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The stories that matter on money and politics in the race for the White House
Last year, the Dutch central bank launched a study into how inflation shapes sentiment. The results should be chilling for US President Joe Biden, as he prepares for the upcoming presidential debate and election campaign.
What Dutch economists determined is that not only do consumers — aka voters — think it is the job of government not central banks to deliver price stability, but when prices swing wildly this cuts confidence in all institutions. As with a romantic relationship, once trust is broken it is painfully hard to restore.
Sadly, the Federal Reserve has not (to my knowledge) dared to replicate this research. Thus we cannot know whether American voters are exactly the same. But I suspect they are — and would urge the White House to take note.
Biden’s team is haunted by a peculiar paradox. If you look at opinion polls, you would presume that the US economy is imploding. A Guardian-Harris survey last month shows that 56 per cent of voters think the country is in recession, 49 per cent think that the stock market has fallen this year and 49 per cent think unemployment is at record-high levels. Ouch.
Unsurprisingly, that leaves only 32 per cent of voters who trust Biden to run the economy, compared to 46 per cent who trust Donald Trump, according to an Ipsos poll. This is ominous given that 88 per cent also cite the economy as the top factor influencing their votes.
But hard US economic data tells a completely different tale. Yes, Biden has presided over rising national debt and a temporary surge in inflation. But debt jumped by a similar amount under Trump. And the sharp rise in inflation was seen across the western world since it mostly reflected Covid-era supply chain shocks and war in Ukraine. In any case, inflation has tumbled this year.
Meanwhile, unemployment is at its lowest level for 50 years, wage growth is strong, particularly among lower-paid workers and manufacturing investment is surging at record high rates, partly due to the Inflation Reduction Act. Even more remarkable, four-fifths of IRA-linked investment is occurring in red not blue states. A similar proportion is in communities with below average educational scores, as Heather Boushey, economic adviser to the White House, told the Aspen Ideas festival this week.
She credits this skew on the White House’s deliberate policies to create jobs in blighted regions; others attribute it to the fact that it is easier to start investment in red states because of looser construction and hiring regulations.
Either way, the imbalance could make it politically tough to reverse the IRA even if Trump wins in November, since many Trump-supporting areas are seeing an investment boom. Yet that same demographic apparently blames Biden for a “bad” economy.
Why? One explanation might be data flaws. The basket of goods used to calculate average inflation, for example, does not always reflect actual household budgets, particularly poorer ones. And, as Republicans point out, impressive employment data glosses over the fact that many poor Americans work multiple jobs to pay their bills, which creates double counting in some statistics.
Another factor is tribal politics and media misinformation. A Harvard-Harris poll shows that while 59 per cent of Democrats think that the economy is on the right track, only 13 per cent of Republicans agree. Yet they largely face the same economy.
However, I suspect that the third and most crucial issue is the point highlighted by Dutch economists around the psychology of inflation. Unlike economists, ordinary consumers tend to judge inflation by simple heuristics, such as the petrol prices blazoned on station forecourts. They also focus on absolute price levels, not percentage figures about annualised growth (or falls).
And since absolute price levels have jumped around 20 per cent under Biden — more dramatically than most voters have ever experienced before — this is exacerbating a wider loss of trust in institutions. This hurts both parties, polls suggest. But I suspect it damages Biden more since he presided over the inflation surge and Trump claims to be anti-establishment.
So is there anything the White House can do (other than pray for lower oil prices)? Last week, Boushey convened a workshop of mostly Biden supporters, where I heard many ideas tossed around: raise Biden’s social media presence; work with local influencers to tell personal stories about the IRA boom; embrace simple populist — not technocratic — messaging to match Trump.
A case in point: back in 2020, when Trump’s White House distributed stimulus checks to offset the Covid slump, Trump insisted they carried his signature. These branded the handouts with his name in an easy-to-remember manner for voters. When Biden’s White House delivered its own largesse to consumers, he did not follow suit. Big mistake.
Maybe the White House can now rectify this. Janet Yellen, Treasury secretary, is striking a more populist tone. But it will be an uphill, near-impossible fight and one that calls for psychologists and anthropologists, as well as economists.
The one thing that is crystal clear is that we need to update the famous 1990s mantra that elections rest on “the economy, stupid”. Today, it is economic feelings — not “just” facts — that matter.
