If it is about the Economy, Harris should win by a Landslide
To understand the momentum of the US economy, you have to read the foreign Press. The US Press, for various political constraints [1], does not get it.
Recently, The Economist focused on how well the US economy was doing, especially when compared with developed countries throughout Western Europe, and Japan.
Public’s perception of the economy = Polarization
Within this same issue, The Economist reviewed this paradox between how well the US economy is doing and how bad Americans feel about it.
The Economist explained this paradox with polarization. They graphed the Consumer Sentiment index since 2006. There is a huge difference in Consumer Sentiment between the two parties. Their members feel a lot better about the economy when their party occupies the White House.
The sad part is that the groups that are perceived as the most disenfranchised (low income, no college degree) are the ones who benefited the most from Biden’s policies. Their respective Consumer Sentiment index levels should be very high. Instead, it is approaching record lows.
Within the two graphs above:
- the one on the left shows the plummeting Consumer Sentiment levels since 2020 among: a) Republicans, b) the bottom third of income levels, and c) the ones without college degrees (HS or less). Notice the close visual correlation between the three groups with Republicans diving down faster than the other two groups (the Trump effect).
- the one on the right shows how the wages for the low wage groups have grown a lot faster than for any other groups over the 2019–2023 period. I understand this trend is going on to this day. This is a unique period in the modern history of the US economy (low wages groups rising faster than the others).
Thus, the low income/wage groups who are among the most bummed out are the ones who actually benefited the most from Bidenomics.
Understanding inflation
Trump has set up a trap. He advances that inflation is a terrible problem because prices are much higher now than they were when he was President. The entire US Media has fallen for this trap.
But, this is a mind trap that needs to be debunked. Over time, overall prices always go up [2]. It is true that they went up rapidly during the onset of the COVID pandemic associated with a breakdown of our supply chain.
However, over the long term there is a simple equation that can define the equilibrium between wages and inflation. And, it demonstrates how over time the real GDP per capita keeps on rising.
Inflation + Labor Productivity = wage growth
As long as this equation stands everything is fine. And, inflation is not an issue. Most of the time this equation does hold up.
During economic shocks (oil shocks in the 1970s, Financial Crisis, COVID) on a temporary basis, the equation does not always hold up. And, inflation can rise faster than wage growth. And, workers temporarily lose some purchasing power. But, these phenomenons (economic shocks) are typically temporary. And, these economic shocks are totally outside the control of the US President.
The graph below indicates that since April 2023 the above equilibrium has been restored boosted by rapid increase in labor productivity and a marked slow down in the inflation rate. Overall wages have grown much faster than inflation. And, this trend is most likely to continue.
Benchmarking the US economy vs its foreign counterparts
To truly understand a phenomenon you need to benchmark it against a control group of some kind. Within this section we will benchmark the performance of the US economy vs. some of its main fully developed counterparts.
Economic growth
The Economist disclosed how much faster the US economy grew vs. European economies and Japan.
Independent of The Economist, I did my own stuff. Below see how the US real GDP growth per capita [3] has grown so much faster than for the foreign counterparts: Australia, Canada, France, Germany, UK, and Japan [4].
Let’s unpack the above graph to better visualize the performance of each country.
Several of the countries have struggled to recover their respective real GDP per capita pre-pandemic level. Not the US, as its real GDP per capita is now 10% above its 2019 level. On this measure the US economy has grown more than twice as fast as the second country, Australia.
Inflation
Something to keep in mind is that a country whose real economic growth is faster than another one has often a higher inflation rate. In and of itself, it is not a bad thing. Given the US much faster economic growth, one would expect that its inflation rate would be a bit higher than other countries [5].
The graph below shows the inflation rate defined as the 12-month change in the consumer price index (CPI). As shown below, the US inflation rate (orange line) grew faster during the pandemic. But, it also peaked faster and declined faster. This was due to the Federal Reserve raising interest rates faster than the other central banks.
While the US inflation rate was higher early on during the pandemic, it declined rapidly starting in mid 2022. By now all countries inflation rates appear reasonably well controlled as they are converging towards being under 3%.
As a side note, Trump who is so concerned about inflation, a non-existent problem, has come up with policies that would ensure a spike in inflation. These include:
a) Across the board tariffs of 20% and 60% for China (increase in prices, decrease in real consumer spending, downward pressure on economic growth);
b) Not giving any path to citizenship for 11 million undocumented immigrants, and attempting to expel them all from the country (increase in labor cost).
Unemployment Rate
The US experienced near record high unemployment in 2020 during Trump’s term due to COVID.
Because of fiscal stimuli implemented by both Trump and Biden, the US unemployment rate dropped rapidly. And, it is now hovering around 4% near its record low levels [6].
Since 2022, the US unemployment rate has been at the low end among its peers. Only Japan and Germany have marginally lower unemployment rates.
Economic performance summary
When you benchmark the overall economic performance of the US vs its foreign counterparts, the US is a clear winner. It has achieved a far faster economic growth with an inflation rate that has converged downward to the ones of its much slower growing foreign counterparts. Its unemployment rate is also close to its all time low levels.
Endnotes
[1] The US Press avoids debunking Trump’s narratives (“sanewashing”). The Washington Post and the LA Times even avoided endorsing a Presidential candidate for the first time to avoid being in Trump’s cross hair. Thus, the US Press does not cover the US economy well.
[2] When prices go down (deflation), you have a problem. It results in depressed consumer demand. Why would you buy anything today if you can wait to buy stuff cheaper later? Deflation is associated with flat economic growth. Japan has struggled with this issue since the late 1980s.
[3] Real GDP per capita growth is the output of the equation:
Wage growth = Inflation + Labor productivity
Thus, real GDP per capita growth is an important metric of an economy’s performance.
[4] I did not include China, India, and Russia among the control group-counterparts. This is because their respective GDP per capita are way too small vs the US to be relevant and included in a control group.
[5] As long as wages = inflation + labor productivity, and real GDP per capita grows, an economy is typically doing fine.
But, you don’t want inflation to run chronically hot (> 4%). Higher inflation rates can cause economic growth to slow down because:
- On the supply side, high inflation causes a higher cost of capital resulting in lower capital investments, lower labor productivity, and lower economic growth.
- On the demand side, high inflation causes a higher cost of credit resulting in lower real consumer spending and lower economic growth.
The inflation sweet spot for most countries probably ranges from 2.0% to under 3.5%. Central Banks typically target 2% as they don’t want inflation to run out of control. However, at the margin they would rather have to fight inflation than deflation. The latter is harder to deal with (Japan).
[6] The US Press goes bananas if the US unemployment rate goes up from 4.0% to 4.1%. But, by historical standards the current unemployment rate is near record lows as shown on the graph below. The current unemployment rate at 4.1% is indeed near the record lows since 1950.
