Economics and the election

Excerpts from two recent articles.

See How Trump Won the Economy-Is-Everything Election: Voters expressed anger over prices and frustration about their ambitions feeling out of reach; ‘our daily grind has been so hard’ by Rachel Louise Ensign, Rachel Wolfe and Justin Lahart of The WSJ.

"The experts said the economy was doing great. Everyday Americans disagreed. 

Roughly 40% of voters said the economy was their top issue, far outstripping any other issue, and those voters favored Donald Trump by 60% to 38%. Many weren’t thinking about the streak of robust economic growth or the Federal Reserve’s potential soft landing when they voted, but their grocery bills and out-of-reach ambitions. 

Americans are still feeling sticker shock from higher prices on everything from cleaning supplies to a cup of coffee that followed the pandemic. Their anger about the economy extended beyond prices to encompass wider discontent and anxiety over the future. Many Americans are frustrated that they can’t afford to buy a home or start a family. Fewer believe that the American dream is achievable." 

"While Democrats touted the economy’s strength, many voters said the economy as they knew it was broken.

“This happy talk doesn’t resonate with most Americans,” Mark Zandi, chief economist at Moody’s Analytics, said of the political messaging. “They’re still paying higher prices for many things they need to buy.”"

"Trump put the cost of living front and center in his pitch, claiming in his nomination acceptance speech that “inflation will vanish completely” under his watch. Harris, too, said that families were struggling, and that policy proposals like an expanded child tax credit would help. 

Trump’s message has long appealed to voters in places where the decline of domestic manufacturing eliminated good blue-collar jobs. It also has resonated with working-class voters who once thought they could count on a college degree as a ticket into the middle class, but have started to question its value.

The run of high inflation that followed the Covid pandemic made the economy a concern for a range of voters. Inflation shot up during the Biden presidency, and although it has cooled lately, prices remain far higher than they were when Trump left office. The Labor Department’s measure of consumer prices was nearly 20% higher this September than in January 2021—the largest increase for a single presidential term since Ronald Reagan’s first four years in office. 

Anger over inflation persisted despite a labor market that steadily added jobs while boosting wages. Even though Labor Department data indicate that median wages outpaced inflation, that wasn’t true for a significant number of people. 

A whopping 96% of voters said “high prices for gas, groceries and other goods” were a factor in their vote, according to AP VoteCast."

"Many Americans also feel pinched by high interest rates. Federal Reserve data show that just before the central bank began raising rates in 2022 in its bid to cool inflation, the average rate on credit card plans was 14.6%. As of August, just before the Fed cut rates for the first time, it was 21.8%. 

Many Americans also feel pinched by high interest rates. Federal Reserve data show that just before the central bank began raising rates in 2022 in its bid to cool inflation, the average rate on credit card plans was 14.6%. As of August, just before the Fed cut rates for the first time, it was 21.8%. 

Interest rates rose on car loans and mortgages. The average rate on a 30-year fixed mortgage climbed from less than 3% when Biden came into office to 7.8% last year, a multidecade high, according to Freddie Mac. It has since fallen to 6.7%.

Home prices also shot up, making it harder and harder for many families to buy their first home. The National Association of Realtors’ housing affordability index, which incorporates median single-family existing-home prices, mortgage rates and median family incomes, shows homes are at their least affordable level since the early 1980s.

A July Wall Street Journal/NORC poll of 1,502 U.S. adults found that 89% of respondents said owning a home is either essential or important to their vision of the future, while only 10% said homeownership is easy or somewhat easy to achieve."

See also What Trump’s Win Means for the Economy: President-elect plans tariffs and tax cuts, as in his first term. There are risks with both, but also lots of caveats by Greg Ip of The WSJ.

"The consensus of economists and investors is that tariffs will put upward pressure on inflation while tax cuts could spur growth and add to deficits, together tending to nudge interest rates higher. And indeed, long-term Treasury bond yields had risen recently on strong economic data and Trump’s improved polling, and shot up early Wednesday, along with stock-index futures, as Trump’s victory became apparent.

The first years of Trump’s first term were better for the economy than many expected on election night in 2016, and expectations could be similarly miscalibrated now. For one thing, he inherits a relatively benign outlook. Growth has been surprisingly strong while inflation has fallen substantially from its peaks, although prices are still high. The Federal Reserve is set to trim interest rates Thursday for the second time this year. This should keep recession risks to a minimum.

As for Trump’s own plans, he may not raise tariffs as much as threatened, opting for negotiations over trade war. Congress may water down his tax plans. Finally, presidents are seldom the main driver of economic performance. Trump’s policies may have less to do with how the economy performs over the next four years than larger forces and unexpected events, such as a crisis, a war or a boom driven by new technology."

"Trump’s first-term tariffs had no noticeable effect on inflation because they were relatively modest, and globally subdued demand and investment and slack labor markets were pushing in the opposite direction. On the eve of his election, wages were rising just 2.4% a year. Bond investors expected future inflation to average 1.8%, below the Fed’s 2% target.

This time Trump has proposed much higher tariffs—at least 60% on China, and 10% to 20% on everyone else. Such a combination would lift U.S. tariff rates to their highest since the 1930s. And it would come when demand is brisk, supply chains are vulnerable to geopolitical conflict, and memories of inflation are fresh. Wages are growing 3.8% a year, and bonds see future inflation at 2.3%."

"Morgan Stanley estimates Trump’s 60% and 10% plan would raise U.S. consumer prices 0.9%. That’s a one-off effect: Eventually, inflation should fall back to its underlying trend."

"Portions of the tax law that Trump and congressional Republicans passed in 2017, such as for lower rates for individuals and businesses who pay their taxes on their individual returns, expire at the end of 2025 and they have given priority to extending the law. That would cost about $5 trillion over 10 years, the Committee for a Responsible Federal Budget estimates."

"Trump’s other proposals . . . which have at times included lower corporate tax rates; exempting tips, Social Security benefits and overtime pay from taxes; and deductions for car loan interest and state and local taxes. These proposals would, the CRFB estimates, add about $4 trillion to the deficit over 10 years.

Tariff revenue would reduce that cost somewhat as would spending cuts, though Trump also plans some spending increases." 

"Deutsche Bank estimates that a unified Republican government would boost growth by 0.5 percentage point in 2025 and 0.4 in 2026 without higher tariffs."

"Trump has proposed lighter regulation, for example of mergers and of the oil-and-gas industry. These ought to boost growth and business confidence and hold down inflation. But economists think the effects are too difficult to identify in the broader economy. For example, U.S. oil production and gasoline prices are driven mostly by global prices, which are in turn heavily influenced by OPEC, sanctions, Middle East conflict and Chinese economic growth."