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The stories that matter on money and politics in the race for the White House
Some things are unambiguous, among them that Kamala Harris is a better Democratic presidential candidate than Joe Biden. And the US election is still very close. Other matters such as the economic record of the Biden administration are subject to nuance and ambiguity ill-suited to a vicious presidential campaign. Harris should not put the economy at the centre of her campaign.
It is not that the Biden administration’s economic record is poor, but it is complicated. For a start, the public are not convinced by US economic strength. Responding to the long-running University of Michigan consumer sentiment index, even Democrats barely report above average confidence, while the period of high inflation pushed the reading well below long-run norms for independent voters and Republicans.
You might say that confidence is just vibes and an election needs to be fought on truth, not sentiment. But even here, the answers are difficult. Not least because the 2020 election was held in the teeth of a pandemic, and 2024 is similar to neither 1984 when the US economy was booming or 1992 when Bill Clinton rammed home the “it’s the economy, stupid” message that things were not working.
Some economic indicators have definitively performed well. Levels of real GDP and personal consumption in the US have returned to the pre-Covid trend, demonstrating that the US economy managed to recover from the 2020 recession without any lasting damage. The same cannot be said for the Eurozone economy, the UK or Japan, where a permanent loss has all but been accepted. The problem for Democrats is that international evidence might be persuasive in Europe and Japan, but rarely registers at home.
In the US domestic economy, there is little doubt that the jobs market has performed strongly over the past three years. During the pandemic, there were concerns that employment would not recover fully, but these can now be cast aside as the employment to population ratio was higher in July than on the eve of the pandemic. The problem for Harris is that although jobs are plentiful, the jobs performance is no better than the Trump administration achieved.
The Harris administration should not worry about the recent rise in unemployment, which hit 4.3 per cent in July from a low of 3.4 per cent in April 2023. This is a movement around a historic low and other indications suggest the labour market remains strong if not as tight as it was. That was exactly what the Federal Reserve wanted to happen as it sought to cool the economy since 2022.
Where Harris should have more concern is how she would answer perhaps the most devastating question in recent elections. Shortly before polling day in 1980, Ronald Reagan asked: “Are you better off today than you were four years ago”? The answer for most Americans was, “no” and the Democratic party was duly punished.
For Harris, the same question produces a complex answer. Recent research by David Autor, Arindrajit Dube and Annie McGrew shows that a tight labour market since the pandemic generated significant gains for workers with the lowest wages, which reversed a quarter of the previous four decades of rising wage inequality in the US. The rise in wages for those who did not go to college relative to graduates applies across all US states whether they impose high minimum wages or not.
If anything could demonstrate that the Biden administration was on the side of ordinary workers, this would be it, but there is a problem. Similar trends were evident during the Trump administration in parts of the US and, everywhere, real wage growth was higher.
The Achilles heel for the Biden administration in all of this is inflation. Although the annual rate of growth of prices is almost back to the 2 per cent target, memories of high inflation have not dissipated so quickly. For many people on average earnings and above, rapidly rising prices have cut real pay levels and it is only those on the lowest salaries that can unambiguously answer Reagan’s question in the affirmative.
Worse for Democrats is that people generally do not think about real wages as rationally as economists. They feel they earned any nominal pay increases they received and had the gains taken away from them by inflation. That makes them cross.
None of this is lost on the smartest economists in the Biden administration. In a speech last week, Jared Bernstein, chair of the White House Council of Economic Advisers, noted that people would have preferred the real wage movements without the inflation. “In my job, vibes matter,” he said. Bernstein said that the Fed and the administration had made much progress in eradicating the political legacy of inflation. Price rises were now moderate, real incomes had grown for many Americans and consumers were adjusting to the higher level of prices. The problem for Harris is that she does not have time for that adjustment to be completed. The US election is in less than 100 days.
Harris would be wise to ignore the advice of well-meaning economists who want the Democratic party to shout about economic progress. The nuance required to see the US economy in a positive light is still beyond most people. The lesson is not that people are stupid; it is a reminder that people really hate inflation.
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