Why Biden Can’t Win On Inflation
Things aren’t as bad as they were in 1979, but for many, the comparison is still apt. According to the latest consumer price index1 numbers, prices in November were up 6.9 percent compared with a year ago, the highest increase since 1982. And that comes alongside near-record-low consumer sentiment and a net approval rating for President Biden of -7.6 percentage points.2 Biden has said reversing inflation is a priority for his administration, and he has released strategic reserves of oil and announced plans to “relieve bottlenecks” to address soaring prices, but a difficult and uncertain road lies ahead.
It’s no secret that inflation is politically powerful. You can’t miss rising prices, and research has found that Americans care deeply about inflation. But the politics of handling it is messy, and should prices continue to rise, Biden has a difficult task. He faces a country that views inflation through a highly partisan lens — and that will judge his performance on the issue accordingly. If he ignores inflation, it could spiral as it did with Carter. But at the same time, should Biden react too forcefully, the cure could be worse than the disease.
Inflation’s unique place in the American psyche is bad for presidents
Inflation occupies a unique place in American life. That’s in part because price increases can feel far more palpable than something like the government deficit; they’re also front and center for the average consumer. Add to that the power of political memory: The Great Inflation brought along four recessions from 1969 to 1982 and has had an indelible effect on our politics.
Trying to pinpoint what’s causing today’s inflation, though, is challenging. The pandemic transformed the economy, and many experts pointed to the exceptional nature of this economic recovery as the primary driver of inflation. Austan Goolsbee, a professor of economics at the University of Chicago Booth School of Business, stressed to me that the abnormality of the pandemic-induced downturn is key to understanding the price increases we’re seeing now.
“This was a serious downturn, but it really wasn’t a recession. It didn’t look anything like a recession,” said Goolsbee. “Normally, the thing that drives a recession is long-lived items that get put off, like consumer durables and housing. And those things rose in the downturn.”
But though Goolsbee is on the side of the debate arguing that the current inflation is temporary, he grants that even an economy that’s back to normal by summer would “give heartburn” to the Biden administration. And there’s good reason for that: As the chart below shows, steep inflation has coincided with several sharp downturns in presidential approval since at least 1960. Biden himself is currently in the dumps as far as his approval rating goes.
It’s not entirely clear how much inflation is related to a president’s approval rating, but research does suggest that it can hurt politicians in power. A 1999 study, for instance, found that increases in unexpected inflation hurt incumbent parties’ electoral performance. And a 2010 paper showed that inflation had a significantly negative effect on Americans’ evaluations of the president. Finally, a 2013 paper found that, along with increases in the budget deficit and unemployment, an increase in inflation “cause[d] a deterioration of presidential popularity” in the United States.
But some prices are just more important than others when it comes to inflation. Consider rising gas prices: A 2016 paper found that higher gas prices had a negative effect on presidential approval, in part because Americans are constantly reminded of them. Carola Binder, a professor of economics at Haverford College who researches inflation expectations and monetary policy, told me that high gas prices are particularly likely to affect how Americans evaluate the economy.
“You literally see gas prices and big numbers as you’re driving down the road, and you also purchase it more frequently,” said Binder. “So you’re more likely to remember how much it used to cost if you saw it last week was $2 and now it’s $3.” Binder said the same isn’t true of, say, the price tag of a family vacation.
Americans who lived through the inflation of the 1970s, however, are also more likely to react negatively to steeper gas prices. Per a 2019 paper, Binder and her co-author Christos Makridis found that Americans who lived through the oil crises of the 1970s were more pessimistic about rising gas prices than those who didn’t. That’s because, as Binder put it, “they formed their model of how the economy works based on how it worked back in the late ’70s.”
Recent polling further confirms that Americans are feeling the strain of rising prices. Forty-five percent of households reported facing either “moderate” or “severe” hardship because of rising prices, according to a November Gallup poll, and 56 percent of voters in a November Wall Street Journal survey said inflation was causing a “major” or “minor” financial strain on them. That strain has been particularly hard on poorer Americans, too; according to that Gallup poll, 7 in 10 adults in households earning less than $40,000 a year said the pandemic was causing them hardship.
Though inflation weighs heavily on the American conscience, it’s important not to overstate its influence, especially on presidential approval. The chart above, for instance, shows George W. Bush’s approval falling during the Great Recession, a period of deflation. And even Carter’s reelection was doomed by a number of other key issues, both foreign and domestic. But that doesn’t stop Americans from dwelling on inflation, even when it is low. And, right now, there’s evidence that price hikes are hurting many Americans.
