The Capitol, Washington Monument, Lincoln Memorial and National Mall are seen from the air (SAUL LOEB/AFP via Getty Images)AFP via Getty Images
The current economic situation is [fill in the blank]. The future state of the economy is [fill in the blank]. Policy makers across Washington, DC are trying their best to fill in the gaps.
A “vibes recession” in a confusing economy
It’s a confusing economy. Inflation has declined but not abated. The Federal Reserve’s aggressive rate-hike campaign and a banking crisis have created a kind of credit crunch.
Still, the unemployment rate is at its lowest level in 54 years. Black unemployment is at its lowest level ever. Wages are still rising.
There are four possible outlooks for the economy: a soft landing (low inflation/low unemployment), a hard landing (low inflation/high unemployment), no change (high inflation/low unemployment), or stagflation (high inflation/high unemployment). .
Jason Furman, a Harvard economist and former chairman of the Council of Economic Advisors, has a useful outlook on what could happen by the end of the year.
There is no clear outlook on how the economy will develop. This leads to a conflicting economy with terms like “recession without recession” or “recession without jobs”.
But there is certainly a “vibes recession.” Less than 20% of Americans believe the economy is doing well, and the majority believe the country is already in or close to a recession. Partisanship plays a role too — Republicans have a more negative view of the economy than Democrats, the opposite of when President Donald Trump was in office.
A bad economy – or rather the trend of a bad economy – is not good for established companies. President Joe Biden’s economic approval rating is lower than his overall approval rating, unlike Trump. But Biden isn’t the only one in the doldrums on economic approvals. According to Gallup, Federal Reserve Board Chairman Jerome Powell, who once held the highest level of economic confidence for a Fed chairman since Alan Greenspan, now has his lowest level on record at just 36%.
When it comes to elections in business, both the trends and the current situation matter. The 2010s was dominated by the “unemployment boom”, but in 2012 the economy was expected to recover, giving President Barack Obama a boost for re-election. In 2016, the economy was doing well, but much of “Trump country” was in recession, which helped Trump defeat former Secretary of State Hillary Clinton. The 2020 pandemic stalled the recovery, but a quick economic recovery ensued on the back of the fiscal and monetary policy response that made the economic issue a bit of a shock in the minds of voters.
Typically, the gauge of the economic impact of an election is not determined until the second quarter of an election year. There’s still time for the economy to improve or worsen before voters start making lasting decisions for 2024.
The Economy and the Federal Reserve
The Fed remains the most important institution influencing the economy this year and next. The Federal Open Market Committee voted unanimously this month to raise interest rates to 5-5.25%, the most restrictive level in 16 years. However, the FOMC forecast pointed to a possible pause in rate hikes. The market expects a rate pause followed by a rate cut of between 50 and 75 basis points by the end of the year.
The Fed faces a delicate balancing act between price control and maximum sustainable employment. Powell is still confident that a soft landing can be achieved even as Fed officials anticipate a recession later in the year.
Unlike other Fed chairmen in the past, Powell does not have a doctorate in economics. He is more willing to look at the data to make a policy decision than stick to a single model. The banking crisis and the signs of a credit crunch justify a possible interest rate pause.
But Powell is an institutionalist, which markets continue to underestimate. A Fed chairman’s reputation and legacy depend primarily on his ability to fight inflation. “I think that policy is strict,” Powell said at a news conference this month. “We stand ready to do more where more monetary restraint is warranted.”
Perception is just as important as reality. If businesses and consumers believe that inflation will remain pervasive, they will adapt to a high-inflation world. In such a world of elevated inflation, even if lower compared to last year, Powell and the FOMC are unlikely to sit idle. A recession could be a necessary evil, something that would pose a political challenge for Democrats in 2024.
The Economy and the Presidency
Biden’s re-election introductory video last month focused on freedom and democracy, not the economy. But just because Biden isn’t basing his re-election primarily on the economy doesn’t mean there isn’t an economic agenda from the White House and the administration.
