Receive the US Election Countdown newsletter for free
The stories that matter about money and politics in the race for the White House
Last year, De Nederlandsche Bank launched a study into how inflation affects sentiment. The results should be chilling for US President Joe Biden as he prepares for the upcoming presidential debate and election campaign.
What Dutch economists have established is that consumers – also known as voters – not only think that it is the job of the government and not of the central banks to ensure price stability, but that when prices fluctuate wildly this undermines confidence in all institutions. harms. Just like in a romantic relationship, once trust is broken, it is painfully difficult to rebuild.
Unfortunately, the Federal Reserve (as far as I know) has not dared to repeat this study. So we can’t know whether American voters are exactly the same. But I suspect it is — and I would urge the White House to take note of this.
Biden’s team is plagued by a curious paradox. To look at opinion polls, you’d think the U.S. economy was imploding. A Guardian-Harris poll from last month found that 56 percent of voters think the country is in recession, 49 percent think the stock market has fallen this year, and 49 percent think unemployment is at a record high. Ouch.
Unsurprisingly, this leaves only 32 percent of voters confident that Biden will manage the economy, compared to 46 percent who trust Donald Trump, an Ipsos poll shows. This is ominous as 88 percent also cite the economy as the most important factor influencing their voting behavior.
But hard US economic data tells a very different story. Yes, Biden has presided over rising national debt and a temporary increase in inflation. But under Trump, debts rose by a similar amount. And the sharp rise in inflation was seen across the Western world as it mainly reflected Covid-era supply chain shocks and the war in Ukraine. Be that as it may, inflation has fallen this year.
Meanwhile, unemployment is at its lowest level in fifty years, wage growth is strong, especially among lower-paid workers, and investment in manufacturing is rising at a record pace, partly due to the Inflation Reduction Act. Even more remarkable, four-fifths of IRA-related investments are in red states, not blue states. A similar percentage occurs in communities with below-average education scores, as White House economic adviser Heather Boushey told the Aspen Ideas festival this week.
She attributes this skew to the White House’s deliberate policy of creating jobs in devastated regions; others attribute it to the fact that it is easier to invest in red states because of looser building and hiring rules.
Either way, the imbalance could make it politically difficult to undo the IRA even if Trump wins in November, as many Trump-supporting areas are seeing a surge in investment. Yet that same demographic is apparently blaming Biden for a “bad” economy.
Why? One explanation could be that there are data errors. For example, the basket of goods used to calculate average inflation does not always reflect actual household budgets, especially poorer ones. And, as Republicans point out, impressive employment data obscures the fact that many poor Americans work multiple jobs to pay their bills, leading to double counting in some statistics.
Another factor is tribal politics and media misinformation. A Harvard-Harris poll shows that while 59 percent of Democrats think the economy is on track, only 13 percent of Republicans agree. Yet they are largely dealing with the same economy.
However, I suspect that the third and most crucial point is the one that Dutch economists emphasize about the psychology of inflation. Unlike economists, ordinary consumers tend to judge inflation based on simple heuristics, such as the gasoline prices posted on station squares. They also focus on absolute price levels, not on annual growth (or decline) percentages.
And since absolute price levels have risen by about 20 percent under Biden — more dramatically than most voters have ever seen — it’s exacerbating a broader loss of trust in institutions. This is hurting both parties, polls suggest. But I suspect it’s hurting Biden more, since he presided over the inflation wave and Trump claims to be anti-establishment.
So is there anything the White House can do (other than pray for lower oil prices)? Last week, Boushey hosted a workshop with mostly Biden supporters, where I heard a lot of ideas thrown around: increasing Biden’s social media presence; working with local influencers to tell personal stories about the IRA boom; embrace simple populist – not technocratic – messages that suit Trump.
For example, in 2020, when the Trump White House distributed stimulus checks to offset the Covid slump, Trump insisted that they bear his signature. This branded the handouts with his name in a way that voters could easily remember. When the Biden White House showed off its own largesse to consumers, he didn’t follow suit. Big mistake.
Perhaps the White House can now rectify this. Treasury Secretary Janet Yellen is striking a more populist tone. But it will be an uphill, almost impossible battle, requiring psychologists, anthropologists and economists alike.
The one thing that is crystal clear is that we need to update the famous mantra of the 1990s that elections are based on “the economy, stupid.” Today, it is economic feelings—not “just” facts—that matter.
gillian.tett@ft.com