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Economic Good News Now Can Be Bad News for Democrats, But Good News for Republicans, in 2024:
Unless the Republicans Damage Themselves (Again), with Manchin
Those who follow the stock market are probably mystified when stock prices fall right after good economic news is announced – whether about jobs or GDP -- but then rise when the economic news is bad. Given the large jump in inflation over the past 18 months or so, this seemingly crazy pattern makes sense.
That’s because the Fed has been raising interest rates like crazy trying to slow the economy to bring inflation back down to its pre-pandemic target of 2%. So, when news comes out, as it has been doing recently, that the economy remains strong despite the Fed’s extraordinary rapid increases in interest rates, investors rightfully get spooked that the Fed will raise rates even more, and possibly faster, than has widely expected. Indeed, as I am writing this today, Fed Chairman Jay Powell indicated that the Fed was going to continue raising rates quickly to slow down the economy, and predictably, stocks fell. Conversely, any news of labor market or GDP weakness is considered by investors to be good for stock prices, since slower growth means that inflation is more likely to fall, permitting the Fed to slow or quit its rates-tightening campaign.
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This same upside-down pattern may have major political repercussions as well, especially on the outcome of the 2024 presidential election, whoever the nominee from each party turns out to be (though conventional wisdom today is that 2024 will be a Biden-Trump rematch). That’s because the longer the good news about the economy’s remarkable strength keeps coming, the less likely it is that “core” inflation – the price index for the prices for all goods and services except for volatile food and energy prices – which is what the Fed (and the markets) most look at, will come down any time soon, if all, to the 2% range. Which means that it is growing increasingly likely that the Fed will have to raise short-term interest rates (the only rates it most directly controls) above the peak 5.5% level that up to now has been widely expected.
The higher those interest rates go, of course, the greater (the already substantial) risks there will be that the economy will fall into recession and suffer substantially higher unemployment. I recognize, of course, it is always possible that core inflation can come down without so much pain — the proverbial “soft landing” — but history counsels otherwise. The unkinking of supply chains induced by the pandemic – which has cooled off the “headline” inflation numbers that include food and energy prices -is just about over. And yet core inflation over the past several months is running at about 4.5-5%, still far above the Fed’s 2% target. It is true that Fed monetary policy changes have “long and variable lags,” so that the rate increases already under the Fed’s belt may eventually tame inflation without interest rates going north of 5.5% (or a bit higher). But that possibility is becoming more remote every day.
And so, this a prediction, not policy advice: the most widely anticipated recession of my lifetime – what the Wall Street Journal has referred to as the “Godot” recession -- may happen at the very worst possible time for President Biden, if as expected, he formally announces his reelection campaign, or for any other Democrats who may choose to run if Biden doesn’t. Indeed, as of early November, 2022, or five months ago, nearly 2/3 of Americans already believed we were in recession, even though it was clearly not true! https://thehill.com/business/3715688-2-in-3-say-us-in-a-recession-survey/.
The economic predicament Democrats face is eerily similar to the 1992 election, when President George H.W. Bush (’41) was running for reelection but was slammed by Bill Clinton for, among other things, presiding over a recession-plagued economy. As it turned out, the economy was actually recovering from the 1990-91 recession – one of the shortest and shallowest of the post-war era – during most of 1991 and into 1992, but enough Americans felt economic anxiety that James Carville’s famous campaign theme, “It’s the Economy Stupid!” played enough of a role (along with Ross Perot’s third party candidacy, which probably hurt Bush more than Clinton) to give the victory to Clinton. If the US economy falls into recession later this year, there almost certainly won’t be enough of a “recovery” by election day 2024 to match even the slow recovery that doomed Bush ‘41’s chances of winning reelection.
President Reagan was a lot luckier with the timing of the recession on his watch. He came into office with the economy already in severe trouble, only to see it get much worse, as the Fed, led by the late central banking giant (literally) Paul Volcker, pushed interest rates to high double digits in an ultimately successful battle against then unprecedented double-digit inflation. But the inflation battle led to soaring unemployment, topping out at nearly 11% at year end 1982, when Reagan’s popularity, not surprisingly, was in the pits. Yet two years of recovery thereafter was enough time for Reagan to run for reelection on an “It’s Morning in America” theme that powered him to a landslide victory in 1984 over former Vice President Walter Mondale.
