Donald Trump's victory and the politics of inflation

In March, I was a guest at a dinner discussion hosted by a progressive advocacy group in New York. As the discussion revolved around Joe Biden's low approval ratings, another participant brought up the biased media coverage of the president's economic record, which seemed to be a source of vexation for almost everyone at the table. I easily agreed that the positive news about jobs, GDP, and Biden's efforts to boost manufacturing investment, of which there was plenty, was not getting the attention it deserved, especially compared to the voluminous inflation hedge. But I also pointed to governments across the political spectrum in other countries, such as Britain, Germany and France, which have seen sharp increases in consumer prices. Inflation, it seems, was a poison to all existing leaders, regardless of their geographic location or political affiliation.

At this point, I was still hoping that with the US inflation rate returning to pre-pandemic levels, there would be enough time for public opinion to change and Biden's approval ratings to improve. restore. Of course, that never happened. According to the network's exit poll, conducted by Edison Research, seventy-five percent of voters in last week's election said inflation had caused them moderate or severe hardship over the past year, and of that group, about two-thirds voted for Donald. Asset. The political half-life of the post-Covid inflationary shock has proven to be long. Kamala Harris and the Democrats have joined Rishi Sunak's Conservative Party, Emmanuel Macron's Renaissance Party and a number of other incumbents who have been punished by disaffected voters. According to the Financial Times, every ruling party contesting elections in a developed country this year lost vote share, the first time this has happened in almost 120 years.

To be clear, I am not claiming that economic factors are solely responsible for America's outcome. Immigration, the culture war, Trump's disapproval and other factors have all contributed to this mix. But anger over high prices clearly played a significant role, raising the question of what, if anything, the Biden administration could have done to counter the global anti-incumbency wave. This is a complex issue that cannot be fully addressed in a single column. But a good place to start is the White House itself, where members of the Council of Economic Advisers (CEA) and the National Economic Council have spent a lot of time analyzing the inflation surge and considering options for dealing with it. face.

In July 2021, when the inflation rate was rising sharply, the CEA published a blog post claiming that a historical comparison with the period immediately after World War II, where prices took off due to shortages of supply and pent-up demand, suggested that inflation could quickly decline once supply chains come fully online and pent-up demand stabilizes. While inflation fell sharply in the second half of 2022 and the first half of 2023, this analysis proved rather prescient, more prescient, certainly, than another comparison that was circulating, with the wage-price spiral of the 1980s. 1970s, when inflation reached double digits. But at the White House, Biden's economists now faced a new question: Why, despite falling inflation, was public opinion about the economy and the president still so bitter ? We quickly realized it wasn't just about the inflation rate, Ernie Tedeschi, a former CEA chief economist who left the administration earlier this year, told me. People still went to the store and saw the high prices of eggs and milk. Even when an inflationary period ends, prices do not magically return to their previous levels.

The Biden administration had already taken steps to address supply shortages and high energy prices. In 2021, he established a supply chain task force, which focused on unglamorous but essential efforts, such as clearing delays at U.S. ports and easing shipping regulations. meat labeling, both of which resulted in more products being placed on the market. In 2022, when oil prices soared following Russia's invasion of Ukraine, the administration sold more than forty percent of the United States' strategic oil reserves (and later replenished them at lower prices and make a profit for the taxpayer). Both of these policies were successful in their own right. But, obviously, in the end, prices continued to do what they did, Tedeschi noted. I like to think that the White House may have provided marginal help, but the main tool in fighting inflation has been the federal government's monetary policy. (Broadly speaking, this refers to how the Federal Reserve can cool or stimulate the economy by setting interest rates.)

One of the questions that has arisen in recent years is whether this division of labor, which is the norm in the United States and other advanced countries, is a sufficient answer. Isabella Weber, an economist who teaches at the University of Massachusetts Amherst, pointed to the fact that as inflation increased, corporate profits increased in many sectors, indicating that companies were taking advantage of the situation. to increase their margins. She advocated price controls. . More recently, Weber has argued that such policies would not only constrain profits, but could also help combat the political extremism that high inflation can fuel. Can we finally have a serious conversation about an anti-fascist economy? she wrote about X last week.

Most U.S. economists, including those associated with the Biden White House, remain skeptical about the effectiveness of price controls, which they say can lead to serious distortions and shortages. I'm trying to be humble, but I don't know how they would have helped, Tedeschi said. People were complaining about inflation. If we had controlled prices, they would have complained about shortages. It would still have been pinned on the President. Perhaps, but imposing large-scale price controls was not the only possible option to address public anger. As the profits of major energy companies increased, the UK introduced a windfall tax on their profits, which was later increased and is still in force. Germany imposed a targeted cap on the price of natural gas and electricity and introduced winter fuel subsidies for businesses and households. As far as I know, the Biden administration never seriously considered such options. It is also true, however, that they did not have a lasting political impact and certainly did not change the political fortunes of the parties that introduced them.

Even if there was no simple policy solution to the policy problems facing the Biden administration, could the Biden administration have done a better job of rhetorically addressing voters' concerns? William Galston, a fellow at the Brookings Institution who worked in the Clinton administration, said last week that Biden should have shifted much earlier from focusing on job creation to focusing on the cost of living. He was trapped in a very traditional mentality of jobs, jobs, jobs, Galston said. It was a fundamental error.

While Biden's record on GDP growth and job creation is truly commendable, since since January 2021 the economy has created sixteen million jobs, perhaps there is something to this criticism. For a time, it seemed that the White House was not sufficiently recognizing the frustration and anger generated by soaring inflation. Yet early last year, Biden spoke much more about high prices and sought to place some of the blame on corporate corruption. He announced measures to crack down on junk fees and criticized price contraction and price gouging, getting very little credit in the media or elsewhere. The administration also tried to publicize the groundbreaking steps it had taken, through the Inflation Reduction Act of 2022, to reduce health care costs: capping the price of insulin for retirees, give Medicare the power to negotiate the prices it pays for certain drugs and introduce limits on out-of-pocket costs.

After Harris replaced Biden at the top of the Democratic ticket, she vowed that lowering the cost of living would be her first priority. She also outlined a number of proposals designed to help low- and middle-income families, including expanded child tax credits, a new subsidy for first-time home buyers, and allowing Medicare to help to cover the cost of home care. One of the biggest problems with the recent wave of price increases was that even after food and gasoline prices stabilized, housing and child care prices were out of reach. and have been a source of enormous stress for middle and working class families. decades, Felicia Wong, president and CEO of the Roosevelt Institute, a liberal think tank, told me. Harris' proposals were designed to address these issues.

Ultimately, however, none of this dispelled the public perception that overall prices were still too high and that Biden and Harris, if not entirely to blame, were convenient vehicles for voters to express their frustration. If people have brilliant ideas about how we could have communicated more effectively about inflation, I'm all ears, Tedeschi said. But we tried several different things. I just don't think it's possible to talk about it, precisely because it's so real.

That seems to be the main thing. The great irony, of course, is that the candidate who promised to raise prices further by imposing across-the-board tariffs on imported goods emerged victorious last week.

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