Economy unlikely to help the Democrats

NO CHAMPAGNE bottles may have been popped in the White House last Wednesday (Aug 10). After all, opinion polls suggested that President Joe Biden’s job approval rating remained at a historic low of 38 per cent and that the Democrats were likely to lose their control over the House of Representatives after the November midterm elections.

Still, the news that the US inflation rate for July has fallen relative to previous months was certainly a cause for some celebration among the president’s economic and political aides as well as among Democrats preparing for the midterms.

For months the Biden administration has been trying to remind Americans voters of its economic successes, including a falling unemployment rate and rising wages. But the surging inflation remained at the top of the public’s worries as polls indicate that rapid price increases have eroded the confidence of Americans, many of whom blame the president for the rising gas and food prices.

But now it seems that the consumer price index climbed 8.5 per cent through July, markedly less than the 9.1 per cent increase in the year through June. The deceleration in overall inflation was driven by the drop in energy prices by 4.6 per cent, which translated into a 7.7 per cent fall in gasoline prices. The news came a week after an unexpected strong job report underlined a continuing American economic momentum.

Moreover, the Biden administration and his allies in Congress were hoping that the president’s recent legislative triumph -- the passage of a major tax, climate and healthcare bill -- would help boost the political fortunes of the president and the Democrats.

In fact, trying to persuade voters that President Biden was focusing most of his time and energy on what Americans cared about, combating inflation, the Democrats have even called their signature bill the Inflation Reduction Act, with the president suggesting that it was “the most consequential thing that Congress can do” to keep inflation down.

It’s true that the bill could, over 10 years, reduce the budget deficit by around US$300 billion and as a result lower inflationary pressures sometime in the future. But it would probably have no impact on inflation in the next few years, and certainly not during President Biden’s term in office.

In reality, many of the measures in the bill, not to mention the infrastructure bill that passed last year as well as the bill that calls for government spending on boosting the semiconductor industry, are expected to increase the federal budget deficit and keep inflation higher.

In a way, the legislative and policy agenda promoted by President Biden and the Democrats has had nothing to do with reducing deficits and combating inflation.

Instead, Biden has made it clear when he entered office that his goal was to expand the social safety net, narrow social-economic inequality, and fight climate change, which by definition would involve increasing government spending and widening the deficit, not lowering inflation.

The Biden administration has remained committed to those pledges, starting with the passage of its US$1.9 trillion stimulus plan which most economists now agree, helped boost inflationary pressures. And the Republicans will likely remind voters of that during the coming election campaign.

President Biden and his supporters, on the other hand, are likely to argue that the administration’s initiatives, including investing in clean energy, in the semiconductor industry and in public infrastructure, make sense on so many levels, like reducing the economic dependency on the fossil fuel industry and competing more effectively with China in the global economy.

That may be true. But it is doubtful that these arguments would help win the support of voters fixated at this point on the threat of rising prices and not on the need to encourage consumers to purchase electric cars or to respond to China’s technological challenge.

At the same time, while consumers would welcome the recent slight drop in gasoline prices, that does not change the economic reality under which the price of gas is almost 30 per cent higher than it was a year ago. That perhaps explains why the majority of Americans believe that the US is in a recession.

And prices continue to rise in most important consumption segments, including grocery prices, which were up 1.3 per cent in July from a year ago, the fastest annual rate since 1979. And when the cost of feeding your family goes up, the last thing on your mind is buying an electric car.

It’s possible that gas and food prices could continue to fall in the coming months, but not fast enough to have an impact on the November election.

It may be unfair to President Biden that most Americans are economically illiterate and blame him for the surging inflation, and assume that he has the power to force down prices.

It is, however, not the administration’s fiscal policy but the US Federal Reserve and its monetary policy that, by raising interest rates, can cool the labour market and slow demand enough to control inflation, without creating the conditions for recession.

The Fed has lifted interest rates in both June and July, and it is doubtful that the slowdown in the monthly measure of core inflation would lead the central bank to slow or suspend interest rates as long as inflationary pressure across a range of goods and services do not show signs of moderating.

The bottom line is that the economy is unlikely to produce good news for the White House and the Democrats anytime soon in order to make a major political difference in November and/or even during the 2024 presidential election.

Ironically, the main good news for the Democrats is political and remains former President Donald Trump’s popularity among Republican voters.

Recent Harvard CAPS-Harris poll indicates that Americans disapprove more of the former president than the current one. Nearly 80 per cent of Americans don’t want Trump to run in 2024, compared with only 71 per cent for the incumbent.

Republican primary voters have recently elected candidates associated with the former president and with the view that Trump, and not Biden, had won the 2020 presidential race, to represent them in key House and Senate races. That reduces the chances of the GOP to win those races in “blue” Democratic states like Pennsylvania and in “purple” states like Arizona, and may allow the Democrats to maintain their control of Congress.

It all may depend on whether independent voters and moderate Republicans in those states would regard Trumpism as more of a long-term threat than inflation.