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Good morning. We’re pleased to team up, for the second time, with Adam Tooze of Columbia University. This letter will appear in both Unhedged and Adam’s Chartbook newsletter (you should subscribe!), and will be followed by two more collaborations on the next two Thursdays. We start today with a look at Joe Biden’s presidency — how it may be perceived by voters next November, and what its lasting impact might be. We’re keen to hear your thoughts: [email protected] and [email protected].
Unhedged: the Biden balance sheet
The direct impact of US politics on markets and the economy is often exaggerated. The right answer, for example, to “what will a government shutdown mean for markets?” is “probably not much”. But there is powerful causal connection running the other way. Market moves can have large, rapid political repercussions.
Ronald Reagan, when he was running against Jimmy Carter in 1980, asked voters: “Are you better off than you were four years ago?” The president’s control over the answer to that question is wildly overrated. Tough luck: the buck stops at the Oval Office, and elections are about psychology, not justice, as Carter discovered the hard way. Here, then, is Biden’s are-you-better-off balance sheet:
Employment and consumption. By far Biden’s greatest asset is a historically strong labour market. Capitalism runs best when labour markets are tight. Employers are forced to compete for workers, who can plough higher earnings back into spending, which in turn supports companies.
In the early months of Biden’s term, the labour market was too tight, distorted by the pandemic. More recently it’s levelled out, but the balance of power has remained titled towards workers, supporting robust consumption growth. Real spending is right at its pre-pandemic trend, defying higher interest rates.
Wealth. According to the Federal Reserve’s distributional accounts, Americans’ net worth has risen nicely since Biden’s inauguration in January 2021 through to the second quarter of this year — driven mostly by the rising value of real estate holdings and ownership of private businesses. In welcome news, the greatest percentage gain in private wealth (25 per cent) has been among the bottom half of the wealth distribution, who have seen the prices of their houses and cars jump.
House prices (I). US house prices have risen 31 per cent since his inauguration. As rates have soared, incumbent homeowners have clung to their cheap legacy mortgages. Mortgage payments as a share of disposable income, at 4 per cent, is close to a record low. This dynamic has strangled the housing market elsewhere, but for homeowners sitting on home-equity gains funded by cheap debt, it must feel good.
Union activity. Americans’ positive feelings towards unions are at six-decade highs. Biden marched with striking car workers, and pursued pro-union policy broadly, for example by increasing penalties for employers who fire workers in the run-up to a union election. Pro-labour voters have reason to back Biden.
Real wages. It’s not easy to measure how much wages have increased relative to prices, but it’s roughly a wash. Using the employment cost index (the highest-quality measure of wages) and the GDP deflator (the price index used to determine real GDP), real wages are just a shade lower than they were at the start of 2021. An economics nerd might say: “We had a global pandemic. The stimulus response may have been inflationary, but wages kept pace and we’re at full employment; that’s a success.” Voters won’t see it that way. People feel losses more than gains. They will look at the cost of living, which is up almost a fifth in three years, and hate it; their nominal wage gains will feel less significant.
Petrol prices and energy costs. When a random American is asked about the economy, they almost immediately start talking about the petrol price. It is up about 70 per cent since the inauguration, and has been very volatile to boot:
Market performance. The S&P 500 has returned 15 per cent under Biden. If you were in a 70/30 stocks/bond portfolio, you are up a limp 5 per cent. Given the torrid run for risk assets since the financial crisis, this mediocre performance is to be expected; returns mean revert. But everyone is used to high returns on everything, and that has not happened in the past few years.
House prices (II). If you’re a young person who wants to buy a house, this is a terrible time. It’s not much better if you’re a renter; the national rent-to-income ratio now exceeds 30 per cent, the threshold for an individual being “rent burdened”, according to Moody’s.
The long-term economic impact of Biden’s policies is more Adam’s area than ours, but three areas strike us as most important.
A revitalised regulatory state. Lina Khan’s Federal Trade Commission has launched aggressive applications of antitrust law against, for example, private equity’s horizontal integration tactics and Amazon. The Department of Justice is suing Google on antitrust grounds, too. Gary Gensler’s Securities and Exchange Commission is rewriting disclosure rules to reflect the post-2008 expansion of private capital. People focus on legal wins and losses; we think the larger issue is how all this shapes assumptions and attitudes in the years to come. This is to say nothing of Biden’s industrial policy push, which may be an even bigger deal.
Domestic spending. The American Rescue Plan, Biden’s fiscal response to the pandemic, included a number of social support programmes that break with Clinton-era welfare politics and that leave a “proof of concept” for future administrations, argues Claudia Sahm, the former Fed economist. This includes a child tax credit which cut child poverty (despite a partial rebound after the credit’s expiration). But the flipside is a historically large peacetime fiscal deficit. How that is financed — with tax rises, lower spending or higher inflation — and whether the coming avalanche of Treasury issuance breaks the bond market remains to be seen.
