U.S. President Joe Biden in the Rose Garden of the White House in Washington, on Nov. 7.Mark Schiefelbein/The Associated Press
Judging by the state of the U.S. economy, the Democrats should have coasted to victory this week.
Corporate America is thriving, growth is robust, unemployment is low, and the stock market is booming. These are not the conditions that would normally have the masses frothing for change.
In fact, we’ve been led to believe that elections are about the economy above all else. Voters vote with their wallets, and so a dynamic economy should heavily favour the incumbent.
What’s changed? Prices, that’s what.
To the average American – or Canadian, for that matter – the macroeconomic indicators don’t seem to jibe with their own lived economic experience. When you’re paying 30 per cent more for food than you were before the pandemic, you may not care so much that gross domestic product grew by 2.8 per cent in the third quarter.
The inflation crisis is largely over from a policy perspective, but its legacy endures and is reshaping the political landscape.
Donald Trump was able to tap into a deep well of voter discontent over, among other things, consumer prices. On the campaign trail, he said he would make inflation “vanish completely” upon his return to the White House.
This will come as a shock to no one, but Mr. Trump’s bravado does not always stand up to scrutiny. On this point, Mr. Trump’s policies are no inflation remedy; in fact, they have the potential to reignite inflation, according to several prominent economists.
Inflation isn’t dead yet. Not in the minds of the average consumer – and not as an economic force.
While households may curse its staying power, inflation is not entirely negative. It is generally a byproduct of a growing economy. As are rising wages, which have largely offset the rise in prices in the United States.
There is upside for investors, too, as a strong economy with moderate inflation is right in the stock market’s sweet spot. In the 25 years up to the global financial crisis, U.S. inflation averaged 3.1 per cent. Over this time, the S&P 500 gained roughly 14 per cent a year on average.
Similar conditions have prevailed for nearly two years now, ever since runaway inflation began to subside. And look at what U.S. stocks have returned over that time – 27 per cent a year, after dividends. Accounting for the bite of inflation only knocks off a few percentage points.
A strong stock market tends to make people feel better about the economy. It’s called the “wealth effect” and it’s well-grounded in research. People feel more financially secure. They spend more. All good things if you’re an incumbent in an election year, at least in theory.
Mark Hulbert at MarketWatch has been arguing for months that the Dow Jones Industrial Average has a remarkable track record in predicting election outcomes. With a year-to-date gain of 11 per cent up to election day, the Dow’s strength translated to a 70-per-cent chance of a Kamala Harris victory, according to his model.
The real economy gave off similar signals. In the postwar era, U.S. incumbents have only lost presidential elections during, or shortly after, recessions.
The U.S. economy is nowhere near a recession. Unemployment is at 4.1 per cent – very low by historical standards. Job creation has averaged 370,000 per month during President Joe Biden’s term. GDP growth has averaged almost 3 per cent for more than two years.
“Guess what? We got the strongest economy in the world. The whole damn world,” Mr. Biden said last week, sounding as though he was trying to convince voters of some obscure fact. And in a way, he was. There is an enormous disconnect between the state of the economy and the American public’s economic perceptions.
The U.S. Federal Reserve’s latest annual survey of economic well-being of U.S. households showed that a huge majority believe the national economy is doing poorly.
Another poll conducted for The Guardian last May suggested that most Americans mistakenly believed the economy was in a recession. Half also believed unemployment was at a 50-year high and the stock market was falling.
Where is all this pessimism coming from? Inflation is a clear culprit. Exit polls from election day show that three-quarters of voters said inflation caused them hardship over the past year. The hardest-hit overwhelmingly supported Mr. Trump.
The irony is that, in doing so, those voters endorsed what may be an inflationary platform.
For starters, Mr. Trump loves tariffs. “To me, the most beautiful word in the dictionary is ‘tariff,’” he said last month. He has threatened to impose a 60-per-cent tariff on goods from China and a blanket levy of 10 to 20 per cent on all other imports to the U.S., totalling roughly US$3-trillion annually.
Tariffs are inherently inflationary because they largely flow through to the end consumer. Moody’s Analytics has estimated that Mr. Trump’s policies would add an average of 1 percentage point to inflation each year over the next two calendar years.
Mr. Trump insists that foreign producers will foot the bill for the tariffs. This claim is entirely divorced from reality. But that hardly seems to matter any more.