Changing fortunes: The front page of a newspaper after Biden dropped his reelection bid. The next US president is expected to inherit a Goldilocks economy, say observers. — Reuters
IMAGINE you could put the Covid-19 pandemic, Russia’s invasion of Ukraine and the various other tumults of the last half decade out of your head and just focus on the past year.
In that period, wages have risen faster than prices.
That’s true even though nominal wage growth has itself been slowing down.
The key is that the rate of inflation has fallen steadily and is now at the point where it is very close to the US Federal Reserve’s (Fed) target level of 2%.
All this happened because of a mix of good luck and good policy – mostly interest-rate hikes that generated some softening of the labour market but nothing like the recession and rising unemployment that were widely predicted as a result of the Fed raising rates.
Wages have been rising faster than prices for more than a year.
The policy has been so successful, in fact, that the Fed is now expected to begin cutting rates in September.
The mythical “soft landing” has become reality: The US economy has low unemployment and falling inflation. By next year, as interest rates continue downward, America will have a true Goldilocks economy to pair with its record stock market and falling crime.
Under ordinary circumstances, you might expect Democrats to be cheering this news. These are not, to state the obvious, ordinary circumstances.
Instead, much of the party is in a dark depression about the reality that Republican presidential nominee Donald Trump is likely to be the beneficiary.
Polls show he is more likely than not to win the election this November, and many Democrats believe that if he does, the country’s sour economic mood will suddenly dissipate.
Making this an even more bitter pill for Democrats is that many of them believe Trump already receives undeserved credit for the placid economic circumstances of 2017-2019.
The way they tell it, former president Barack Obama inherited an economy ravaged by the global financial crisis. He oversaw a painstakingly slow but extremely steady recovery.
And then Trump took over – and basked in the glory of full employment. Now the very same scenario, with the pandemic replacing the global financial crisis, is poised to play out again with Trump and Joe Biden.
Of course a big part of the problem for Democrats is that most of the public simply doesn’t share their interpretation of the past few years. The way the electorate sees it, inflation may be low now, but it was even lower before Biden took office.
It is apparently very difficult for a president to claim victory over a problem people believe to be of his own making.
Prices may no longer be accelerating rapidly, or even rising faster than wages, but they certainly haven’t fallen, and the higher interest rates raise the cost of living in ways that aren’t captured by the consumer price index.
Politics aside, the fundamentally sound US economy does raise the question of what exactly Trump plans to do if he wins.
On the one hand, one of the main talking points at last week’s Republican convention in Milwaukee was that things were pretty good in America on Trump’s watch.
On the other, Trump keeps promising to do all kinds of stuff in his second term that he didn’t do in his first.
In last Thursday’s acceptance speech, for example, he promised “the largest deportation operation in the history of our country”.
He wants not only a very expensive extension of the Tax Cuts and Jobs Act, but also a large corporate income tax cut.
And of course there’s his plan for a 10% across-the-board tariff plus a 60% (or higher) tariff on merchandise from China.
The tariffs and mass deportations would have no precedent from his first term.
And doing an even larger tax cut in the face of much larger baseline deficits and higher interest rates seems risky.
Given that actual economic conditions in the country are, in fact, fine, it’s not obvious why any president would want to rock the boat like this.
If the voters want to still be angry at Biden about past inflation, that’s up to them – and it’s certainly fair game for Trump to try to exploit it.
But whoever’s fault you think the inflation of 2022 and 2023 was, it genuinely is over. And even if it weren’t, shrinking the labour force, growing the deficit and cutting off foreign trade is a terrible way to fight inflation.
Of course, maybe Trump is not serious about the sweeping changes he talks about on the campaign trail – to say nothing of the even more sweeping Project 2025 changes that Democrats like to warn about.
But in general, and despite the widespread cynicism about politics, elected officials try to carry out the promises they make as candidates.
For Democrats, meanwhile, the economic situation may provide a reason over and above the president’s age to think about a new candidate.
Because the truth is that any Democratic presidential campaign is going to be stronger by making the case against Trump – on character and ethics, on abortion rights, on his dangerous economic policy ideas – than by making the case for Biden.
The cleanest way to do that is not to have Biden on the ticket at all. Then his chosen successor, rather than a Republican, might be able to reap the rewards of Biden’s policies. — Bloomberg
Matthew Yglesias is a columnist for Bloomberg Opinion. The views expressed here are the writer’s own.
