Although Donald Trump did not deliver a knockout blow to Nikki Haley in the New Hampshire primary, this year’s presidential election will likely be a replay of the 2020 election. Voters invariably will compare the track records of Trump and Biden as president, with public opinion polls showing those in key swing states favor Trump’s handling of the economy by a wide margin.
Biden needs to set the record straight on Trump’s economic policies, as well as his own, to alter peoples’ perceptions.
This task is formidable because many people believe the occupant of the White House dictates the state of the economy. Yet, with the notable exceptions of Lyndon Johnson, Ronald Reagan and Bill Clinton, U.S. presidents in the post-war era have impacted the economy mainly at the margin.
Consider what has transpired since the 2008 financial crisis. Key indicators such as real GDP, employment and inflation show steady economic trends during both Obama’s and Trump’s tenures until the COVID-19 pandemic struck in 2020. The economy plummeted then when businesses were shuttered, and it rebounded quickly as they reopened.
The fiscal policy responses to the pandemic of both Trump and Biden were similar: Their combined allocation of money to households, businesses and local governments totaled $5 trillion, or more than five times greater than the response to the 2008 financial crisis. While this bolstered the economy, the federal budget deficit spiked to $3 trillion per year in 2020-2021, which was three times larger than before the pandemic.
The big surprise was the surge in inflation in 2021-2022 that forced the Federal Reserve to tighten monetary policy significantly. In the process, many voters blame Biden’s policies for higher inflation but do not give him any credit for the 14 million increase in jobs in the last three years.
Amid this, one economic indicator is decidedly lower — the index of consumer sentiment. Until recently, the University of Michigan’s index was nearly 40 percentage points below where it stood before the pandemic. It mirrors public opinion polls about the handling of the economy by Trump and Biden and indicates voters wish to return to a period of low inflation.
The good news for Biden is that consumer confidence picked up late last year as inflation receded and the economy surpassed expectations. Former Trump adviser Larry Kudlow conceded that his forecast of a looming recession was off the mark following data showing the economy grew by 3.1 percent in 2023. Looking ahead, therefore, perceptions about the economy could improve if inflation recedes and the Fed lowers interest rates.
Meanwhile, Biden must explain why policies that Trump is espousing would be bad for the economy. Trump’s campaign pledge calling for a universal 10 percent increase in tariffs is where he is particularly vulnerable.
A WSJ commentary by Phil Gramm and Donald J. Boudreaux of the American Enterprise Institute documents how the tariff increases in 2018-2019 impacted businesses by raising prices for imported goods, which resulted in them being passed along to consumers. Moreover, the impact of additional tariffs could be even greater now, because they would hinder the Fed’s efforts to rein in inflation and thereby could keep interest rates elevated longer. Biden should ask voters how they would feel about this.
The biggest concern for business leaders at the World Economic Forum in Davos, however, is that such unilateral action risks a global trade war. Indeed, as the Wall Street Journal’s editorial board notes, the last U.S. president to entertain a trade idea this radical was Herbert Hoover, who signed the Smoot-Hawley Tariff Act that contributed to a global depression.
Meanwhile, Biden needs to improve his standing on immigration, an area where he receives poor marks from voters because of the surge in illegal immigrants at the southern border. He will likely indicate he is committed to tackling the problem and is willing to limit migrants’ ability to claim asylum in recent budget deliberations.
But that may not be enough to sway voters’ perceptions. Biden should also explain to the American public why it is essential to increase legal immigration.
The primary reason economic growth slowed in the past decade was due to demographics: The growth of the working-age population fell to 0.3 percent per annum from 1.1 percent previously, which resulted in real GDP slowing by a comparable amount. With population growth projected to slow further in the coming decade, the U.S. needs to attract more workers to alleviate labor shortages and bolster economic growth.
Contrary to Trump’s assertion that America’s economy is moribund, it has outperformed Europe and many Asian countries including China. This is mirrored in the substantial outperformance of the U.S. stock market relative to international markets in recent years. As David Rubenstein of the Carlyle Group observed in a CNBC interview, there’s no doubt the U.S. economy is in “a league by itself.”
An important reason is that the technology sector is growing rapidly, and it is where the U.S. plays a dominant role globally. Looking ahead, the rapid development of generative artificial intelligence by U.S. companies could contribute to increased productivity and thereby increase the rate of economic growth.
The bottom line is Biden must counter the pessimism many voters have about the American economy while he challenges the folklore about Trump’s economic policies. If he fails to do so, Trump’s economic legacy could become yet another urban legend.
Nicholas Sargen, Ph.D., is a global economist and has authored three books including Investing in the Trump Era: How Economic Policies Impact Financial Markets.