Americans have been unimpressed with President Joe Biden’s management of the economy. In fact, according to polling averages, roughly 60% oppose it. Meanwhile, Donald Trump’s scores on economic issues are significantly higher. The disparity in attitudes bodes ill for Mr Biden’s chances of winning the presidential race in November, especially given voters regard the economy as the most critical issue confronting the country.
However, the economy itself is rapidly improving. Inflation is down, GDP is strong, the stock market is soaring, and, if investors are correct, the Federal Reserve will slash interest rates by a percentage point before voters go to the polls, lowering mortgage costs. Despite Mr Biden’s low support ratings for economic management, may the state of the American economy help him win re-election?
Three insights arise from research that examine the link between economic fortunes and election outcomes. The first two are terrible news for Mr. Biden: voters dislike inflation and have strong opinions about the economy. Ten months before the election, Mr. Biden has presided over a 14.4% increase in prices, as measured by the personal-consumption-expenditure index—more than at any other stage in a presidential tenure since 1984. Despite the disruption caused by the covid-19 outbreak, the stain of inflation appears to wipe out today’s solid labor market and real wage growth, which has been consistent with the late 2010s trend.
The third lesson is much better for Mr. Biden: voters have short memories.”The clear consensus in the literature is that recent economic performance is much more relevant at election time than earlier performance,” wrote Christopher Achen and Larry Bartels, two political scientists, in their book “Democracy for Realists”. Americans, according to them, “vote on the basis of how they feel at the moment” and they “forget or ignore how they have felt over the course of the incumbent’s term in office” . The authors demonstrate that rises in real disposable income per person in just the two quarters preceding a vote can, with an adjustment for tenure in the White House, predict the vote share of America’s ruling parties with remarkable accuracy (see chart).
It’s a crucial result, especially since inflation has just plummeted. Prices grew 2% annually in the second half of 2023, down from a peak of 7.7% in the first half of 2022. Even if the hot economy boosts inflation, it is unlikely to reach the previous peak, especially given futures markets predict that oil prices—and thus the cost of filling up a car—will remain level in 2024. Because inflation has declined without a recession, tight labour markets have resulted in robust real wage growth. In the fourth quarter of 2023, real disposable income per person increased at an annualized rate of 1.9%. If sustained until the election, that pace would result in a victory margin similar to Bill Clinton’s in 1996. “Recent widespread pessimism about Biden’s prospects seems to me excessive,” said Mr. Achen. “The economy appears likely to help [him].”
Don’t blame me
The influence of inflation right before elections is less researched than that of growth. America does not have many examples of high inflation to draw on. However, economists have long suspected that governments in emerging nations try to win votes by temporarily restraining price increases ahead of elections. A typical example is Brazil in 1986, when the government introduced price and wage restrictions and fixed the currency rate in February, reducing monthly inflation from 22% to less than 1%. Only six days after winning parliamentary elections in November, the administration was forced to reject the plan due to massive economic imbalances. By the middle of 1987, annual inflation had surpassed 1,000 percent. These “stop-go” policies would fail unless voters rewarded governments for bringing inflation under control.
Are comparable analogies applicable in America, where the inflation problem is more original but far less severe? Ray Fair’s calculations at Yale University imply that things may be more complicated. He discovers that a model that includes inflation over the incumbent party’s whole tenure is the strongest predictor of presidential elections, even when recent economic development is given special consideration. The memory of inflation as painful would explain why the traditional relationship between consumer confidence and the economy failed in 2023, with survey respondents remaining pessimistic despite robust growth and decreasing inflation.
However, there are indicators that Americans are becoming more optimistic about their economic situation. Consumer confidence, as assessed by the University of Michigan, increased significantly in December and preliminary data for January, reaching its highest level since July 2021 (a conclusive reading will be announced shortly after this column is published). Such better sentiment is consistent with the findings of Ryan Cummings and Neale Mahoney, two former Biden administration economists now at Stanford University, whose model permits the psychological impact of inflation to fade gradually over time. They forecast that if inflation in 2024 is 2.5%, consumer mood will be 50% lower by the end of the year and 70% worse than it was in mid-2022. Such an influence would almost certainly flow over into Mr Biden’s polling numbers.
Even Mr Fair’s model, which weighs both high inflation in 2022 and low inflation in 2024, forecasts that economic growth will lead Mr Biden to victory in the popular vote. There is no certainty that the economic estimates that underpin such models are correct. Indeed, since the covid outbreak, they have frequently been inaccurate. The electoral college is biased towards Republicans; Mr Trump triumphed in 2016 despite losing the popular vote. And Mr. Biden is starting from a low point, not simply in terms of his economic standing. However, as the president works to close the polling deficit, the economy should give him with a boost.
