many discussions miss the larcenous and extractive nature of it, substituting things—like higher compensation—that end up as transfers to an indefensibly tax-advantaged sector now approaching one-fifth of GDP.

Reader Rich Batey writes: You write about the cost of health insurance. That’s driven by the rapidly rising cost of medical care. And that’s a result of the massive state and federal wealth transfers into the healthcare sector. Congress can curb federal spending. Presidents rarely veto spending bills. So please stop giving Congress a pass on its huge responsibility to curb runaway federal spending.

I’m The Wall Street Journal’s chief economics commentator. I’ve been writing about economics, markets and politics for more than 40 years, in the U.S. and from around the world.

WSJ Economics brings you essential insights, news and commentary, twice weekly. Send your feedback to wsjeconomics@wsj.com (if you’re reading this in your inbox, you can just hit reply). Matt Grossman contributed to this newsletter.