In short, it pays for presidents to get any recessions “out of the way” early in their terms. Biden inherited a pandemic-induced economic tailspin, which he was able to prevent through vigorous advocacy of his American Rescue Plan early in his first year. But the nearly $2 trillion of economic relief provided by that plan, on the heels of Donald Trump’s earlier trillion dollar rescue package, exacerbated the inflation caused by pandemic-induced supply chain problems and global energy and food price hikes induced by Russia’s invasion of Ukraine. Although the US inflation rate peaked at an annual rate of 8% some months ago, it is the residue of the remaining inflation – the 4.5-5% “core” rate – that, coupled with the current strong economy, that threatens to push the economy into a possible “Biden recession” later this year or early in 2024. In other words, the worst possible timing for a sitting president.
Do the President and Democrats have any way of countering the political fallout from this doomsday scenario? Conversely, is there anything that Republicans will do to screw up the political benefits they will reap if the Godot/Biden recession happens later?
One thing many Democratic members of Congress almost certainly will do as the economy weakens is urge the Fed to let up on its anti-inflation campaign, or at least urge the Fed to announce that it is aiming for a 3% rather than 2% target. Democrats are also likely to argue that any downturn or recession is not their fault, but the Fed’s. That line of argument is unlikely, at least in my view, to gain much political traction because Republicans across the board will counter that Biden appointed the Fed Chairman, Jay Powell, who also was originally appointed by Trump.
It is always possible that, as in the 2022 mid-terms when inflation was much higher and pundits widely predicted the Red Wave that never happened, Republican craziness will scare enough independents to trump (pun clearly intended) any sourness in the economy and thus hand victory to Democrats. We have been living through such strange times over the past decade that, I guess, anything is possible.
There is one way, however, that Republican craziness can do their 2024 candidate in, however – but it will take a combination of an odd sort of luck favoring Democrats and political deftness by the President (and Congressional Democrats).
The “luck” is that the economy doesn’t materially weaken between now and July, when the Treasury Department will have run out of its tricks of putting off a default on U.S. debt because the government’s debt ceiling has not been lifted.
The “craziness” is if House Republicans refuse to lift the debt ceiling in July and force the government to default, entirely or partially (by prioritizing payments redeeming government debt, payment of interest, and honoring federal social security “entitlement” obligations, which some Republicans have been urging Congress to do, or which, push comes to shove the Treasury may do on its own once it has exhausted all of its cash saving maneuvers). Whatever the nature of any “default,” it almost surely would trigger a sharp decline in the stock market (as the near default in 2011 did), a spike in interest rates, and if at least five House Republicans don’t cross the aisle and accept the White House’s demand for a “clean” debt ceiling increase, then an extended default could be the trigger that finally pushes the US economy into recession. Well-known macroeconomist Mark Zandi has provided some plausible estimates of the damage and they are not comforting: https://www.nytimes.com/2023/03/07/us/politics/debt-default-economy.html.
Of course, with stocks in a swoon and interest rates soaring, the pressure on at least five House Rs, if not more, to make at least a temporary debt ceiling deal – say, extending the limit until at least September 30, when appropriations for this fiscal year run out – will be enormous. Just as in 2008 when Congress initially didn’t pass the Bush bank rescue plan, but then quickly reversed course after the market tanked.
Still, even a temporary default – which would send longer-term interest rates higher (as also happened with the near default in 2011) – well short of the doomsday scenario outlined by Mark Zandi could be damaging enough to investor and business confidence to tip the economy over the edge. The odds of that happening go up if there is another government shutdown just a few weeks later due to an inability of Rs and Ds to agree on a fiscal 2024 appropriations bill, or at least a Continuing Resolution (CR) funding the government at FY 2023 spending levels.
In short, the debt ceiling and appropriations fights might be the straws that finally break the back economy’s back. The big political question is who will swing voters (remember, they’re the only ones that count for 2024 election purposes) blame if this happen? If history is any guide (which it may not be this time), with the “Manchin and Trump wild card” caveats I am about to mention, Republicans are likely to get the blame. And so, if these fights actually do push the economy into recession, Democrats may be able to persuade swing voters later in the election season that Republican intransigence, or “budget terrorism,” is responsible for the long-awaited recession. I suspect that President Biden and his advisers know all this, and this will be one reason they will be inclined to hang tough in any budget negotiations, refusing to cut spending as a condition for lifting the debt ceiling.
