Going forward, governments will be willing to accept high unemployment if it means avoiding high inflation.
By most metrics – and especially when compared to other advanced economies – the U.S. economy is doing quite well.
Unemployment is near historic lows.
Inflation is down to just 2.1%.
The stock market is booming.
Wage growth has outpaced inflation for quite a while.
In helping the economy recover since the aftermath of the Covid pandemic, the Biden-Harris Administration did what most governments are advised to do.
They stimulated the economy with significant government investment – including long-term investments in infrastructure and energy production.
They promoted an accommodating immigration policy (much less generous than in Canada on a per capita basis).
They prioritized job creation.
Now, when compared to 2021, the US economy has significantly recovered.
But in the meantime, those large-scale immigration and inflation ultimately doomed Vice President Kamala Harris in her bid to hold on to the White House for the Democratic Party.
With voters angry about the economy, former U.S. President Donald Trump took advantage of this.
He ran on a return to the days of low prices, and it worked.
This is notable, given that Trump left office amid disastrous economic conditions, including huge job losses and a massive drop in GDP.
What this indicates is that if there’s one thing incumbent governments should avoid, it would be inflation.
Governments can seemingly win re-election amid high unemployment, so long as prices aren’t rising that fast.
This was the case with former U.S. President Barack Obama, who had a similar inflation record to Trump:
“The CPI rose an average of 1.9% each year of the Trump presidency (measured as the 12-month change ending each January), according to the Bureau of Labor Statistics. That was about the same as the average under Obama (1.8%) and below the average of 2.4% during each of George W. Bush’s years.”
It is also important to look at the economic conditions in November of 2012, when Obama was re-elected in a decisive victory over Republican candidate Mitt Romney:
“In November 2012, the labor market had 3.7 million fewer jobs than when the recession began in December 2007. And, because the potential labor force grows as the population expands, the economy should have added 5.2 million jobs since December 2007 just to keep the unemployment rate stable. Counting jobs lost and jobs that should have been added, the U.S. economy has a jobs shortfall of 8.9 million.”
Now, both Obama and Trump were charismatic candidates (in very different ways), but it is notable to see voters heavily punish inflation while being quite forgiving about unemployment. Another irony here is that Trump was probably lucky to lose in 2020 – as he would have otherwise been associated with the inevitable inflationary spike that followed, and Obama was lucky the Democrats lost the 2010 midterm elections which led to divided government and limited federal spending.
Trump will of course benefit from an economy that was largely fixed by Biden-Harris, and claim their success as his own with inflation already now stabilized. But voters are reacting to the cumulative impact of inflation, not just inflation as it stands today.
We see a similar inflation-punishment dynamic in Canada. Voters are ready to punish the Liberals for the damage of inflation, and no amount of talk of high GDP growth (skewed by inflation) or low unemployment is budging voter sentiment.
The lesson for governments going forward will be clear: If given a choice between inflationary stimulus to create jobs, or austerity that keeps prices low but drives up unemployment, governments will choose the latter.
At the end of the day, this shouldn’t be too surprising. When inflation is high, everybody gets slammed with higher prices and a loss of purchasing power. When unemployment is high, the vast majority of people still have jobs. And political success still often comes down to upsetting as few people as possible.
Spencer Fernando
