Four Myths About the Economy That Could Cost Biden the Election
Most American voters think that Joe Biden has done a lousy job on the economy, and they give much higher marks on this front to Donald Trump. That includes many Democrats, surprisingly. Voters’ sour views on this issue are a key driver of Biden’s low approval ratings and could cause him to lose the election.
But there is a profound mismatch between the public’s views and economic reality. In fact, the US economy is in great shape because of Biden’s policies. Biden did not exaggerate, in his State of the Union address, when he said that the American economy was outperforming all other major nations, including China.
Furthermore, many Americans also have far too rosy a recollection of the economy’s performance under Trump. They have swallowed Trump’s hype about “the best economy in history”, which is simply not true. The US economy performed reasonably well under Trump, but that was despite his policies, not because of them.
We will look at four myths about the economy that could swing the Presidential election in Trump’s favor.
Myth #1: Biden’s Spending Triggered Inflation
Voters think that Donald Trump would handle the economy better than Joe Biden, by a 20-point margin: 54% to 24%, according to a recent Wall Street Journal poll.
This is probably because many Americans believe that Joe Biden’s supposed “out of control spending” caused “runaway inflation”. However, this is based upon Republican propaganda, not facts.
Two key factors caused inflation to rise in the US…and all other major countries:
• the dislocations and supply-side disruptions caused by the Covid pandemic
• the spikes in energy and grain prices triggered by Russia’s invasion of Ukraine
As Covid raged around the world, it shut down factories and snarled transportation networks. Meanwhile, many professional workers in the US (and other developed countries) worked from home. Their expenses declined because they were not commuting to work. These more affluent Americans started to buy a lot of stuff, like Peloton bikes and furniture for new home offices. Severe imbalances between supply and demand led to sharp price increases.
Then the war in Ukraine wreaked havoc on prices for oil and gas, as Western Europe slashed its imports of energy from Russia. Meanwhile, the fighting disrupted the production of wheat in Ukraine, one of the world’s bread baskets.
As a result, inflation surged around the world. Although the US suffered large price increases, conditions in many European countries have been worse. Their energy prices leaped, as they moved to replace Russian oil and gas with supplies from other producers, including the US.
Reality: Biden’s Covid Package Prevented a Recession
Mainstream economists, such as Ben Bernanke, former head of the Federal Reserve, and Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, concede that Biden’s Covid package had some effect on inflation. But they think the impact of Covid and the war in Ukraine has been far more important. They also believe that Biden’s stimulus package helped the US to avoid a recession and provided a desperately needed safety net for millions of Americans who were out of work.
Republicans criticize Biden’s $1.9 trillion American Rescue Plan as too big and unnecessary. (Apparently the two massive Covid support programs passed during the Trump administration were fine, in their view.) The Republicans claim that the economy was already recovering from the pandemic, so a large program was not needed, and the government largesse led to a sharp jump in consumer spending…and inflation.
But this is rewriting history.
Biden’s Covid program may have been somewhat too large, but, as Bernanke and Krugman have emphasized, the US economy needed a lot of stimulus to offset the shocks from Covid. The official unemployment rate was high--10 million Americans or 6.3%-- when Biden took office, because of Covid and Trump’s abysmal mismanagement of the pandemic.
But a broader measure provides a more compelling picture of the economic distress caused by Covid: 15% of the labor force or 25 million Americans were either out of work or had suffered a drop in hours and pay because of the pandemic, according to the Economic Policy Institute.
A government program could trigger inflation, if it were to lead to consumers suddenly having a lot more money to spend. But Biden’s relief package program directed funds overwhelmingly to the unemployed. Affluent Americans received only a few payments, because the program included income tests.
Since the program primarily replaced lost wages for the unemployed, its funds helped those workers maintain, not increase, their level of consumption--on basics like rent and food. Consequently, the program was not a major trigger for inflation. And although many affluent Americans had more cash on hand, that happened because their expenses fell, not because they received much government support.
Other Key Biden Programs Were Not Inflationary
Republicans have also attacked as inflationary the President’s other two major initiatives, the Infrastructure Act and the Inflation Reduction Act (IRA). However, the funding for infrastructure projects is spread out over many years, and the IRA contained tax increases to mitigate the impact of its spending. In any event, both programs will increase the efficiency of the US economy, and the IRA should have a very beneficial impact on energy costs over time.
