Biden screwed up on inflation — badly

There’s a pretty widespread consensus about which issue was most responsible for Kamala Harris’s defeat: inflation.

There’s much less consensus on what, if anything, Democrats could have done differently about it.

Polls have been clear for years that voters were irate about the inflation that occurred under the Biden administration — the highest in decades. Yet it’s also clear that Biden’s policies were not the primary cause of that inflation. It was a global phenomenon in the post-pandemic return to normal, exacerbated by Russia’s invasion of Ukraine in early 2022.

Some of Biden’s defenders have argued he did the best he could with a bad hand. After all, his economic policy eventually resulted in a “soft landing” where inflation rates dropped without a recession. Additionally, incumbent parties have been struggling in elections nearly everywhere, and Harris’s loss was comparatively small compared to incumbents’ blowout defeats overseas.

There’s another theory of the case, which argues that Biden’s team shouldn’t be let off the hook so easily. The administration, critics say, screwed up on inflation in two distinct and avoidable ways.

First, according to economists, the Biden administration’s policies worsened inflation. This was not inevitable — policymakers ignored critics’ warnings at the time that their policies would likely have this effect.

Then, once the problem became evident, Democrats didn’t pivot to genuine inflation-fighting policies, such as deficit reduction. Instead, they mainly chose to rebrand their existing policy priorities as “inflation-reducing” or cost-reducing, sometimes falsely. The public didn’t buy it.

All this suggests a reckoning is needed in Democratic policy circles, to address what went so wrong and why.

Traditionally, the purpose of an economic stimulus bill is to fill what economists refer to as the “output gap”: the amount of economic activity recessionary pressures are currently suppressing. If there’s a bigger output gap, you need a bigger stimulus. But if a stimulus is too big, the risk is overstimulating the economy and spurring high rates of inflation.

By the time Biden took office, the US had already passed two large pandemic aid bills, the $1.9 trillion CARES Act of March 2020 and a $900 billion follow-up bill in December 2020. The Congressional Budget Office (CBO) estimated in early 2021 that the remaining output gap over the next two years would be about $600 billion.

But Democrats ended up passing a far bigger stimulus than any credible estimate of the output gap required — they enacted the $1.9 trillion American Rescue Plan. They didn’t just overshoot the output gap, they blew past it by more than $1 trillion, assuming the CBO estimate was accurate.

How, exactly, Democrats decided to size their bill at $1.9 trillion was something of a mystery at the time. The fullest accounting of it I’ve read was in Franklin Foer’s book, The Last Politician, which lays out the following sequence of events:

There could be more to the story, but by this account, the sizing of the American Rescue Plan was determined largely by political concerns — the need to please Democratic senators — and not by economic analysis. (The eventual package contained stimulus checks, expanded unemployment insurance benefits, an expanded child tax credit, and aid to state and local governments. Some of that helped people in need, but much of it was not so well-targeted.)

Critics, such as economist Larry Summers, who’d served as Barack Obama’s top economic adviser, warned at the time that this seemed too big. “There is a chance,” Summers wrote in February 2021, it “will set off inflationary pressures of a kind we have not seen in a generation.”

But Summers’s star had fallen in a Democratic Party that had moved left. Mainstream economists, too, had far less influence in the Biden administration, compared to Obama’s. Biden’s administration was more keen on the advice of progressive reformers, lawyers, and political aides.

Democrats pushed back furiously against Summers’s criticisms. They argued that the risks of going too small were far bigger than going too big (since Congress would be unlikely to approve new spending if needed later) and that Obama’s too-small stimulus in 2009 was one of his biggest mistakes. (Though Obama’s approval recovery in time for his 2012 reelection is looking pretty good right about now.)

Democrats had also likely been conditioned to ignore concerns about inflation after a decade in which deficit hawks had constantly warned of imminent inflation that never seemed to arrive, and after Trump had spent freely with no practical or political consequence.

All of this, in retrospect, seems like wishful thinking — justifications for what Democrats wanted to do politically, rather than a serious analysis of how best to manage the economy.

How much did it hurt? Inflation increased by about 7 percentage points in 2021, and estimates suggest the American Rescue Plan was responsible for between 1 and 3 percentage points on its own.

In other words, there would have been inflation anyway, but quantities matter; 4, 5, or 6 percent inflation would have been significantly better than 7. Prices wouldn’t have risen as high, and interest rates wouldn’t have needed to have been hiked as high to quash inflation later on. (The public, as a rule, dislikes inflation, and they also dislike aspects of the ensuing high-interest-rate environment, like high mortgage rates.)

