Joe Biden is even older than I am, so he surely remembers inflation’s searing political costs in the late 1970s: President Jimmy Carter’s loss to a candidate, Ronald Reagan, who promised to align an anti-inflation fiscal policy with the bazookas already firing full force at Paul Volcker’s Fed. What does this mean for Joe Biden? A fundamental axiom of political decision-making is that politicians maximize their own advantage at all times sure as they do so that what’s good for them is also good for everyone about whom they care. Combine the history of the late 1970s with this seemingly-eternal axiom and one knows what Joe Biden will do: he will make his Fed pick based on where he sees his political advantage. If inflation is not proving itself truly transitory by the time this call lands in his hands, even the formidable powers pushing Mr. Powell may not prevail.
The old political lesson of inflation’s costs to those who hold office are already evident. Republicans are finding that blaming Democrats for inflation is their most effective advertising against moderate Democrats in swing seats. A poll released late last week also shows inflation now ranks as the top economic concern for Republicans, with Democrats listing it second behind only income inequality. And, if one wants an even more direct bellwether of inflation’s political impact, see Sen. Joe Manchin’s letter to Jerome Powell, directly challenging the Fed chairman because of rising inflation the senator doubts will prove transitory in the sectors key to his West Virginia constituents.
I have written before about inflation’s cost to voters such as Mr. Manchin’s. The Fed may not get them, but President Biden surely will. Some of these politically-potent inflation costs may indeed moderate if semiconductor flows resume, lumber prices stay down, and demand splurges melt away. Still, the bulk of recent price increases will only decelerate, not reverse, leaving low-, moderate-, and middle-income households still worse off.
Heightened economic inequality may well make the political reaction to inflation even more toxic in 2024 than it was in 1979. Ronald Reagan’s policies initially renewed prosperity, leading to his landslide 1984 victory. However, his supply-side solution and aggressive Fed tightening redirected the force of both fiscal and monetary policy in favor of those with wealth.
This triumph of supply-side and austerity policy in both the Clinton and Bush I and II Administrations led to a sharp hollowing out of the U.S. middle class. Now, most wealth flows up to the top ten percent and a little bit trickles down to the poorest Americans thanks to a somewhat greater emphasis on means-tested transfer payments and taxes to compensate for so much lost economic opportunity.
A country with a weak economic middle is a country with polarized politics. Mr. Biden eked out his election over Donald Trump not because his moderate economic messaging was so compelling to undecided voters, but because COVID was so bad and Donald Trump was worse. Democrats of course barely held on to the House and Senate. If Americans now feel that their ability to get ahead, buy what they need, and save for the future is endangered, they will not hesitate to send Joe Biden the same unequivocal message their more complacent, middle-class parents sent Jimmy Carter four decades ago. President Biden surely knows this even if this compelling political history lesson is lost upon his senior economic advisers.