Election defeats are never easy to accept, but the Bidenomics rear-guard action now underway among Democratic economists takes the denial stage of grief to a whole new level. The argument is two-fold: What the Biden Administration did worked fine, and if you didn’t like it, the next Trump Administration will be worse. Voters didn’t believe it, and neither should Democratic politicians.
The political problem Team Biden’s pugnacious rump (and its cheerleaders in academia and on Wall Street) must confront is inflation. The price level rose by more than 20% over President Biden’s term while inflation-adjusted wages lagged. While this crew touts disinflation since 2022—the economics term for a deceleration in price rises—this doesn’t mean prices are returning to their prepandemic level. Far from it: Inflation rates persistently above 2.6% mean prices continue to rise faster than the Federal Reserve’s 2% target.
Voters blamed President Biden and Congressional Democrats. A prime culprit is the $1.9 trillion American Rescue Plan (ARP) passed on a party-line vote in March 2021. Even some liberal economists such as Larry Summers warned it would be inflationary, and consumer prices began their rapid ascent soon after passage. It didn’t help that the Fed effectively monetized much of this debt via a quantitative-easing program that saw the central bank’s holdings of Treasury securities increase by $3.2 trillion between March 2020 and spring 2022.
One element of the rear-guard defense of Bidenomics is to argue inflation was a consequence of pandemic disruptions, almost entirely independent of Washington’s spending spree. An example comes via Peter Orszag, the Obama-era head of the Office of Management and Budget, who recently blamed supply-chain disruptions for 79% of the inflation experienced in 2021.
A growing body of economics research attempts to separate the supply and demand-side causes of the inflation in this way. These papers typically conclude the demand side (meaning, the target of the Biden spending) had relatively little to do with it.
But this elides the question of how and why consumers were able to pay the higher prices caused by supply-chain disruptions, and why prices for other goods and services didn’t fall to offset. A big part of the answer is the Biden budget blowout, and voters seem to have spotted the omission before the election.
That leaves other revisionists to argue that even if the Biden spending bills were inflationary, they were worth doing because the economy would have been worse without them. “Any scenario that envisions less inflation from a reduced ARP also has to wrestle with slower growth, higher unemployment and more child poverty,” Jared Bernstein of the White House Council of Economic Advisers told a Journal reporter.
Really? By March 2021, gross domestic product (in nominal and real terms) had returned to its prepandemic level and the unemployment rate had fallen to about 6% from a high of nearly 15%. The main impediment to growth was the supply-side drag from lingering school closures, persistent social distancing and attempted workplace vaccine mandates. Oh, and the chronic threat of tax increases, high-cost energy policies and overregulation.
Voters saw through this argument, too, perhaps because Mr. Trump himself was on the ballot. His first term delivered impressive pre-Covid economic growth and low unemployment without a spike in inflation. Voters didn’t believe that Mr. Bernstein’s trade-off between inflation and employment exists.
Undeterred by any self-awareness, the Biden rear guard now warns Mr. Trump will deliver, well, the same bad outcomes they did. In particular, they caution his tariffs and big deficits from tax reform will be inflationary.
One can say a lot of negative things about Mr. Trump’s tariffs—we have and will—but this is the wrong argument. It highlights the revisionists’ confusion about the difference between relative prices (which the tariffs will change) and the overall price level (which depends on many factors).
As for fiscal policy, a lot hangs on the nature of the tax cut, the size of the deficit, and whether households and businesses think taxing and spending decisions will generate enough economic growth to pay off the debt. Mr. Trump has to prove he can strike this balance, but don’t trust the revisionists to judge whether he has. They’ll oppose any tax cut because what they want is more spending.
The story of the Biden years is that Democrats pumped up demand via massive spending while sitting on the supply side of the economy with pandemic policies and measures that made it harder for businesses to invest. Voters understood the failure, and Democrats anxious to rebuild trust would be wise to reflect on it.
