We’re still a long ways away from the double-digit inflation of the early 1980s. However, while prices of specific things like healthcare, college, or gas have been political hot-buttons from time to time, the issue of inflation writ-large has barely registered as a major issue during my lifetime. This makes it notable that inflation is emerging as a key worry for voters and that many are tying the inflation specifically to Democratic policies.
The Biden administration is struggling with voters as of late, and disappointment in the state of the economy is a major piece of this dynamic. The most recent Grinnell College poll, conducted by legendary pollster Ann Selzer, shows Biden’s approval rating at 37%. Notably, Biden’s job approval on the economy tracks right along with his overall approval, at a relatively poor 36%.
While some people liked the Trump economy but didn’t love Trump himself, how people feel about the economy under Biden seems very closely tied to how they feel about Biden in general. And as much as the Biden team is treating America’s economic anxieties somewhat dismissively (no, this isn’t just about people mad that their treadmill is coming late), the threat of “stagflation” — economic stagnation paired with inflation — does loom.
This week, the Atlanta Fed projected GDP growth for the year to be fairly dismal. Unemployment is below 5% due to a huge number of people having left the workforce altogether. And some of those who claimed earlier this year that inflation would be “transitory” are changing their tune as supply-chain problems are making it harder to meet consumer demand.
When in March, I first saw the issue pop up in my Echelon Insights monthly survey of registered voters nationwide, I was admittedly a little surprised. When we asked voters whether any of the criticisms of the $1.9 trillion American Rescue Plan worried them, a majority were very or extremely concerned that the plan might lead to inflation. This was higher than concern that the money wouldn’t be spent properly or wasn’t directed to the right places.
In June, the issue hadn’t gone anywhere. Some 71% of voters said “inflation” was a big problem. When asked as “rising prices” instead of “inflation,” concern went up to 78%. And voters were still connecting it to government spending. We presented respondents with six different factors and asked to what degree they thought each had contributed to rising prices. Two-thirds felt “increased government spending” had contributed “a lot,” making it the highest factor on the list, outpacing second-place “corporate profits” (53%) and rising consumer demand (53%).
Of course, not all government spending affects the economy in the same way. Investment in actual infrastructure for instance — roads, bridges, and so on — could help address the supply problems we are facing, such as backed-up ports. On Fox News Sunday this weekend, economist Mohamed El-Erian thoughtfully pointed out that “the more we can improve our infrastructure, the higher productivity, the more we can supply goods to the marketplace, and the more inflationary pressures come down.”
But other fiscal policies that have tried to subsidize and stimulate have pumped up demand for things without any corresponding increase in supply. For much of this year, generous unemployment benefits made the cost of not working much less of a big deal for many workers, leaving many industries struggling to find employees. (Your local restaurant — already working on thin margins — most likely had to raise wages in order to get workers in the door, and then it had to pass those costs along to customers.)
The Build Back Better package being debated this fall includes another proposed huge dump of federal money as well as big changes to industries such as child care. But some well-intentioned provisions such as requiring higher wages for child care workers will just make child care even more expensive for average families unless also accompanied by, you guessed it, government subsidies. (And of course, whenever something gets subsidized, its price often goes up faster than even the overall rate of inflation.)
And don’t forget the role of monetary policy in all this. In the words of AEI economist Desmond Lachman, it is “all too probable that by the time the Fed decides to close the ultra-easy monetary policy door, the inflation horse will long since have bolted the stable.”
Americans can always be counted on to vote with their pocketbooks. A good economy can paper over other concerns and give incumbents a fighting shot in an otherwise tough political environment. But at the moment, Americans do not seem thrilled with what they see when they get to the grocery store or the gas pump — and they aren’t sure Democrats have the right answers.