Americans’ views of inflation are strongly shaped by politics
Though inflation affects all Americans, there’s a gulf in perception. In short, whether you share a party affiliation with the president likely looms large for just how bad you think inflation will get. That tracks more broadly with how Americans’ views on the economy increasingly have little to do with the economy itself; rather, they’re about who’s in office.
“When the president of your political party is in power, you tend to be more optimistic about how the economy will be and tend to have lower inflation expectations,” said Binder. “When a president whose politics you disagree with is in power, you tend to be more pessimistic about how the economy will be, and you’re going to have higher inflation expectations.”
Recent research has borne that out, too, finding that Americans expect significantly lower inflation when the party they support is in the White House. According to a 2019 paper, inflation expectations were higher in red states than in blue states when Barack Obama was in office, only for the positions to reverse when Donald Trump arrived.
This trend has existed for a while, too. In the 1980s, for instance, when inflation had fallen nearly 10 points under Reagan, more than 50 percent of “strong” Democrats said that inflation had gotten somewhat or much worse in a 1988 survey, while fewer than 8 percent said it had gotten much better (13 percent and 47 percent of “strong” Republicans, respectively, said the same). Meanwhile, according to a study conducted near the end of another GOP administration, Bush’s in 2008, Democrats were once again more likely than Republicans to say inflation had increased over the past eight years.
Unsurprisingly, this schism is also evident today: Under Biden, Republicans have consistently reported greater fears about the economy — and inflation — than Democrats, and it doesn’t appear that divide is going away anytime soon.
The cure for inflation may be disastrous
On a surface level, inflation is bad. If you hold all other things constant, it erodes purchasing power and the value of your dollar. And if Biden gives the appearance of doing nothing, then fears of inflation may become a self-fulfilling prophecy: Americans, anticipating higher costs, could demand higher wages from employers to offset inflation, which would then lead employers to demand higher prices, resulting in even worse inflation.
The problem is that the solution — economic and political — isn’t as simple as raising interest rates to bring down inflation: There’s a cost to keeping inflation rates low, and we’ve often been too quick to pump the brakes on a recovering economy.
“We only talk about inflation when it’s higher, and not as much when it’s lower,” said Jonathan Kirshner, a professor of political science at Boston College who studies the politics of inflation. But he stressed that whether inflation is high or low, policies that target it end up picking winners and losers in the economy. “There’s no escaping the politics of inflation policy, even when inflation is at very low levels,” Kirshner added.
Moreover, some of the policies designed to deal with inflation — especially when it’s high — have had devastating effects. Take, for instance, the policies set in motion by the Carter administration that eventually stamped out inflation in the 1980s. For starters, the country went into a deep recession, and millions of workers lost their jobs. Disaffected building contractors and construction workers even mailed chunks of two-by-fours to the Federal Reserve’s Board of Governors, claiming the wood was no longer needed because no one was buying houses anymore. The political fallout from inflation didn’t stop with Carter either. Reagan also saw his approval rating tumble even as inflation got under control.
But more recent episodes, such as the slow recovery from the Great Recession, have further called into question the merits of being ultra-tough on inflation. Kirshner pointed to the double-dip recession of the 1930s as a consequence of being too quick to fight the inflation bogeyman. Inflation, of course, hasn’t yet approached the runaway levels of the 1970s, but there is a possibility that we course-correct too quickly, as we did in the 1930s and 2010s.
And that could pose a big problem considering that most other economic indicators that characterized the country’s 1970s “stagflation” aren’t present. In fact, the American economy has recovered strongly according to a number of measures: Unemployment is falling rapidly — though workers continue to quit their jobs en masse — retail spending has increased, and households have saved more than would have been expected in a non-pandemic world (though there’s some evidence that those savings are falling).
All of this means that Biden is stuck between a rock and a hard place. He has to address very real concerns about an overheating economy while also being careful not to overreact to prices that may stabilize as things get back to normal. Meanwhile, roughly half of the country will appraise the economy relatively critically as long as a Democrat is in office, which complicates Biden’s approach. What’s good for the economy in the long term may not be good for his political and electoral concerns in the nearer term, and vice versa.
“People like me think that in the short-to-medium run, at least, you have to let this inflationary wave pass through the economy,” said Kirshner. “Is that good politics? I suspect it’s terrible politics. But you’re selecting from a menu of unpalatable choices, and especially in the current political environment, whatever unpalatable choice you make will be vilified by the opposition.”