Once Again, It Was the Economy, Stupid

– Mohamed A. El-Erian
Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016) and a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).

CAMBRIDGE – “It’s the economy, stupid!” This famous mantra, coined by the political strategist James Carville, helped Bill Clinton unseat President George H.W. Bush in 1992, and now it explains another election. The economy played a critical role in the 2024 presidential race, creating the conditions not only for Donald Trump to trounce Kamala Harris, and for the Republicans to gain control of the Senate and the House of Representatives, but possibly also for a counter-elite to usher in a new power structure.

The election’s outcome reflected two seemingly opposing views of the economy, both of which are correct. The interaction between them says as much about the basic economics-related strategies of the two political campaigns, good and bad, as it does about the state of expert economic communication in today’s America.

The message from voter surveys was unambiguous: The economy was one of the two main issues in this election (the other being illegal immigration). When asked for specifics, many said “inflation”; and if pushed harder, they reported being heavily influenced by what they see as excessively elevated prices, and the lack of any sign that they are coming down.

The Trump campaign masterfully exploited voter dissatisfaction with the cost of living. Following Ronald Reagan’s example in 1980, they repeatedly posed variations of the question: “Are you better off today than you were four years ago?”

One reason why Democrats failed to respond is that they were obsessed by another (ironically correct) characterization of the economy. The Harris campaign emphasized America’s “economic exceptionalism,” echoing a point that many professional economists have been making. The Democrats pointed to robust US growth, which has outpaced the rest of the G7, and to recent gains in real wages, owing to the decline in the inflation rate. And, of course, there have been multiple record highs in the stock market.

But this approach signaled to many voters that the Democrats simply did not understand what was going on, that they are fundamentally disconnected from pocketbook realities on the ground. On some occasions, they even came across as being full of hubris.

After all, a “K-shaped economy” means that improvements associated with robust growth are not evenly shared. Some sectors and households prosper; others struggle. Among those struggling the most are very low-income households that have exhausted their pandemic savings, maxed out their credit cards, have no financial buffers and, therefore, live with an unsettling degree of economic insecurity.

Michael Spence, the Nobel laureate economist, put it well at a recent lecture at the University of Cambridge’s Judge Business School. Pointing to data illustrating the financial fragility of the bottom half of the income distribution, he noted that such households hearing about economic exceptionalism from the traditional media may have one or more of the following reactions: “the media doesn’t know what it is talking about,” “the media is biased,” or “the media is not to be trusted.” From these starting points, one can easily arrive at a belief that whoever is talking about the economy doing well simply doesn’t understand or represent one’s interests.

The Democrats also lost control of the narrative on inflation. It did little good to tell people that the rate of price increases, while still positive, had fallen sharply from its 2022 high, when their concerns were with the overall price level. The cumulative effect of inflation has added to their cost of living and thus reduced their quality of life.

Similarly, record-breaking equity-market runs mean little to households that own few, if any, stocks. Meanwhile, a housing-price boom is far from a blessing for those seeking to buy their first home.

But the issue is not just how each party communicated to voters. The traditional expert economic consensus also has proved wanting, not least in its inability to describe clearly and widely the interaction between these two views. Mainstream economists also stood little chance of changing voters’ minds about the other big issue in this election: immigration.

By bolstering the US economy’s supply side, illegal immigration has, in fact, supported growth. But the experts who formulate the consensus economic opinion were never going to be able to communicate this to skeptical voters, and even more so because they belong to a club that has taken one credibility hit after another for the past 16 years.

It started with the failure to anticipate the 2008 global financial crisis and subsequent Great Recession – which almost resulted in an even more devastating depression. Likewise, in 2021, the mainstream expert economic consensus insisted that the rise in the US inflation rate would be “transitory,” that is temporary and reversible. But this view was upended when inflation continued to rise, peaking above 9% in June the following year.

This saga also served as a reminder of an unusual fact: the head of the world’s most powerful central bank, the US Federal Reserve, is not an economist, but a lawyer. Would we have someone lacking in formal medical training put in charge of the National Institutes of Health?

All these threads are consistent with a broader theme that was apparent in this election. Not only has the “establishment,” including traditional media, taken a big hit, but the incumbent elites that have led this establishment are being seriously threatened by the rise of a counter-elite. As the historian Niall Ferguson put it, this election was also a victory for “the new generation of builders whose autistic-virile qualities [Elon] Musk exemplifies.”

There are many important messages in Trump’s decisive victory and the down-ballot results. Democrats and the economics profession would do well to heed them.

Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016) and a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).

Copyright: Project Syndicate, 2024.
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