Why Biden Can’t Win Inflation

It was the summer of 1979, and President Jimmy Carter was against it. The Americans were paying a lot more for gas and groceries than the previous year, and Carter faced a choice: he could tell the Americans that this was a problem that the government could fix, or he could ask them to tighten their belts and persevere. He chose the latter. But prices continued to rise and in 1980 Carter was defeated in a landslide by Ronald Reagan.

Things are not as bad as in 1979, but for many the comparison is still appropriate. According to the latest Consumer Price Index, prices rose 8.9 percent in November from a year earlier, the highest increase since 1982. Percentage points. Biden says reversing inflation is a priority for his administration, and he has revealed strategic oil reserves and announced plans to “remove barriers” to tackling rising prices, but there is a difficult and uncertain road ahead.

It is no secret that inflation is politically strong. You can’t miss rising prices, and research has shown that Americans are deeply concerned about inflation. But the politics of managing it are messy, and Biden has a hard time keeping up with rising prices. He faces a country that looks at inflation through a very biased lens – and will judge its performance on this issue accordingly. If he ignores inflation, it could be as spiraling as Carter. But at the same time, if Biden reacts too strongly, the cure may be worse than the disease.

The unique place of inflation in the American mentality is bad for presidents

Inflation occupies a unique place in American life. This is partly because price increases may seem much more obvious than things like government deficits; They are in front and in the center of the average consumer. Add to the political memory: Great inflation brought four recessions from 1969 to 1982 and had an irresistible impact on our politics.

Trying to pinpoint the cause of today’s inflation is, however, challenging. The epidemic has transformed the economy, and many experts point to the exceptional nature of this economic recovery as the primary driver of inflation. Aston Golsby, a professor of economics at the University of Chicago Booth School of Business, emphasized to me that the epidemic-induced recession is the key to understanding the price we see now.

“It simply came to our notice then. It doesn’t look like a recession, “says Golsby.” Generally, the thing that drives the recession is the long-term item that shuts down, such as consumer sustainability and housing. And those things have grown in the recession. “

Although Golsby argues that current inflation is temporary, he acknowledges that even a return to normalcy in the summer will “cure” the Biden administration. And there are good reasons for this: The chart below shows that, with the approval of the President since 1960, there have been a number of sharp recessions, with sharp rise in inflation. Biden himself is currently in the dump as far as his approval rating goes.

Presidential approval ratings and inflation line charts for every president since John F. Kennedy show that in some cases, rising inflation is associated with declining approvals - especially for Jimmy Carter and more recently, Joe Biden.

It’s not entirely clear how much inflation is linked to the president’s approval rating, but research suggests it could hurt politicians in power. For example, a 1999 survey found that unexpected rise in inflation has undermined the electoral performance of ruling parties. And a 2010 study showed that inflation has had a significant negative impact on Americans’ assessment of the president. Finally, a 2013 study found that budget deficits and rising unemployment, as well as rising inflation, were the “causes”.[d] Declining presidential popularity in the United States.

But in the case of inflation, some prices are more important than others. Consider Rising Gas Prices: A 2016 study found that higher gas prices had a negative effect on presidential approval, as Americans constantly reminded them. Carola Binder, a professor of economics at Haverford College who researches inflation expectations and monetary policy, told me that higher gas prices can have an impact on how Americans in particular evaluate the economy.

“You literally see gas prices and large numbers when you’re driving on the road, and you buy it more often,” Binder said. “So you’ll probably remember how much it cost if you look at it being $ 2 last week and now it’s $ 3.” The same is not true of family vacation price tags, Binder said.

Americans who survived inflation in the 1970s, however, may react negatively to rising gas prices. According to a 2019 study, Binder and his co-author Christos Macridis found that Americans who lived through the oil crisis of the 1970s were not as pessimistic about rising gas prices as those who were not. This is because, as Binder puts it, “they built their model based on how the economy worked in the late ’70s.”

Recent polls further confirm that Americans are feeling the effects of rising prices. Forty-five percent of households face “moderate” or “severe” hardship due to rising prices, according to a November Gallup poll, and 56 percent of voters in a November Wall Street Journal poll said inflation was a “major” or “small” financial strain on them. That strain has been particularly hard on poor Americans; According to that Gallup poll, 7 out of 10 adults in households earning less than ,000 40,000 a year say the epidemic has caused them distress.