It is true that the US economy ended up quite strong by many metrics — strong GDP growth, low unemployment, a booming stock market — and in the international context. But that growth came with inflation and price growth that ate into much of workers’ gains, and the American Rescue Plan’s poverty-fighting policies proved temporary when they later expired. And given how much stimulus had already passed, the US may have been on track to recover perfectly well, albeit a bit more slowly, without Biden’s added spending, so it’s unclear whether his policies actually deserve credit for the economy’s strengths.

Democrats’ errors, critics contend, continued once it became clear inflation was really happening at a level unseen for decades. This was, simply, not a problem the party’s political experts or political coalition was well-equipped to solve.

The party’s economic policy under Biden was focused very heavily on bespoke interventions into various parts of the economy or toward various constituencies. These policies included a sectoral restructuring for clean energy and semi-conductors, an expanded child tax credit, ribbon-cuttings on new bridges, an effort to rein in big tech and cut down on corporate mergers, and loan forgiveness for student debtors (some of which likely worsened inflation).

Democrats’ hope was that all of that would add up and they’d get credit from the electorate for doing good things — for “delivering.” But because inflation affected everyone, not just workers in certain industries or people getting certain government benefits, it mattered more to voters than Democrats’ various scattered policy accomplishments. To shore up their economic bona fides, Democrats may have been better off focusing on the broader economy rather than these various projects.

Furthermore, once inflation did become undeniably painful, Democrats pursued a somewhat cynical strategy of rebranding the policies they wanted to pass anyway as inflation-fighting initiatives. This most famously occurred with the so-called Inflation Reduction Act — mainly a bill to fight climate change, it did not actually reduce inflation (and wasn’t meant to; it got that name as a sop to wavering Sen. Joe Manchin). The administration also pitched its toughened antitrust enforcement as anti-inflationary, but these individual interventions were insufficient to make a real dent in an economy-wide problem.

It is true that, once inflation had gotten going, the main determinant in how it would play out was the Federal Reserve’s approach to interest rates. Given norms against presidential influence on interest rate decisions, Biden’s decision to reappoint Powell in late 2021 was his key decision there. Powell got some criticism for initially being slow to act on inflation, but he has since been praised for hitting the sweet spot of raising interest rates enough to rein in inflation while avoiding a recession. Biden could have appointed someone else, but it’s far from clear that a different person would have done a better job (particularly if he appointed a progressive, given widespread progressive skepticism of the inflation problem’s seriousness).

In theory, Biden could also have tried to fight inflation by urging Congress to cut spending. Both Bill Clinton and Obama pivoted to deficit reduction after midterm defeats in far less inflationary environments, but Biden never made this pivot. In his battle with House Republicans over spending levels in 2023, he fought to keep spending high, and the result was basically a continuance of the status quo.

If Biden had advocated spending cuts, he would have faced serious pushback from progressives. But if it helped rein in inflation, perhaps it would have been politically worthwhile. Biden could also have tried to drive prices down by lowering some of the Trump administration’s high tariffs — but that would have won the ire of labor unions and national security hawks.

So to the extent voters concluded that Biden’s administration was not making fighting inflation its top priority, they were clearly correct: Democrats had many other things they cared about more.

Biden was faced with a genuinely tough environment and truly challenging economic problems, and he had his fair share of bad luck. But he also had some good luck: Despite record inflation, he got away without an actual recession, and Powell managed the soft landing. There’s no reason the US economy was necessarily doomed to similar struggles as, say, Europe’s, which was weaker to begin with and hit far harder by the impact of Russia’s war in Ukraine.

Democrats also made their own bad luck. In retrospect, the assumption in 2021 that it was okay to greatly overstimulate the economy because the Fed could always correct it later with interest rates was disastrous. Politically, the enduring higher prices from inflation made Democrats extremely unpopular — and, once interest rates did go up quite a lot, a public used to a decade of easy money hated that too. Economically, throwing gas on the fire led to a bigger fire, which meant the ensuing interest rate hikes ended up having to be higher and more painful.

This is not just hindsight. Many of these criticisms were made at the time and dismissed. Through it all, the party’s brain trust demonstrated a preference for coalition-pleasing happy talk rather than a willingness to seriously grapple with what was going wrong or what the public was unhappy about. The policies Democrats were most excited about turned out to be utterly ineffective at making Biden popular, and his economic record became toxically unpopular.

Blueprint, a Democratic polling initiative, published research showing that one of the most effective arguments for pushing swing voters away from Harris was that “inflation was too high under the Biden-Harris administration.” So in the blame game over Harris’s defeat, Democrats need to think hard about what they could and should have done differently to have produced different results. As it is, Harris’s loss suggests their governance on the issue was an unequivocal failure.