What history tells us about this feel-bad economy

Since last week’s big Democratic electoral victories, I’ve been seeing some speculation to the effect that the 2024 election may be marked by a reverse coattail effect: that President Joe Biden, whose poll numbers have supposedly been weighed down by a bad economy, may be lifted up by local candidates who have been racking up wins over social issues.

Well, I’ve been delving into some economic and political history, and I’m having some problems with this narrative.

First, Biden is not, in fact, presiding over a bad economy. Nonetheless, many Americans tell pollsters that the economy is bad. Why? I don’t think we really know; what we can say is that historical experience throws some cold water on one popular view about the sources of American discontent.

Finally, could Biden have pursued alternative policies that would have left him in a better political position? The lessons of history suggest no. If economic perceptions are a big problem for Democrats next year (which remains far from certain), this may be more a matter of bad luck than of bad policy.

Start with the state of the economy. The simple reality of the past year or so is that America has accomplished what many, perhaps most, economists considered impossible: a large fall in inflation without a recession or even a big rise in unemployment. If you don’t trust me, listen to Goldman Sachs, which Wednesday issued a report titled “The Hard Part Is Over,” noting that we’re managing to combine rapid disinflation with solid growth, and that it expects this happy combination — the opposite of stagflation — to continue.

What went right? In 2021, Biden administration economists published an essay on historical inflation episodes, arguing that the closest parallel to current events was the inflation surge after World War

II, which subsided after the economy resolved wartime disruptions and readjusted to peacetime production. While inflation went much higher for much longer than the Council of Economic Advisers expected, it seems the council, while it underestimated the size and duration of the shock, got the basic story right.

Yet, voters aren’t happy. The most widespread story I’ve been hearing is that people don’t care about the fact that prices have been leveling off; they’re angry that prices haven’t gone back down to their pre-pandemic levels. This makes some psychological sense. But here’s where my historical doubts come in.

This isn’t the first time we’ve seen a temporary surge in prices that leveled off but never went back down. The same thing happened after World War II and again during the Korean War, the latter surge being roughly the same size as what we’ve seen since 2020. Unfortunately, we don’t have consumer sentiment data for the 1940s, although some political scientists believe that the economy actually helped Harry S. Truman land his upset election victory in 1948. But we do have such data for the early 1950s, and it suggests that people were relatively upbeat on the economy despite higher prices. Why should this time be different?

Also, it seems worth noting that many voters have demonstrably false views about the current economy — believing, in particular, that unemployment, which is near a 50-year low, is actually near a 50-year high.

Whatever is really going on, was there something that Biden or the Federal Reserve could have done that would have mollified voters?

Here’s how I think about it: The supply chain disruptions caused by the pandemic made it inevitable that prices of some goods would rise sharply. The only way to have avoided overall inflation would have been to force major price cuts for other goods and services.

And everything we know from history suggests that trying to impose deflation — falling prices — on large parts of the economy would have had disastrous effects on employment and output, something like the quiet depression Britain inflicted on itself after World War I when it tried to go back to the prewar gold standard.

So what’s going to happen in the next election? I have no idea, and neither do you. I can say is that if you believe that Biden made huge, obvious economic policy mistakes and could easily have put himself in a much better position, you probably haven’t thought this thing through.