Although inflation weighs heavily on American conscience, it is important not to overstate its impact, especially in the case of presidential approval. For example, the chart above shows that George W. Bush’s approval fell during the Great Depression, a time of inflation. And even Carter’s re-election was ruined by other key issues, both foreign and domestic. But that doesn’t stop Americans from stabilizing inflation, even when it’s low. And, right now, there is evidence that rising prices are hurting many Americans.

Americans’ views on inflation are strongly shaped by politics

Although inflation affects all Americans, there is a gulf in perception. In short, whether you’re sharing a party affiliation with the president is probably the biggest reason you think inflation is going to get worse. It tracks in more detail how Americans’ attitudes toward the economy have little to do with growing economies; Rather, they are about who is in the office.

“When the president of your political party is in power, you are more optimistic about what the economy will be like and tend to expect lower inflation,” Binder said. “When a president whose politics you disagree with is in power, you become more pessimistic about what the economy will look like and you will have high inflation expectations.”

Recent research has also shown that Americans expect significantly lower inflation when they support the White House. According to a 2019 study, inflation was higher in the red state than in the blue state when Barack Obama was in office, only to reverse positions when Donald Trump arrived.

This trend has been around for some time. For example, in the 1980s, when inflation fell nearly 10 points under Reagan, more than 50 percent of the “strong” Democrats said inflation was slightly or worse in the 1988 poll, with less than 8 percent saying it achieved much more. Good (13 percent and 47 percent of “strong” Republicans, respectively, said the same thing). Meanwhile, Democrats again said more than Republicans that inflation has risen over the past eight years, according to a 2008 poll conducted towards the end of another Bush GOP administration.

Surprisingly, this divide is still evident today: under Biden, Republicans have consistently expressed more fears about the economy – and inflation – than Democrats, and it doesn’t look like the split will soon be over.

The remedy for inflation can be catastrophic

At a surface level, inflation occurs Worse, if you keep everything else constant, it lowers your purchasing power and your dollar value. And if Biden pretends to do nothing, the fear of inflation could turn into a self-fulfilling prophecy: Americans, expecting higher costs, may demand higher wages from employers to offset inflation, leading employers to demand higher prices. Resulting in even worse inflation.

The problem is that the solution – economic and political – is not as simple as raising interest rates to reduce inflation: there is a cost to keeping inflation low, and we are often too early to pump a break into a recovering economy.

“We only talk about inflation when it’s high, and not when it’s low,” said Jonathan Kirschner, a professor of political science at Boston College who studies the politics of inflation. But he stressed that whether inflation is high or low, the policies that target it select the winners and losers in the economy. “There is no escape from the politics of inflation policy, even when inflation is at a very low level,” Kirsner added.

Moreover, some policies designed to deal with inflation – especially when it is high – have had a devastating effect. Take, for example, the dynamic policies pursued by the Carter administration that finally stopped inflation in the 1980s. For starters, the country went into a deep recession and millions of workers lost their jobs. Dissatisfied building contractors and construction workers even mailed two or four pieces to the Federal Reserve’s Board of Governors claiming that the timber was no longer needed because no one was buying the house anymore. The political collapse of inflation did not stop with Carter. Reagan has seen his approval rating downgrade even after inflation came under control.

But recent episodes, such as the slow recovery from the Great Recession, have further called into question the ability to be super-tough on inflation. Kirschner pointed to the double recession of the 1930s as a result of the rapid rise in the fight against inflation. Inflation, of course, has not yet reached the level of the 1970s, but there is a possibility that we will correct the trend very quickly, as we did in the 1930s and 2010s.

Why such a political landmine with high inflation Five Thirty Eight Politics Podcast

And this could create a big problem considering that most other economic indicators that mark the country’s “stagflation” of the 1970s are missing. In fact, the American economy has recovered strongly on the basis of a number of measures: Unemployment is declining rapidly – although workers are leaving their jobs – retail spending has risen, and households have saved much more than expected. Epidemic world (although there is some evidence that those reserves are declining).

All this means that Biden is stuck between a rock and a hard place. He has to deal with very real concerns about an overheated economy and at the same time be careful not to overreact to prices that could stabilize as things return to normal. Meanwhile, as long as a Democrat is in office, about half of the country’s economy will be evaluated relatively critically, which complicates Biden’s approach. What is good for the economy in the long run may not be good for its political and electoral concerns in the near term, and vice versa.

“People like me think that in the short-to-medium run, at least, you have to let this inflationary wave go through the economy,” Kirschner said. “Is this good politics? I suspect it’s terrible politics. But you are choosing from a menu of disliked choices, and especially in the current political environment, whatever disliked choice you make will be condemned by the opposition. “

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