In the current US economy more people appear to be moving into the category of the super wealthy. On Wall Street, the Dow hit record levels in mid-December in anticipation of interest-rate cuts next year, while unemployment remains at historically low levels. But at the same time polls suggest that a significant majority of Americans are unhappy with the economy.
The hangover from the spike in inflation that took place in late 2021 and into 2022 has certainly not abated and could have very serious political implications for US President Joe Biden as he seeks a second term in the White House next November.
Biden has spent weeks travelling the country announcing and promoting projects funded under the massive post-Covid spending initiatives. In early December he was in Las Vegas to announce plans for a multi-billion-dollar, high-speed rail line connecting the city with Los Angeles.
The president spoke at a training centre run by the Brotherhood of Carpenters about the economy and also about why the wealthy should pay their fair share in tax. In doing so he set out how the cohort of super rich in the United States was increasing.
“We used to have – before the pandemic – we had, in the United States of America, 750 billionaires. And guess what we have now? We have a thousand billionaires,” he said.
He argued that billionaires paid about eight per cent in tax to the federal government and said he was proposing a minimum of 25 per cent.
Biden has bet his political future on his model for growing the economy “from the middle out and the bottom up”, which has come to be known as Bidenomics. The White House has maintained that it is built around three pillars:
- Making smart public investments
- Empowering and educating workers to grow the middle class
- Promoting competition to lower costs and help entrepreneurs and small businesses thrive
The president has made clear on many occasions that he wants to get away from the trickle-down economic philosophy that says tax cuts for the wealthy eventually make their way into the wallets and purses of the less well off. He has argued that it just does not work.
In Las Vegas in December he told union workers: “I made a commitment. And this is the God’s truth. I made a commitment to build this country, to stop the trickle-down economics. My dad was a hardworking guy, busted his neck. Not a whole lot trickled down on our kitchen table. Not a whole lot trickled down.”
The White House has argued that the US economy has added about 14 million jobs – including nearly 800,000 in manufacturing. The administration has said it has “unleashed a manufacturing and clean energy boom”. The problem is that, up to now at least, many Americans do not seem to be buying into Bidenomics.
A poll released by CBS News in December maintained that 62 per cent of respondents said the economy was in a “bad” state, with just 34 per cent saying it was “good”. A total of 27 per cent said inflation was the most important issue facing the US.
The poll found that nearly half of Americans (46 per cent) said their standard of living was worse than that of their parents. This was, in particular, a view among younger people – worrying for Biden as they made up an important part of the coalition of voters that elected him to the White House.
A lot of the anxiety about the economy can be traced back to the spike in inflation in late 2021 and early 2022. Inflation in the US peaked at about nine per cent in June 2022 – figures not seen in the country in 40 years – as the cost of petrol, housing and food all surged.
The Biden administration did not help itself by insisting that the rise in the cost of living was just temporary when ordinary people could see their bills rising month on month. The rising cost of eggs became a particular totem.
As inflation soared, the Federal Reserve sought to choke it off by raising interest rates. But the subsequent rising cost of mortgages and other loans further soured the public mood. As mortgage rates hit seven per cent the impact on the housing market was inevitable, pricing out many first-time buyers and discouraging others from trading up.
As interest rates increased, consumer sentiment bumped up and down over the first half of 2023 but has been sliding each month since July.
The White House pointed to the impact of the Russian invasion of Ukraine, as well as tangled supply chains following the Covid-19 pandemic, as contributing to the inflation problem. However, opposition Republicans and political conservatives argued that Biden and his Democratic Party had simply poured too much money into the economy with his $1.9 trillion post-Covid stimulus plan and his separate $1 trillion infrastructure bill.
The White House argues at present that inflation has fallen back considerably. But conservatives such as the Heritage Foundation think tank in Washington contend that “since president Joe Biden took office, the consumer price index (CPI) has risen over 17 per cent, an annualised rate of almost 6 per cent”.
“October was the fourth consecutive month of inflation outpacing monthly earnings growth,” the Heritage Foundation said. “For 27 of the last 31 months prices have risen faster than annual earnings. This decline in real earnings coupled with elevated borrowing costs from today’s higher interest rates have cost a typical American family the equivalent of about $7,400 in annual income under the Biden administration.
“This situation is the direct result of the Federal Reserve failing to maintain the dollar’s stability while the Congress and the White House fail to exercise any fiscal restraint whatsoever. Multi-trillion-dollar deficits, which were allegedly a one-time measure during the 2020 pandemic, have now become a structural problem in federal finance, exploding the federal debt.”
The Heritage Foundation maintained it was now costing more than $1 trillion each year to meet interest payments on US government debt.
Biden, however, has a different story to tell. In his view the economy has been more resilient than forecast by some economists who had warned that significant unemployment would be needed over a number of years to curb inflation. What the White House wanted was “a soft landing”.
In December, following the release of the consumer price index figures for the previous month, the president argued that inflation was at that point standing at 3.1 per cent – down by nearly two thirds from its peak.
“Inflation has come down while unemployment has remained below 4 per cent for the longest stretch in 50 years, which means that workers’ wages and household wealth are higher now than they were before the pandemic, adjusted for inflation,” the president said. “Prices have declined for a number of products over the last year, from cars and gallons of gas to TVs, toys and many appliances, to eggs and milk.”
However, Biden acknowledged reality and said that “many Americans still find too many things unaffordable”. It was largely the same message he had given to the trade union workers in Las Vegas a few days earlier.
The White House plan to ease the financial pressures on families and workers was not simply to concentrate on the traditional tool of raising interest rates. Biden was also focused on political action to cut what he considered to be unnecessary costs and boost the spending power of ordinary people.
“That’s why I’m fighting to eliminate the hidden junk fees that banks and airlines and other companies do to rip off consumers,” he said. “Look, did you ever think when you pick up the phone and call on what your balance in your account is, you’re going to get charged 20 bucks, or you get in an airline, you want your kid sitting next to you, they tell you it’s going to cost you another 300 bucks? I mean, this is ridiculous.”
The president said he had also tackled drug costs to put more money back into the pockets of ordinary people. He said people with diabetes used to pay $400 per month for insulin but the cost was now $35.
“And, by the way, by 2025, no matter what your prescription drug costs are – and some cancer drugs are as much as $13,000 – nobody, as a senior, will have to pay more than $2,000 a month”, he said.
Biden also maintained that the US economy had added 199,000 jobs last month. This was way down on the blockbuster 336,000 increase in jobs recorded in September, which blasted through the forecasts of economists and fuelled fears of an overheating economy.
The president described the 199,000 jobs figure as solid, steady employment growth a “sweet spot that’s needed for stable growth and lower inflation, not encouraging the Fed to raise interest rates”.
In mid-December, the Fed decided to hold rates unchanged at a range of 5.25 to 5.5 per cent, for its third meeting in a row. Crucially Fed officials forecast that there could be three rate cuts of a quarter-point each in 2024, more than they had predicted earlier in the year.
The Fed’s economic projections maintained that officials expected inflation to return to its target of two per cent by 2026. The markets loved the news, sending stocks on Wall Street higher – exceeding the 37,000 mark – and treasury yields falling.
As the year turns, the US economy seems to be in a better shape than had been anticipated several months ago. It remains to be seen whether the president will receive any credit for the development or if the current pessimistic mood of the US public will continue as the political calendar moves towards the election next November, and a possible re-run for Biden against Donald Trump.
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