A healthy U.S. economy is finally emerging from inflation’s shadow, enabling Americans to see and feel its underlying strengths. Is the good news coming in time to give Kamala Harris a boost in the November election?
Normally, a vibrant economy lifts political incumbents, but polls show U.S. voters are still preoccupied with high living costs. The empathetic Harris offers a slew of proposals for driving down the cost of housing, food, health care and other necessities.
That’s essential, but with inflation and interest rates falling, Democrats have a stronger economic hand to play. They can point to growing evidence that working families are benefiting from the U.S. economic boom and to how Donald Trump’s slapdash economic ideas and frantic pandering threaten to derail it.
Research by Micheal Mandel, my colleague and chief economist at the Progressive Policy Institute, shows that with inflation easing, wages for working-class Americans have risen higher than they were on Election Day, 2020. In other words, U.S. workers are better off today than they were under Donald Trump.
In addition to milder headwinds from inflation, Mandel attributes the rise in real wages to a revival of U.S. productivity growth, driven by a combination of strong government and corporate investment since 2020.
The International Monetary Fund has confirmed America’s world-beating economic performance, noting that ours is the only G-20 country whose GDP is higher now than before the COVID pandemic.
So much for Trump’s preposterous claims to have produced “the greatest economy in history” before Joe Biden and Kamala Harris “destroyed” it. In fact, by most measures, the economy has performed better under the Democrats than Trump.
Economist Robert Shapiro has run the numbers, leaving the pandemic year of 2020 out of his calculations as an anomaly that can’t be charged to Trump’s account. Even so, the economy has grown faster (averaging 3.4 vs. 2.7 percent) under Biden-Harris. Job growth, private investment, and new business start-ups show similar results.
The big exception, of course, is inflation. It peaked at 9 percent two years ago and dropped to 2.4 percent in September, but it inflicted a lot of economic pain along the way.
What brought it back after four decades in hibernation?
Most economists point to pandemic-induced supply chain disruptions as a key factor driving inflation here and around the world. Others cite a shortage of affordable housing. Studies by the San Francisco and New York Feds found that America’s comparatively larger fiscal stimulus significantly contributed to the spike in U.S. prices.
Progressive economists, who pushed President Biden to go big on stimulus, disagree. It’s not an esoteric debate, because future policymakers will apply lessons from the pandemic recovery the next time the economy slumps and needs stimulating.
Here’s the key takeaway: Don’t underestimate the political risks of overheating the economy, because inflation drastically undermines working families’ economic security by erasing their wage gains and eroding their purchasing power.
Whatever errors the Biden administration may have made pale in significance to the damage Trump’s harebrained economic plans would do.
Start with his throwback fixation on tariffs and protectionism. Trump is calling for 60 percent tariffs on all Chinese goods and tariffs of up to 50 percent on goods from other countries, including key U.S. allies.
He claims his “beautiful” tariffs will bring back manufacturing jobs while also uncorking a geyser of federal revenues to pay for extending his 2017 tax cuts and all the new tax breaks he’s promising voters. That’s sheer fantasy.
U.S. consumers mostly pay the cost of tariffs in the form of higher prices on goods and services, both imported and domestic. The Peterson Institute estimates his tariffs would cost an average household at least $2,600 a year.
High tariffs would also hit U.S. businesses that rely on imported inputs to be competitive. And farmers and other exporters would get walloped again by the retaliatory tariffs other countries inevitably would impose.
Another Trump idea — deporting around 8 million undocumented immigrants — also would wreak economic havoc. The overwhelming majority are working, so removing them would create massive labor shortages across the country. Production of goods and services would plummet, bringing on a recession.
In addition to being inhumane, it’s a perfect formula for reigniting inflation by shrinking U.S. productive capacity.
Nor can U.S. taxpayers count on Trump to be a careful steward of their money. In a blatant bid to bribe older voters, he vows not only to increase Social Security and Medicare benefits but also to exempt them from the federal income tax. Budget experts say his proposals could bankrupt Social Security in six years.
Finally, Trump threatens to strip the Federal Reserve of its independence. As president, he constantly badgered Fed Chairman Jerome Powell to make deeper cuts in interest rates, which could have rekindled inflation earlier.
On Biden’s watch, Powell has skillfully set interest rates just high enough to tamp down inflation without plunging the economy into recession. Even so, Trump insisted this week that if elected he should have a say in setting rates because “I made a lot of money.”
This is a spectacularly bad idea that would open the door to chronic partisan interference in the Fed’s management of monetary policy. Congress deliberately insulated the Fed from such pressures so that it could make the tough calls necessary to manage the business cycle and stabilize financial markets — unpopular decisions politicians prefer to avoid.
If Trump gets his way, Americans can kiss goodbye the Feds’ historic role as a sturdy pillar of U.S. macroeconomic stability.
Fortunately, there’s still time for Harris to make a strong closing argument that Trump poses as big a threat to American prosperity as he does to our democracy.
Will Marshall is founder and president of the Progressive Policy Institute.