Geopolitics. Stalwart, if slow-moving, support for Ukraine and a tough tack on China will surely matter. We think the former is a clear win for American interests, in that the surprising stalemate with mighty Russia shows the value of being a US ally. On China, we are less sure. Marko Papic of Clocktower Group says US-China relations are on a “dangerous path”, because Biden has not presented the Chinese with concrete demands that can be met. Instead, the US has offered “platitudes and moralistic statements [such as US national security adviser Jake Sullivan’s speech at the Brookings Institution about a] ‘foreign policy for the middle class’ which, quite frankly, sounds broadly antagonistic to China’s ability to grow”.
Adam, what say you?
Historians will no doubt look back at the Biden years as a period of bold economic policy. The $1.9tn American Rescue Plan is the one of the largest acts of fiscal stimulus in history. In response to inflation the Fed raised interest rates far more than anyone thought likely, voiding the “Greenspan put”, the implicit Fed guarantee to support asset prices with rate cuts. The administration doubled down on anti-China policy and took on big tech. How this ends up working out for corporate America and investors, it is too early to call.
If it had been up to the administration and the Democratic party leftwing, it would also have been a bold period in social policy. That was not to be, thanks to the dogged opposition of the Republican party and Democratic Senator Joe Manchin’s concerns about inflation, fiscal balance and welfare spending. Scandalously, after halving child poverty, Congress decided that the child tax credit wasn’t a priority and allowed poverty to surge again. What Congress did pass were three signature industrial policies — the bipartisan Infrastructure Investment and Jobs Act, the Chips Act and the Inflation Reduction Act — handing out big subsidies for green industries, solar panels and electric vehicles, infrastructure and microchips.
For wonks and market commentators it has been quite the feast. In assessing the electorate’s reaction, Reagan’s question that you raise is an obvious starting point. And in answering the question, Biden’s team no doubt fervently wishes that voters would draw up precisely the kind of balance sheet you have. Indeed, for the health of democracy, it would be a fine thing if Americans could agree on what that balance should be and which figures should be in it. But that is the world of our newsletters, not the reality of American politics today.
What surveys show is something both weird and entirely characteristic of contemporary America, which is that everything is filtered through a partisan lens. How you answer Reagan’s question seems first and foremost to depend on what you feel about the incumbent in the White House. The result is a circularity.
If you look at the economic sentiment figures reported by GOP-leaning respondents to the University of Michigan consumer survey (see chart above), you would think that the US economy went off a cliff in February 2020 and has continued to collapse ever since. Following Reagan’s rule, those folks are clearly not voting for Biden. But the reality is that the US economy has benefited from one of the strongest and most complete rebounds in history and respondents who rate themselves as independent are far less gloomy than Republicans. They too, however, lag behind the rosy economic numbers. The only people in the US whose assessment of their personal circumstances actually align with GDP numbers right now appear to be card-carrying Democrats.
This does not mean that it is all simply down to partisanship. Broad shocks are visible in sentiment across all groups. Biden would be enjoying better numbers if inflation had not been so strong. Unlike the readers of our newsletters, voters don’t generally follow the Fed closely. Only 7 per cent of Americans polled in 2022 said they knew “a lot” about monetary policy. But it will be easy enough for the GOP to run with the story that high spending, “socialist” Democrats are responsible for big deficits and thus for inflation. The finer points of the inflation debate and the actual fiscal record of the Democrats will be by the by.
One thing that the economist Larry Summers was definitely right about is that inflation, once it is out of the bag, is a big political liability. So the question for the Biden team is how they compensate. Getting behind the United Auto Workers will help on that score. Unions are rightly seen as defenders of a decent standard of living.
Biden’s team is pushing Bidenomics. Strikingly, Bidenomics for the stump is different than the complicated formula that Jake Sullivan talked about at Brookings. On the stump, what the president stands for is a blue-collar agenda. His bugbear is that old 1980s warhorse “trickle down economics”. It avoids complexity and suits the president’s retro style.
Trying to run on industrial policy as such is a non-starter because, when polled this summer, more than 70 per cent of Americans had not heard of the IRA.
If one reads the numbers, it is hard to avoid the conclusion that despite the handsome balance sheet and for all the excited commentary that has been lavished on Bidenomics, the economy is likely to be a Republican issue and an attack line. In a recent Wall Street Journal poll, 46 per cent of Republicans named the economy and inflation as key voting issues. By contrast, for Democrats only 15 per cent did. The single most important issue for Democrats was abortion. In a Biden vs Trump race the Democrats’ best bet will not be to ignore pocket book issues, but to fold them into broader questions about national identity.