Recently, Democratic Party-cheerleading economist Paul Krugman declared, “Inflation is over. We won.” This is like a robber shooting you and then declaring, “The coma I put you in is over! We won!”
The truth is that the wild inflation, high interest rates, bank failures, and other economic harms of the last three years were all entirely avoidable and all entirely caused by President Biden and the Democrats’ arrogant and unwise policies.
This is not “Monday morning quarterbacking.” Some of us were saying this well before the fact. My May 7, 2021 column (“Joe Biden, Economy Killer”) accurately forecast the inflation, rising interest rates, and rising government debt service long before the Biden administration even acknowledged the risks were real.
The U.S. economy did not need another giant stimulus plan when Biden and the Democrats took control in 2021. The U.S. gross domestic product, knocked down by the COVID shutdown in the first half of 2020, had jumped up by a record 33% in the third quarter of 2020 and by another 4% in the fourth quarter, all before Biden took office. The S&P stock market had risen 16.3% in 2020. Employers were waiting for workers to come back to work, and another stimulus package had been passed with bipartisan support in the last quarter of 2020. Happily, the inflation rate was only 1.4% as 2020 ended, with a one-year Treasury rate of just 0.10% and a 10-year Treasury rate of just 0.95%
The outlook for 2021 was also favorable. As the Wall Street Journal reported on Jan. 28, 2021, “The International Monetary Fund expects the U.S. economy to grow 5.1% this year, while economists surveyed by the Wall Street Journal projected 4.3% growth … U.S. employers are poised to add more than five million jobs this year, according to economists surveyed by the Journal. That would make 2021 the best year for employment gains in records dating back to 1939.”
As Biden entered the White House in January 2021, a wiser new president would have allowed this recovery to continue without meddling. But what political fun is that? How can you be the “new FDR” unless you present matters as worse than they are, so that you can create giant new programs and be the savior? How can you transfer trillions of taxpayer money to build a Democratic Party political base?
Instead, Biden took office and quickly proceeded to do everything exactly wrong. He used the Reconciliation Act to jam through a $1.9 trillion stimulus bill (the “American Rescue Act”) without one Republican vote. This was an economic mistake, a knife in the heart of the regular political order, and made a lie of the bipartisan respect that he had campaigned upon.
When former Democratic Treasury Secretary Larry Summers warned Biden that his rescue bill was inflationary and six times the amount needed, Biden’s biographer Franklin Foer reports that “Biden called Summers and unloaded on him. His younger aides, many of whom had worked for Summers in the Obama administration, pumped their fists when they learned about the president’s fiery rebuttal. Biden had put their old mentor in his place.”
Even as Biden overstimulated demand, he moved to restrain supply. He temporarily slowed up oil and gas production with a series of jawboning and regulatory attacks against the Keystone Pipeline, fracking, and traditional energy companies. He increased incentives for workers to stay home, thereby exacerbating labor shortages and supply-chain bottlenecks. He berated governors like Florida’s Ron DeSantis, who sought speedy re-openings of their states. He praised teacher union leaders as they kept schools closed. His fecklessness with the U.S. military withdrawal from Afghanistan may well have emboldened Vladimir Putin to launch a ground invasion of Ukraine, leading to a host of other energy and supply chain shocks.
The foreseeable result of excessive demand stimulus, plus constrained supply, is inflation, which has been a terrible burden to the average American. In total, prices are up about 17% since Biden took office, and real wages are down about 2%. It takes the average American roughly $11,000 per year more just to maintain the same lifestyle now as pre-2021. Credit card debt has soared in the last two years to over $1 trillion as consumers struggle to keep up.
The Federal Reserve was slow to react to Biden’s errors. They then raised interest rates at a nosebleed pace in 2022 and 2023 to catch up, and to fight the Biden-fueled inflation that reached a height of 9.1% per month in the summer of 2022. The fact that the Fed had to raise rates once inflation began, however, was totally to be expected, and fully predicted in my May 2021 piece.
Rising interest rates mathematically translate into declining values for long-term, fixed-rate bonds, whose existing rates look relatively less attractive as other rates rise. As the Fed was forced to whip up rates to cure the Biden inflation, the U.S. long-term bond market suffered its worst annual losses since the Napoleonic Wars in 1803, a decline of 53% for 30-year U.S. Treasury bonds between March 2020 and October 2023.
