aMERICANS TO HAVE unimpressed by President Joe Biden’s handling of the economy. In fact, according to poll averages, almost 60% disapprove. Meanwhile, Donald Trump’s economic ratings are significantly better. The gap in perception does not bode well for Biden’s chances of winning November’s presidential election, especially as voters see the economy as the most important issue facing the country.
But the economy itself is improving rapidly. Inflation is falling, growth is strong, the stock market is booming and if investors are right, the Federal Reserve will cut interest rates by a percentage point before voters go to the polls – an expectation that will lower the cost of mortgages. Could the state of the US economy, despite Biden’s poor approval ratings when it comes to economic management, actually boost his chances of re-election?
Three lessons emerge from studies that look at the relationship between economic prosperity and election outcomes. The first two are bad for Biden: opinions on the economy matter a lot and voters hate inflation. Ten months before the election, Biden has already accounted for a 14.4% increase in prices as measured by the personal consumption and expenditures index – more than at the same point in any presidential term since 1984. The taint of inflation appears to be erasing from the current healthy labor market and real wage growth that, despite the disruption of the Covid-19 pandemic, has followed the trend seen in late 2010.
The third lesson, however, is a lot better for Biden: Voters have short memories. “The clear consensus in the literature is that recent economic performance is much more relevant at election time than previous performance,” write Christopher Achen and Larry Bartels, two political scientists, in their book ‘Democracy for Realists’. Americans, they argue, “vote based on how they feel in the moment” and “forget or ignore how they felt during the sitting president’s term.” The authors show that increases in real disposable income per person in just the two quarters before a vote, adjusting for White House tenure, can predict the vote share of the parties governing America with a striking degree of accuracy ( see graph).
This is an important finding, especially since inflation has fallen recently. In the second half of 2023, prices rose 2% year-on-year, down from a peak of 7.7% in the first half of 2022. Even if the hot economy causes a revival in inflation, the highest unlikely to match the previous peak. , especially as the futures markets indicate that oil prices – and therefore the cost of refueling a car – will remain the same in 2024. Because inflation has fallen without a recession, tight labor markets continue to produce strong real wage growth. In the last quarter of 2023, real disposable income per person grew by 1.9% on an annual basis. If that pace were maintained until the election, it would be accompanied by a winning margin equivalent to Bill Clinton’s in 1996. “The recent widespread pessimism about Biden’s prospects seems excessive to me,” Mr. Achen argues. “It looks like the economy will help [him].”
Excuse me
The impact of inflation just before the elections has been less studied than that of growth. America doesn’t have many periods of high inflation to draw on. That said, economists have long assumed that politicians in emerging markets try to win votes by temporarily suppressing price increases ahead of the polls. A classic example is Brazil in 1986, when the government introduced price and wage controls and fixed the exchange rate in February, causing monthly inflation to drop from 22% to less than 1%. Just six days after winning the parliamentary elections in November, the government was forced to abandon the plan due to huge economic imbalances. By mid-1987, annual inflation was over 1,000%. These stop-go strategies would fail if voters did not reward governments for reducing inflation.
Are such examples relevant to America, where the inflation problem is newer but much less serious? Calculations by Ray Fair of Yale University suggest that matters may be more complicated. He believes that presidential elections are best predicted by a model that takes into account inflation over the entire term of the incumbent party, even while giving special weight to recent economic growth. The memory of painful inflation would explain why the usual relationship between consumer confidence and the economy broke down in 2023, with respondents remaining gloomy even amid strong growth and lower inflation.
However, there are signs that Americans are starting to feel better about their economy. Consumer confidence, as measured by the University of Michigan, rose sharply in December and in preliminary data from January – and is at the highest level since July 2021 (a final result will be released shortly after this column is published). Such improved sentiment is consistent with analysis by Ryan Cummings and Neale Mahoney, two former Biden administration economists now at Stanford University, whose model allows the psychological impact of inflation to gradually decline over time. They calculate that, if inflation reaches 2.5% in 2024, the pressure on consumer confidence by the end of the year will be 50% lower than now and 70% lower than the peak in mid-2022. Such an effect would certainly spill over into Biden’s voting numbers.
Even Fair’s model — which gives equal weight to 2022’s high inflation and 2024’s likely low inflation — predicts that economic growth will propel Biden to popular vote victory. There is no guarantee that the economic forecasts fueling such models are correct. Indeed, since Covid hit, they have been wrong many times. The electoral college has a preference for Republicans; Trump won in 2016 despite losing the popular vote. And Mr. Biden is starting from a position of weakness, not just in terms of his economic record. But as the president tries to close the election gap, the economy should give him a tailwind. ■
Read more from Free Exchange, our column on economics:
The False Promise of Friendshoring (January 25)
What economists have learned from the post-pandemic business cycle (Jan. 17)
Has Team Transitory really won the US inflation debate? (January 10)
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