There are at least three problems with or caveats about any such thinking, though. First, any default may be sufficiently short lived that neither it or a follow-on government shutdown dents the economy that severely. So, Democrats cannot fully count on House-led budget craziness to damage Republicans’ 2024 election prospects.
Second, even if a recession happens around the time of these fights and many swing voters at that time connect the downturn with Republicans’ budget cutting zeal, they may forget all that a year later when the election actually takes place. If at that time the economy is in recession or barely recovering, voters (most importantly, swing voters) may not remember or care how it all started. They just will care that the economy sucks, and other things being equal, blame Democrats (unless they care more about threats to democracy, as already noted, and as I will reiterate again shortly).
Third, much of the voting public that counts may not blame House Republicans for insisting on budget cuts (depending on how severe they are and of what type) as the price for lifting the debt ceiling, if Senator Joe Manchin sticks to his recently stated position (and is joined in that view by Senator Sinema whose views about all this are still a mystery) that the White House and Democrats should engage in deficit reduction talks with Republicans as part of the debt ceiling negotiations. He hasn’t quite said that yet, but has come close to that line, which potentially could greatly complicate any efforts by the President and Democrats to blame any default solely on Republicans. https://www.manchin.senate.gov/newsroom/press-releases/icymi-manchin-calls-on-biden-administration-congressional-leaders-to-get-serious-about-the-national-debt.
So, here is where “deftness” on the part of the Administration and Congressional Democrats is required. If I am right that a default/shutdown triggered recession is the Democrats’ best defense to being blamed for the Godot recession, then they don’t want to make any pre-July budget deal with Republicans that would avert default. But to keep Manchin in the tent, so to speak, they at least need to commit to him that Democrats will be serious about tackling the deficit, at least in part on the spending side, during the appropriations battle several weeks later. Given that Republicans are highly unlikely to agree to the tax increases on those earning more than $400,000 that the Administration has already proposed as a way to reduce the deficit, which Manchin surely knows, the deficit reduction deal this fall will have to be similar to the one struck back in 2011, when then President Obama and then Speaker John Boehner agreed to a cap on future discretionary spending (but without a much larger deal that would have trimmed entitlements a bit and also increased taxes). Updated to today, a 2011-type deal might cap discretionary spending at this year’s level through the next two budget cycles, at most, kicking the budget can down the road until after the 2024 election. The Administration needs to have Manchin’s (and likely Sinema’s) blessing for such a deal (along with assent from the rest of the Democratic caucus), in return for Manchin making clear that his insistence on a deficit reduction deal is not tied to the debt ceiling. If Manchin does this, then if default comes, Democrats can credibly claim to voters all blame rests on House Republicans (and, perhaps by implication, on Senate Republicans and Republican presidential candidates for not being able to rein the House Rs in).
Finally, there is of course, one other wild card that could play havoc with the 2024 election outcome. That, of course, is the Trump indictment wild card – not the one from Georgia over election interference, but more significant for 2024, whether DOJ indicts Trump for any one or more possible offenses (Mar-a-Lago less likely, January 6th related more likely, but not certain). Conventional wisdom has it that any DOJ indictment is all-but-certain to enrage Trump’s supporters and therefore strengthen Trump in his primary fight for the nomination.
But all bets are off about the impact of an indictment on the general election outcome. Here, too, is where Trump (and Republicans who go along with him) can damage themselves and offset the political advantage of the timing of the Godot recession. All that can occur if Trump reacts with authoritarian threats, and other Republicans join in. That sort of craziness could then scare enough swing voters who played a key role in preventing the Red Wave in the mid-terms to put aside any worries they may then have about the economy and vote Democratic. Democrats will have to count on that happening again if the indictment(s) happen sometime between now and the 2024 election.
Bottom line: buckle up for what is sure to be a bumpy ride over the next two years (but then, I suspect, readers of this post surely knew that already).
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