The stock markets fell over 19% in 2022 as well. Workers’ pension plans were battered. Silicon Valley Bank (whose balance sheet was heavily invested in the now plummeting “risk-free” U.S. long-term government bonds) experienced a depositor run, which in turn triggered a bank panic that forced the government to intervene to save the bank sector. This Biden-induced panic has left banks weaker and more regulated, which is likely to result in years of reduced bank lending to Main Street borrowers. Bank loans are also increasingly hard to get for local real estate developers, who are themselves wounded by the impact of higher interest rates on their mortgages and on the relative value of their fixed rent incomes. More generally, the Federal Reserve Bank of San Francisco has recently estimated that every 100-basis point rise in real interest rates reduces total U.S. economic growth by 5% over the following 12 years.
The Biden administration now desperately seeks to avoid blame for U.S. inflation by pointing to the inflation in Europe, much like a fifth grader’s “everybody is doing it” defense. But the European Central Bank itself has made clear this defense is specious.
As the ECB Bulletin explained, U.S. inflation has been chiefly driven by excess demand and government over-stimulus, while Europe’s problems are chiefly due to supply shocks. Consumer demand in the U.S. had already recovered to pre-COVID levels by early 2021 when Biden (foolishly) applied an extreme amount of extra stimulus. In contrast, Europe had weaker demand but was hit hard by higher prices on Russian-supplied energy and natural gas, an increase which also increased electricity and food prices. The U.S. did not share in this inflationary supply shock because our country never depended upon Russian gas and was already energy self-sufficient before Biden took office. Additionally, inflation began in the U.S. several months earlier than in Europe, and this U.S. inflation, plus the rise in the U.S. dollar relative to the Euro, meant that the U.S. goods were themselves fueling higher prices for Europeans in their own currency.
Now, it is 2024. After years of Biden-induced economic hardship, the Federal Reserve rate rises are having their dampening effect, inflation is back down, and asset values can stop falling. The stock market is up in recent months, but even now, this rise is despite Biden, not because of him.
The best-performing sectors of the stock market are often those that Biden and the Dems have tried to cripple, and the worst performers are often those industries he tried to support. The fossil fuel stocks like Exxon were up over 50% in 2021 and 2022 as the stock market fell. The social media and tech companies that Biden browbeats are the largest part of the Magnificent Seven. Drug companies that charge very high prices, such as the makers of weight loss drug Ozempic, are way up. Meanwhile, Blackrock, which promoted ESG investing, is under siege, and the billions and billions of taxpayer money handed to the electric vehicle industry may prove to be largely wasted in the face of slowing consumer demand. Even green energy projects may have perversely suffered under Biden as, the Wall Street Journal reports, “Clean-energy stocks have fallen out of favor, with the pressure created by rising interest rates outweighing supportive government policies.”
Finally, even if current monthly economic numbers are acceptable, the cumulative harm and price increases that have already occurred under Biden are unlikely to reverse and so will live on like a giant weight around America’s collective neck. Even if Treasury interest rates drift back down by a percentage or two over coming quarters, they will still be at a level that is roughly 300 basis points higher than they were pre-Biden, or than they needed to be. These interest rates, now raised, appear likely to stay at this elevated level for years to come.
Biden’s economic legacy – the “Biden Burden” – will be that he made Americans poorer than they should have been, and needlessly moved America to a world of higher interest rates on a larger government deficit.
The Congressional Budget Office last week revised its government deficit estimates upward, expecting $48.3 trillion of government debt by 2034. Interest expense on the federal debt this year has already jumped up to $870 billion, which is larger than the defense budget. Additionally, Biden’s higher interest rates will continue to increase debt service costs as old government debt rolls off and is replaced at higher costs. The risk is stark: a 3% higher interest rate on even the existing $33 trillion level of federal debt equates to $1 trillion of extra federal interest expense each and every year, on top of the already giant existing debt service number.
There is no painless way to pay down this deficit or cover this extra annual government interest cost. The need for billions and billions of extra tax money or budget cuts will fuel fierce political fights, populist divisions, and national anger for years to come. All this public unrest will also be the legacy of the bad Democratic economic policies since 2021. Professor Krugman, when it comes to Bidenomics, “We lost.”