President Joe Biden
Myth #2: Inflation is Still Sky-High
In 2022, inflation certainly inflicted a lot of pain on Americans, especially lower-income consumers, as prices jumped about 9%. That economic hit may be the main reason why Trump has gained some support from Black and Latino voters, most of whom are blue-collar workers on tight budgets.
But two funny things have happened on the way to the election:
• the run-rate for inflation has fallen sharply from the 9% peak in 2022
• average wage gains have outstripped inflation over the last twelve months.
The strong gain in wages is particularly true for lower-wage industries such as the hospitality sector. Consequently, most consumers’ purchasing power has improved over the last year, especially for less affluent Americans.
Inflation dropped rapidly in 2023, to the mid-2% area, as supply chains were unsnarled and the Federal Reserve’s rate hikes cooled demand for housing and other big-ticket items. Inflation has unfortunately been stuck in the mid-3% range so far this year, but that is a far cry from 9%.
There is typically a lag of several months between when inflation starts to ease and when consumers accept that inflation has declined, according to economists. One would expect that at this point, most voters would start to feel better about the country’s economic performance and their own economic situation.
Myth #3: The Economy Is Terrible
After all, it is not just that inflation has declined to more tolerable levels.
By several other important measures, the economy has performed remarkably well during Biden’s tenure. America has rebounded from the disruptions of the Covid period. The US has recovered all the jobs lost during Covid, unlike Western European countries. Even more impressive, job growth has been so strong on Biden’s watch that employment has surpassed pre-pandemic levels.
GDP grew 1.9% in 2022 and 2.5% in 2023. The unemployment rate has been below 4% for 26 months, the longest stretch since the boom times of the late 1960s. Manufacturing employment has risen, partly because Biden’s infrastructure and green-energy programs have triggered a broad range of projects.
But Voters Are Still Downbeat
However, most voters are still pessimistic about the economy, based on a recent Wall Street Journal poll (April 6, 2024). Only 25% say the economy has improved in the last year.
Nonetheless, many voters have a split-screen view of the economy. They say the national economy is weak but conditions in their home state are good. For example, although 66% of voters in North Carolina rate the US economy as “poor”, only 33% see their state’s economy as weak. And while 68% of all voters said that it was becoming harder for the average person to get ahead, 46% reported that their finances were moving in the right direction.
So why do many voters feel despondent about the economy?
It’s My Party, Stupid, Not the Economy
Affiliation with a political party may be a key factor. Americans’ political views often influence, or even dictate, their attitude on the economy. This is particularly true for Republican voters, according to Krugman.
Most Democrats’ perspective on the economy began to improve in late 2022, as they reacted to improved conditions.
However, most Republicans continue to think the economy is a mess, despite the positive trends. They simply refuse to believe that Joe Biden could do a good job on the economic front. After all, Donald Trump and other party leaders continue to tell their followers that the economy is terrible and inflation is sky-high, because of Biden’s “radical, socialist and Marxist policies”. They are running a remarkably successful disinformation campaign.
“We are a nation whose economy is collapsing into a cesspool of ruin, whose supply chain is broken, whose stores are not stocked, whose deliveries are not coming.”
- Donald Trump at a rally in Georgia, March 2024
Myth #4: Trump Had Brilliant Economy Policies
One of Donald Trump’s greatest con jobs was convincing Americans that he was a “genius” at managing the economy. Trump exaggerated his economic record, claiming that he was presiding over “the best economy in the history of the country”.
In fact, Trump pursued disastrous policies. The US economy grew despite his initiatives, not because of them. Furthermore, Trump conflated the performance of the stock market with the real economy.
Trump’s two signature economic policies, his massive tax cut and his endless trade wars, were colossal, expensive failures. Trump’s attacks on immigration threatened one of the US’s key competitive advantages—its relatively younger population—and its long-term growth rate. Thanks to immigration, the US has fewer labor shortages and more entrepreneurs than other advanced nations.
Trump also claimed that loosening environmental regulations promoted economic growth, but that is not true. Worst of all, Trump bungled the government’s response to Covid, which froze the economy and caused many Americans to lose their jobs.
