I can now imagine the conversation taking place in the White House.
“We have created millions of jobs, GDP growth is healthy and there is no sign of a recession. Why do people hate the economy so much?”
Polls show that just 34% of Americans approve of President Joe Biden’s handling of the economy, well below his already low 41% approval rating. The Biden team even coined a name for their policy: “Bidenomics” to market their successes. As someone who is not happy with the economy right now, I can’t believe anyone would want to put a name to it. Am I misjudging the situation? I’ll let you decide.
Bidenonmics, as far as I can tell, is the idea that the government should incentivize job creation and subsidize investment in priority areas like clean energy. It’s essentially the opposite of the Republican approach of using broader tax cuts to boost investment. The problem is that currently both approaches are wrong. We don’t need more investment, either through tax cuts or incentives – we need less.
There is clear evidence that excessive aid spending for COVID-19 has led to much of the inflation we have seen. Instead of backing down, the ironically dubbed “Inflation Reduction Act” is doubling its spending by spending more.
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Binomics creates jobs – lots of them. Great, but there’s a big problem: we don’t have the people available for these new jobs. They merely create demand for which we have no supply, which exacerbates inflationary pressures. We are currently facing severe labor shortages across the United States, with acute shortages of nurses, pilots, handymen and even farmhands. Amazingly, we have around 10 million vacancies and only 5.8 million unemployed.
The problem with Bidenomics is that it is essentially trying to address an employment problem that doesn’t exist. Fighting inflation requires slowing investment, while creating jobs means the exact opposite.
The inflation rates of 2021 and 2022 were the highest we have seen since 1981. Even with wage increases, real wages (profits relative to inflation) have fallen by a whopping 1.5% in the past year alone and by 3.16% since 2021. For 50 million retired people with fixed incomes, the situation is even worse, with prices for basic necessities like groceries down 10.6% over the past year alone, down 10.1% for gasoline and 7.9% for rent % have increased.
The Federal Reserve is rapidly raising interest rates to slow the economy, but Biden and his team appear determined to step on the gas pedal. It has now become a tug of war. As Bidenomics creates new jobs, labor shortages are fueling inflation, which in turn will prompt the Fed to hike interest rates further.
Rapid interest rate increases are intended to slow the economy, but they also have other negative consequences, such as making it significantly more difficult to buy a home. For example, the monthly payment for a $400,000 loan doubles on an 8% mortgage compared to a 2% mortgage.
In my opinion, Biden could easily have done more with this economy. The dramatically low unemployment rate and labor shortage gave him the ability to fight inflation simply by curbing spending without putting people out of work. Instead, the government remains focused on job creation and GDP growth while we grapple with inflation, high interest rates and falling real incomes.
We need a comprehensive team approach between the Fed and Biden teams to address our economic challenges. A big part of this is overcoming unwarranted fears that reasonable spending cuts could trigger a brief recession. Focusing on job creation and/or tax cuts will have the opposite of desired results. By restraining spending, finding employment balance and prioritizing stability, we can pave the way for long-term economic prosperity.
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