Since the Democrats’ big victories on Tuesday, I’ve been seeing some speculation that the 2024 election could be marked by a reverse ripple effect: that President Biden, whose poll numbers have reportedly been weighed down by a poor economy, could be boosted by local candidates running in victories on social issues.
Well, I’ve done a bit of reading into economic and political history – which is, after all, most of what we have to do in such matters – and I have some problems with this narrative.
First, there is actually not a bad economy under Biden. On the contrary, the economic news has been remarkably good, and history explains why.
Still, many Americans tell pollsters that the economy is bad. Why? I don’t think we really know; What we can say is that historical experience challenges a widely held view of the causes of American discontent.
Finally, could Biden have pursued alternative policies that would have put him in a better political position? The lessons of history suggest that this is not the case. If economic perception is a big problem for Democrats next year (which is far from certain), it may be more a matter of bad luck than bad policy.
Start with the economic situation. The simple reality of the past year is that America achieved what many, perhaps most, economists thought was impossible: a sharp decline in inflation without a recession or even a sharp rise in unemployment. If you don’t trust me, listen to Goldman Sachs, which released a report on Wednesday called “The Hard Part is Over” and found that we are managing to combine rapid disinflation with solid growth and that it this happy combination awaits – the opposite of stagflation – moving on.
What went right? Back in 2021, economists in the Biden administration published a paper on historical inflation episodes, arguing that the closest parallel to current events was the post-World War II rise in inflation, which subsided after the economy overcame wartime disruptions and readjusted to peacetime production had. This analysis looked far too optimistic for a while, with inflation having been significantly higher for much longer than the Council of Economic Advisers expected.
At this point, however, as a soft landing looks increasingly plausible, it appears that the Council, while underestimating the magnitude and duration of the shock, has gotten the basic story right.
But the voters are not happy. The most common story I’ve heard is that people don’t care that prices have gone down; They are angry that prices have not returned to pre-pandemic levels.
This makes perfect psychological sense. In September, consumer prices were around 19 percent higher than on the eve of the pandemic. Average wages also rose by about the same amount, and wages for non-supervisory workers (the vast majority of the labor force) rose significantly more. However, human nature being what it is, it is natural for people to feel like they deserve their higher income, only for inflation to take away their gains. And lecturing voters about why that’s the wrong way of thinking is, let’s just say, not a promising political strategy.
But this is where my historical doubts come into play.
This isn’t the first time we’ve seen a temporary spike in price that leveled off but never went back down. The same thing happened after World War II and again during the Korean War, with the latter increase being about the same as what we have seen since 2020. Unfortunately, we don’t have consumer sentiment data for the 1940s, although some political scientists do believe that the economy actually helped Harry Truman to his surprise election victory in 1948. But we have such data for the early 1950s and it suggests that people were relatively optimistic about the economy despite higher prices. Why should this time be different?
It also seems worth noting that many voters have demonstrably incorrect views about the current economy – specifically, they believe that unemployment, which is near a 50-year low, is actually near a 50-year high.
Whatever is really going on, could Biden or the Federal Reserve have done something that would have appeased voters?
Here’s how I think about it: The supply chain disruptions caused by the pandemic made it inevitable that prices for some goods would rise sharply. The only way to avoid overall inflation would have been to force significant price reductions on other goods and services.
And everything we know from history suggests that attempting to impose deflation – falling prices – on large parts of the economy would have had catastrophic effects on employment and production, something like the silent depression that struck Britain inflicted after World War I as it tried to disappear back to the pre-war gold standard.
So what will actually happen in the next election? I have no idea and neither do you. What I can say is: If you think Biden made big, obvious economic policy mistakes and could have easily put himself in a much better position, you probably haven’t thought this through.
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