Reality: Trump’s Tax Cuts Did Not Boost the Economy
Trump’s 2017 massive tax cuts —his only major legislative achievement--goosed the stock market for a year, but they did nothing for the economy. Trump claimed that the tax cuts would stimulate so much capital investment and consumer spending that economic growth would rise to 3-4%. However, none of his predictions came true.
Corporations deployed their tax savings to launch a wave of stock buybacks or raise their dividends, which caused stocks to soar 19% in 2017. Few companies used the funds to expand their operations.
The tax reductions were heavily skewed toward the top 1% of taxpayers, although the top 5% received some cuts. Ultra-rich donors to Trump’s campaigns were delighted, of course. But for 95% of Americans, the tax cuts did not give them much more money to spend, so consumer spending did not take off.
The tax cuts also severely weakened the Federal government’s finances. The annual deficit exploded to $1 trillion in fiscal year 2020 from $585 billion in 2016, primarily because of the tax cuts. As a result, Federal debt rose rapidly during Trump’s administration.
Donald Trump
Reality: The Trade Wars Were a Bust
When Trump launched his trade wars and imposed tariffs in 2018, he promised to revive American manufacturing and end unfair Chinese trading practices. However, Trump has apparently never grasped a simple fact: tariffs are a tax on American companies and consumers. Foreign companies rarely pay the tariffs. They simply pass the added cost on to their American importers, who in turn raise the prices they charge American consumers.
As a result, the tariffs imposed indirect “taxes” of tens of billions of dollars on consumers, which led them to restrain their spending and acted as a brake on economic growth. The stock market took note of this adverse impact, just as the ‘sugar high” of the share buybacks triggered by the tax cuts was wearing off. Consequently, the stock market sank 6% in 2018.
Trump compounded the damage by levying tariffs on reliable trading partners, such as Mexico, Canada, and European countries, in addition to China. Many US firms import parts or finished goods from those nations. The tariffs were so disruptive that the American industrial sector went into recession in mid-2019, way before Covid struck.
By contrast, Biden’s infrastructure and green-energy programs have stimulated investment in projects and strong job growth. These initiatives should continue to create new jobs for years.
Trump Is Stuck in the Past
Unlike Trump, Biden’s programs are forward-looking industrial programs. As President, Trump denied climate change and attended to the needs of the fossil fuel industry. Remember his tribute to “clean, beautiful coal”? Biden’ policies are encouraging a shift to alternative energy sources and the production of electric vehicles and their batteries.
These policies are better for the economy as well as the planet. Solar and wind projects employ vastly more workers than the coal industry, which has been in decline for decades.
Outside the US, the market for electric vehicles and hybrids is growing rapidly. The Biden programs provide some hope that US firms can compete with Chinese car companies, which seek to dominate the EV market globally. Otherwise, if they only sell gas-powered cars, American auto manufacturers could eventually become obsolete, selling the modern equivalent of a horse-drawn carriage.
Obama vs. Trump on The Economy
To be fair, the US economy performed well during Trump’s administration. GDP grew at 2.7% annually, before Covid hit, and unemployment and inflation were low. However, as we have discussed, Trump’s policies did not cause this growth.
Trump was probably just lucky. Under Obama, the economy had gradually begun to recover from the 2008-09 financial meltdown. During Obama’s second term, GPD was growing at a respectable 2.3%. Economists believe that it generally takes 10 years for a country to rebound from a deep financial crisis, so it was normal for the US economy to start growing strongly in 2017-18.
Furthermore, the economy performed better under Obama on two key metrics that affect Americans’ daily lives: job growth and wage growth. The economy produced about 25,000 more jobs per month than during Trump’s tenure, and wages grew 1.3% annually versus 0.4% under Trump. These figures are based on the last three years of Obama’s administration and Trump’s first three years. We consider them more comparable because they avoid the distorting effects of the 2008-09 meltdown for Obama and the onset of Covid for Trump.
Joe Biden has a good economic record to run on. He just must tell his story better.
You can help, too. If a fellow Democrat or independent voter complains about Biden’s handling of the economy, please set them straight. Politely, of course.
The Wall Street Democrat