Barry Eichengreen

US President Joe Biden and his team get little credit for their management of the American economy. Aware that the 2024 presidential election, like most, will turn on economic conditions, or perceptions of economic conditions, the president has taken to the hustings, repeating his mantra that “Bidenomics is working.” But while Bidenomics may be working, the message is not. A CBS/YouGov poll conducted between July 26 and 28 gave Biden just a 34 per cent approval rating on the economy.

The explanation for this negative impression is straightforward: inflation. People rightly perceive inflation as a tax on their incomes. When unemployment is low and they succeed in finding work, they attribute their good fortune to diligence and individual initiative, not to their government’s management of the economy. But when they confront higher prices at the grocery store or filling station, they regard that, not unreasonably, as someone else’s fault.

The question, of course, is whose. And that question is complicated by the fact that America’s recent bout of inflation had multiple causes. This doesn’t let the Biden administration off the hook. Its American Rescue Plan, the $1.9 trillion stimulus package announced on January 20, 2021, the president’s first day in office, provided vigorous support for spending.

With hindsight, we can say: too vigorous. Together with two stimulus packages passed by Congress in 2020, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed by president Donald Trump in March, and the $900 billion COVID-19 Economic Relief Bill, signed by Trump in December, Congress and the president provided $200 billion a month in tax cuts and spending increases to offset a $30 billion monthly income shortfall. The additional spending power enjoyed by households strengthened their finances and averted distress, but also lent impetus to inflation.

Meanwhile, COVID-related shortages and supply-chain disruptions prevented firms from meeting that increased demand. Semiconductor shortages hampered automobile production, for example, causing the prices of new and used cars to shoot up.

Most importantly, there was the failure of the Federal Reserve to anticipate inflationary pressure and act preemptively. The Fed waited until March 2022, when headline inflation was running at nearly 8 per cent, to begin raising interest rates. Had the Fed begun moving a year earlier, when inflation first accelerated, things would have turned out differently.

Future historians will likely attribute the Fed’s failure to its tendency to view economic conditions through the rear-view mirror. The real and present danger for much of the preceding decade had been deflation, not inflation. It took time, too much time, for monetary policymakers to recognise that circumstances had changed and to respond accordingly.

Moreover, monetary policy is a blunt instrument for dealing with inflation caused, even in part, by negative supply shocks. With supply-chain disruptions already pervasive, the Fed was justified in worrying that preemptive interest-rate increases, even if they averted inflation, would worsen already-poor supply conditions and crater a still-fragile economy.

Thus, the US may have struck out over inflation, but the Biden administration was responsible for just one of the three strikes. COVID-related supply disruptions were not its fault. Nor was the administration responsible for the Fed’s delayed reaction. Indeed, Biden exercised restraint by not pressuring the central bank to maintain its accommodating stance, in contrast to previous presidents such as Richard Nixon and Donald Trump.

Now that personal consumption expenditure inflation is back at roughly 3 per cent, down by nearly two-thirds from its peak, will Biden get more credit for his economic achievements? The answer will turn, first, on whether there is widespread public recognition that inflation has receded. Any such realisation will not be immediate. Shocks to short-term inflation expectations tend to linger. Passing worries about inflation can have a measurable impact on long-term inflation hopes and fears.

This slowness of beliefs to adapt to actual economic conditions is likely to be even more pronounced in an era of fake news, when consumers and voters receive information via media echo chambers that tell them only what they are accustomed to hearing. If they are told that runaway inflation is still a problem even when it is not, the perceptual lag could be indefinite.

Biden should tout his other achievements. An unemployment rate of 3.5 per cent is an achievement. Historically low unemployment rates for Blacks and Hispanics are an achievement. So is the fact that nominal wage growth in 2022 for Black Americans employed full-time was 11.3 per cent, compared to 7.4 per cent for the workforce overall. These are signs that Biden’s “trickle-up economics” is working.

But the president, to avoid appearing Panglossian, should acknowledge that inflation has been a painful reality for Americans. He should emphasize that the magnitude of the problem has now been greatly reduced. He must trust that the Fed makes it so. And he must hope that political myths do not drown out statistical realities for the next 15 months.

Barry Eichengreen, professor of Economics and Political Science at the University of California, Berkeley, is the author, most recently, of “In Defence of Public Debt” (Oxford University Press, 2021). Copyright: Project Syndicate, 2023. www.project-syndicate.org