Americans are not happy with President Joe Biden’s handling of the economy. Acording to polling averages, nearly 60% disapprove of it. Meanwhile, Trump’s ratings on economic matters are considerably better. The gap in perceptions augurs ill for Biden’s chances of winning the presidential election in November, especially since voters rank the economy as the most important issue.
But the economy is itself improving fast. Inflation is falling, growth is strong, the stock market is booming and, if investors are right, the Federal Reserve will cut interest rates by a percentage point before voters go to the polls—an expectation that is reducing the cost of mortgages. Despite Biden’s poor approval ratings when it comes to economic management, could the state of the American economy actually boost his chances of re-election?
Three lessons emerge from studies that look at the relationship between economic fortunes and election results. The first two are bad for Biden: opinions about the economy matter a great deal and voters hate inflation. Ten months before the vote, Biden had already presided over a 14.4% rise in prices, as measured by the personal-consumption-expenditures index—more than at the equivalent point in any presidential term since 1984. The stain of inflation appears to blot out today’s healthy labour market and real wage growth that has hewn to the trend of the late 2010s, despite the disruption of the COVID-19 pandemic.
The third lesson, however, is a lot better for Biden: voters have short memories. “The clear consensus in the literature is that recent economic performance is much more relevant at election time than earlier performance,” writes Christopher Achen and Larry Bartels, two political scientists, in their book “Democracy for Realists”. Americans, they argue, “vote on the basis of how they feel at the moment” and “forget or ignore how they have felt over the course of the incumbent’s term in office”.
The impact of inflation just before elections is less studied than that of growth. America does not have many episodes of high inflation to draw on. That said, economists have long supposed that politicians in emerging markets attempt to win votes by temporarily suppressing price rises ahead of polls. A classic example is Brazil in 1986, when the government implemented price and wage controls and fixed the exchange rate in February, causing monthly inflation to fall from 22% to less than 1%. Only six days after winning parliamentary elections in November, the government had to abandon the plan amid huge economic imbalances. By the middle of 1987 annual inflation exceeded 1,000%. These “stop-go” strategies would fail if voters did not reward governments for bringing inflation to heel.
Are such examples relevant to America, where the inflation problem is more novel but far less severe? Calculations by Ray Fair of Yale University suggest that things may be more complicated. He finds that presidential elections are best predicted by a model including inflation over the entire term of the incumbent party, even while recent economic growth is given special weight. The memory of inflation being painful would explain why the usual relationship between consumer confidence and the economy broke down in 2023, with survey respondents staying gloomy even amid strong growth and lower inflation.
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