The Silly Season

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It goes without saying that candidates will make selective use of statistics to make their case. Trump talks of Making America Great Again, but that doesn't capture the dramatic swing he is describing. A more accurate acronym would be: “From Unmitigated Disaster to Great as Ever” (FUDGE). Meanwhile Harris is running on “Keeping America Advancing Like Always” (KAMALA).

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The financial press is loaded with stories that try to ligate these alternative versions of history by pointing to macroeconomic statistics from Trump and Biden’s terms. The usual piece acknowledges that policies of the incumbent party aren’t the only driver of the economy, and then goes on to compare the two terms anyway.

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What do we learn? Let’s first detail the caveats:

(1)?? Trump inherited and economy that was still gradually recovering from the Great Financial Crisis

(2)?? The COVID shock hit and economy that looked like it had a lot more room to run. Years of low inflation had lowered inflation expectations, so actual inflation did not pick up despite a tight labor market.

(3)?? The COVID shock occurred about 10 months before the transfer of power, causing a short, sharp recession and then a fast recovery that was not yet complete.

(4)?? The COVID shock initially lowered inflation and then accounted for most (but not all) of the rise and fall in inflation over the next several years

(5)?? Commodity shocks from the Russian invasion of the Ukraine also triggered a combination of somewhat weaker growth and temporally high inflation.

(6)?? The Fed’s slow response to both the surge in inflation and very aggressive fiscal stimulus, added to the rise in inflation.

(7)?? The Fed’s delayed, but aggressive, response is now putting upward pressure on the unemployment rate.

(8)?? Finally, government gridlock not only froze fiscal policy for the second half of Biden’s term, but the brinkmanship moments injected modest growth-negative uncertainty shocks into the economy.

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Setting all that aside, it turns out that Biden was better for growth, but worse for inflation. Over Trump’s term GDP growth averaged 1.8%, while so far under Biden it has been 2.9%. Under Trump, the unemployment rate ranged from a low of 3.5% to a high of 14.8%, with an average of 5.0%. Under Biden the low, high and average were 3.4%, 6.4% and 4.2%, respectively. Clearly Trump was a disaster for the job market!

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The story is the opposite for inflation. Under Trump CPI inflation averaged 1.9% and PCE inflation was even lower. Under Biden CPI inflation averaged 5.1% and even today is still about 3%. Clearly Biden was a disaster for inflation!

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Of course, in reality most of the macroeconomic developments over this period had nothing to do with who was in the White House. Moreover, the discussion above does not even consider the impact of policy lags: “time in office” is the wrong time frame for judging the ultimate impact of policies. This is particularly the case for policies designed to address long-run problems.

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The obvious conclusion is that comparing candidates requires a much more nuanced discussion that focuses on individual policies rather than broad economic outcomes. Among the things I learned my freshman year in college were:

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(1)?? Tariffs are inflationary and hurt trend growth in the economy especially if they trigger countervailing tariffs.

(2)?? Aggressively stimulative fiscal policy can be inflationary, particularly if it is not offset by tighter monetary policy.

(3)?? Both deficit-financed tax cuts and deficit-financed spending increases can hurt the trend growth in the economy by (a) diverting resources away from private investment in favor of personal consumption and/or government consumption and/or (b) increasing the nation’s overseas borrowing and its servicing cost.

(4)?? By contrast, true tax reform, closing loopholes and lowering rates, is good for trend growth.

(5)?? Since politicians cannot be trusted to manage the economy without inflation it is vital to have an independent central bank.

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Can we please have a serious discussion?