In The End, It’s Almost Always About The Economy

Face it: 2020 was a referendum on crazy. The next election will mostly be about the economy again.

At the G7 summit with Britain’s Prime Minister Boris Johnson, this past weekend

And that could be good or bad for President Biden. And a lot of it based on timing. Some of which he may not have a lot of control over. Which is why he’s got to do infrastructure. Which is why we’re suspicious that enough Republicans will ever back it in a meaningful way.

3 1/2 years ago, I pointed out that President Trump and Republicans had embarked on “a grand experiment that’s never been attempted before“. What was that? They “decided to do a huge economic stimulus package at a time when the economy was already booming.” And they never figured out a way to pay for it: just leaving it at “it’ll pay for itself”. Which it didn’t. Instead, it created federal budget deficits–to borrow Trump phrasing–the likes of which we have never seen before.

And yeah, as I pointed out back then, Trump and Republicans were being extremely reckless: by juicing the economy when it was already booming, they were leaving little room for the Federal Reserve and Congress to maneuver if there ever was a crisis. Which of course there was. 

And Trump wanted to go even further: often insulting his own hand-picked Fed Chairman in the hope that would encourage him to take interest rates negative, which thankfully Jerome Powell didn’t do, because then the Fed would’ve had nowhere to go when it needed to get money into the economy when COVID-19 came along. Which is something it actually did well.

But, I’ll stop there. Nothing beyond what I just said. Because the state of the economy will always determine the fate of the President who is in office. Regardless of what their predecessor may have done. Trump knew that. Biden knows that too. It’s on him now.

And here’s the thing: inflation at 3.4%, which is the Fed’s current estimate for this year, up from the 2.4% it originally projected in March, doesn’t sound too too bad. Like something you paid $1 for last year will now cost $1.03, instead of the expected $1.02. One penny difference. But of course things don’t work like that: the price of some things will not go up at all. The price of some things will even go down (for instance, cleaning products). And the price of some things—maybe things that many people need very much (for instance, a place to live)—will go up 10%, 20%, 30%, who knows? And if those are things that result a hard slap in the face for most families, the political impact can be resounding.

Source: U.S. Federal Reserve

And if that happens, whatever you want to say, and whatever I may have said in the past, and wherever you or I may want to and perhaps rightly place blame, Biden owns that. Which is why the White House was quick to point out the Fed also raised its expectations for US economic growth. In fact it pinned its Tweet pointing that out. Yes, that’s in the chart above too. Projecting 7% growth this year, up from 6.5%. Which is good.

So forget about everything else everybody’s buzzing about. Democrats’ ability to hang on to the Senate, the House, and ultimately the Presidency, will very likely mostly hang on how people are feeling about their economic prospects, coupled with how far their dollars are going.

And there are a lot of dollars out there right now. Probably too many. This became nakedly evident earlier this year, with the nonsense with GameStop and other virtually worthless stocks suddenly becoming stupendous fortune makers for the amusement of bored people with deep pockets.

So definitely too many dollars chasing too few goods in key parts of the economy. Which is a dictionary definition of inflation. And that’s just domestically. The disruption of imports from China and other places is something people in the U.S. have hardly paid attention to, because we’ve got our own problems, but will soon wake up to.

And it will work itself out over time. And perhaps with the encouragement of government, maybe could even create some opportunity for US companies and workers who might transform a lag in imported goods and a continued disruption in shipping into a boon for US-made stuff. Especially if there are tax incentives involved. Or maybe that’s too much to ask…

And all this is not altogether a bad thing: getting money out to people fast was the right thing to do. Figuring out how to level everything out again in an elegant way was always going to be part of it. Fed Chief Powell knows this, and he’s very talented.

And it should absolutely not be an excuse not to do a lot of infrastructure spending. Just that it’s got to be paid for. Congress and the Treasury are in a unique position of just being able to print out unlimited amounts of money if they want to. But at some point they’ve got to say “that’s enough for now”. Which is now. 

Which means raising taxes on corporations and rich people. Not to ridiculous levels. Just back to closer to where they were before Trump and Republicans cut them. And/or by closing loopholes, which is the alternative President Biden has presented to Republicans so they can avoid losing face. But so far they’re not interested in that either. 

Exclusively using a higher gas tax or some other kind of “user fees” instead, as some Republicans are proposing, is a booby trap for Democrats politically. Because then Republicans can endlessly blame Democrats for high gas prices.

Is there middle ground? Where some COVID-19 relief funds get reallocated to infrastructure, or there are some added fees targeted at drivers, but also some smaller tax hikes on corporations and rich people? Maybe. But doesn’t look like it. Plus there may not be enough time for that kind of finesse. So it may be time to force something through. As I’ve said, it’ll be hard to fight for long against something that very visibly creates jobs, as any big infrastructure bill will. 

And there already may not be much time to spare especially since it may be hard enough to make it acceptable to all Democrats, who are always a lot more like herding cats than Republicans tend to be. Although Republicans couldn’t pass getting rid of Obamacare either when they had control of the White House, House and Senate.

From a political perspective, the timing of how everything plays out and ultimately settles is probably more important than that it does, because it will. Or at least there’s very little chance it won’t. But the economy’s got to heal just like we all do. And that’s more crucial to the future of this country than ever.