Mark Twain once observed that history doesn’t repeat itself, but it often rhymes. This is certainly true concerning the recent performance of our economy. Historically, our economy does much better under Democratic presidents than Republicans. The economy grows faster (twice as fast since 1933); job growth is faster (three times faster since World War II); the unemployment rate falls more (since World War II the unemployment rate has typically risen under Republican presidents!). Federal budget deficits are also generally smaller and the stock market performs better (more than twice as well since 1945). Fortunately, Joe Biden is a typical Democratic president and our 2021 economy has largely followed those trends.
Democratic presidents have also had to dig our economy out of the deep holes left by their Republican predecessors. Ten of our last 11 recessions began under Republican presidents. The biggest economic downturns of the last 100 years have come under Presidents Herbert Hoover, George W. Bush, and Donald Trump, all Republicans. FDR got us out of the Great Depression, Barack Obama got us out of George W. Bush’s Great Recession, and Joe Biden is delivering us from the disastrous COVID economy of 2020.
This recovery is historically strong. Despite the continuing headwinds of COVID, 2021 saw nearly 6 million new jobs created, jobless claims at a 52-year low, and a dramatic increase in our economic growth rate - all accompanied by increases in disposable income for the average American household.
Inflation is a lingering problem but there are several considerations to keep in mind. First, inflation will subside once supply chain problems are fixed. COVID distortions have disrupted economies worldwide and most industrialized nation are experiencing inflation.
Presidents are like quarterbacks who receive too much credit when the team wins and too much blame when the team loses. Presidents also get too much credit for low inflation and too much blame for high inflation. For example, gas prices at the pump are determined primarily by international supply and demand, not domestic policy. No president can repeal the laws of supply and demand.
The major influence on inflation is the Federal Reserve’s monetary policy of controlling interest rates and the growth of the money supply. The Fed’s actions have a much greater impact on inflation than anything a president and Congress can do.
Since the Great Recession of 2008, the Fed has kept interest rates at historically low levels while pumping lots of new money into the economy. These expansionary policies have served to fuel inflation. Since inflation is simply too much money chasing too few goods, the cure is to slow the growth of the money supply (which the Fed is now planning to do) and/or increase the amount of goods being produced (which is happening as supply chains loosen and strong US economic growth continues).
Presidents are not miracle workers when it comes to curing inflation. Short of placing wage and price controls on the entire economy (an ill-advised policy at best), there is not much that a president can do unilaterally to cool inflation in the short run. The economic medicine presidents can prescribe consists primarily of changing government taxing and spending, a joint federal responsibility of the president and Congress which takes some time to pass and implement.
In a sense, inflation is the price we pay for a growing economy where workers are earning higher wages and households have increased spending power. We could cool off inflation by slowing the economic recovery, but would we want to return to the 2% inflation rate of 2020 at the cost of an 8 - 10% unemployment rate today?
Presidents can have a stronger impact on an economy’s health in the long run than in the short run. By changing the nature of the economic playing field through changes in taxing, spending, regulation, and infrastructure (physical and human), presidents can influence economic outcomes in the long run. By leveling the playing field between capital and labor, between the working class and the wealthy, a president can shape the nature of the economy going forward in a meaningful way. Remarkably, President Biden’s policies already have increased the net worth of the bottom 50% of households by over a trillion dollars.
Presidents can and do change the underlying economic environment. By moving from discredited trickle-down economics to an economy that supports and defends the working and middle classes, President Biden has taken major steps to assure that our workers are once again protected and celebrated. Our history tells us that a healthy middle class is crucial to the health of our economy, and by espousing policies that help families and children succeed, our president is laying the foundation for a period of sustained economic success.
In many ways 2021 was a powerhouse year of strong economic growth, falling unemployment rates, surging stock prices, and the implementation of important new policies for long run economic success, all in the face of an unrelenting COVID pandemic. President Biden is not the sole cause of our good news, but thankfully we now have a president who understands and is concerned about the long run health of our economy. Here’s hoping for a healthier and even more prosperous 2022!
Rick Schiming is a member of the Talbot County Democratic Forum.