Biden is embracing his populist “Scranton Joe” roots in business. He focuses on the implementation of an American industrial policy. In his fiscal 2024 budget, he proposed tax increases for the wealthy and businesses. He’s looking for wins through the regulatory agenda, such as the Department of Transportation’s attempt to give air travelers full compensation for delayed and canceled flights. Its regulators want to introduce new banking regulations that will tighten controls for mid-sized and large banks, while expecting the largest banks to top up the Federal Deposit Insurance Corporation’s deposit insurance fund. The President has an excellent and progressive antitrust team that mitigates M&A moves and seeks to change long-standing corporate practices such as the use of non-compete clauses.
This vision contrasts with Democrat attacks on the GOP’s economic vision and the imminent threat of job gains if Republicans don’t raise the debt ceiling.
However, Biden faces a balancing act. A populist agenda to appease its supporter base can create headwinds for the economy, which is detrimental to the general electorate. Too much banking regulation could restrict lending, a pro-union and protectionist agenda could limit implementation of industrial policies, a pro-green agenda could drive up energy costs, and a firm stance on the “MAGA” debt ceiling could leave Republicans stymied by the economy.
The Economy and the Divided Congress
It is safe to say that a divided Congress will achieve little. In a world where the two parties are more polarized than ever before, but where majority-minority differences are small, the two sides have little incentive to negotiate with each other. Party leaders see the potential to be in the majority after the 2024 election and implement a reconciliation agenda there without the need for a cross-party compromise.
Nevertheless, there are coercive mechanisms in politics that can have economic effects. In the short term, this is the debt ceiling. In the medium term, these are the funds for the 2024 financial year.
Both sides want to be able to declare victory in these political negotiations, but getting there could heartburn the markets. With the debt ceiling and budget funds, there are fiscal headwinds for the economy, but how big they will be depends on the negotiations. A deal on either could include nominal cuts in basic spending, with some potential economic stimulus from a deal approving reforms.
On the other hand, there are some catalysts that could amplify Congressional action that impacts the economy. If the economy does go into recession, there may be scope for targeted fiscal policy. Republicans in the House of Representatives plan to introduce a tax package that would increase spending on research and development, looser limits on interest deductibility, and a 100% bonus write-off. Democrats are still demanding action on the expired increased child tax credit. But a recession could kickstart an under-the-radar negotiation leading to modest fiscal policies on both sides.
The Economy and the Supreme Court
At a time of public and more consistent executive action, the judiciary has a role to play in some of Washington, DC’s biggest economic issues. This is especially true in a conservative Supreme Court and a progressive White House.
The Supreme Court is deliberating on the constitutionality of Biden’s student loan debt relief executive actions in Biden v. Nebraska and Department of Education v. Brown. The court agreed to consider cases at the next session that could allow for a reevaluation of the Chevron Doctrine, a precedent for judicial deference to regulators’ interpretation of laws, and the constitutional authority of the Consumer Financial Protection Bureau. If Biden decides to take executive action on the debt ceiling, there would likely be grounds for litigation (in fact, it already exists) that could reach the country’s highest court.
The 6-3 conservative Supreme Court is not afraid to influence the economy and the political system. If the court were to reject Biden’s student loan debt relief program, it would create macroeconomic headwinds for an executive measure that would bring an estimated hundreds of billions in relief to student loan borrowers. The court could well turn the regulatory agenda for Biden on its head over the next year, a factor the government must consider as it drafts and finalizes various rules. As with the midterm elections on abortion, this is dragging the Supreme Court into the political zeitgeist as Democrats attack what they believe to be an activist court.
follow me Twitter or LinkedIn.
I am Director of Research at Beacon Policy Advisors LLC, an independent policy research firm based in Washington, DC I work closely with traders, institutional investors, corporations, reporters and lobbyists to cut through the noise of political debate and government bureaucracy to explain, what’s happening now, what might happen next, and most importantly, why it matters. It is important to me to be an astute and unbiased source for analyzing the political, legislative and regulatory landscape. This has resulted in my work and expertise being regularly cited in financial media. Before joining Beacon in 2017, I was a Senior Analyst at Hamilton Place Strategies, a Washington-based consulting and public affairs firm. Before that I spent time on Wall Street and on the buy side.
Continue readingread less
Comments are closed.