Voters are being asked to make sense of competing messages about the state of the economy: Is the economy doing well, overall, as we come out of the crises created by the pandemic? Is the economy doing badly, as we continue to pay higher prices for consumer goods? For candidates, this is a contest to shape the most compelling stories, and to link those stories with peoples’ daily lives.
Recent polling suggests that a slight majority of voters think Republicans are better stewards of the economy than Democrats. While conservative candidates question the data about low unemployment and rising wages and claim the Biden Administration’s spending programs have been a failure (even as they take credit for new infrastructure projects in their districts), Democrats struggle to shape a more positive and hopeful narrative.
Republican candidates benefit from stories that focus on the negatives. Emphasizing higher prices resonates with peoples’ lived experiences: groceries are higher than they were pre-pandemic. Household debt continues to rise. The housing crisis has gotten worse. Too often, workers need two jobs to make ends meet, and they must commute long distances. As these costs have gone up, many pandemic relief programs have expired, including the expanded child tax credit.
Democratic candidates have a more difficult task. They must acknowledge working families’ ongoing struggles and talk about the kinds of actions they would take to make housing, healthcare, childcare, eldercare and higher education more affordable. They need to clearly explain the factors contributing to rising prices, including the role of price-gouging, and what can be done about them. Democrats must do a better job of defending the programs they championed in 2021-2022, like the American Rescue Plan Act, the Infrastructure Investment and Jobs Act, the CHIPs Act, and the Inflation Reduction Act. These programs have helped our economy avoid a post-pandemic recession and enter a period of sustained growth, low unemployment and higher wages.
Organizers and activists who are engaging with multiracial working-class communities to get out the vote also need to talk candidly about our communities’ economic concerns. Our narratives must give voters a way of understanding what has happened since the pandemic, both the setbacks as well as the possibilities for change. In our conversations with prospective voters, we can hear from them about the kinds of issues they care about and encourage them to get involved, beyond the elections, to fight with us for a more just economy.
Convergence Magazine Editorial Board member Sandra Hinson talked with Columbia University economist Eric Verhoogen about the state of the economy and how to talk about inflation. Verhoogen pointed to the need to focus on wage growth and measures that increase workers’ bargaining power—and the sharp divide between Democratic and Republican policies on the social safety net. For more in-depth discussion of the economy, see our “People-Side Economics” series.
Sandra Hinson: Why is inflation the focus of most stories about the economy today? How can we help voters understand why there was a surge in late 2021 through 2022, and what impact it has had on the economy, overall?
Eric Verhoogen: Part of the reason inflation is in the news is because inflation is very visible. We see prices are going up every time we go to the store. I think the prices of eggs has doubled since the pandemic–changes like that are very noticeable.
But when we evaluate how the economy is doing, we have to look at more than just inflation. We also need to look at what is happening with employment and wages. We’ve had a period of relatively low unemployment and rising wages, especially at the low end of the wage distribution. Real wages are back to their pre-pandemic trend. Being more or less where we would have been without the pandemic is actually pretty remarkable.
The Biden Administration is not getting the credit for these more positive outcomes, in part because of all the focus on inflation.
Many economists feel the economy is actually doing much better today than most stories would suggest. We had a huge shock with the pandemic. We had a high inflationary period afterwards. Often what happens is that to combat inflation, the Federal Reserve raises interest rates a lot and you end up in a recession. So far that hasn’t happened.
Instead, the economy seems to have had a landing. Inflation rates are coming down and the labor market remains strong.
That’s a remarkable achievement of economic management for which the Biden Administration deserves some credit. And yet, a lot of voters are feeling that conditions are not so good, for the reasons you mentioned.
SH: Yes, and Republicans hope Harris/Walz will inherit the negative feelings many voters have about the economy under Biden.
You noted that the pandemic was responsible for the inflation surge in 2021-22. Help us understand how and why the pandemic caused such a major shock to the economy.
EV: Because of the pandemic, the entire world economy was shut down very suddenly. And then relatively quickly, economies started opening up again. This was a major, historically unprecedented shock. There were bottlenecks and supply-chain disruptions. Transportation costs went up. It was hard to get staffed up quickly. At first, workers were reluctant to go back into retail and factory jobs. All this gave rise to inflationary pressures. They didn’t just happen in the United States. Lots of places around the world had similar pressures. Then Russia’s invasion of Ukraine compounded things, further driving up prices of energy and food.
You do have to be careful with inflation, because you can get into an inflationary spiral. Once people start to expect high inflation, it can be hard to change their expectations, and they can become self-fulfilling. People were reasonably worried about an inflationary spiral. Most economists would say there was a sound reason for the Federal Reserve to raise interest rates and make the economy run less hot — to reduce economic activity with the understanding that it will also reduce inflation.
The good news is that things have calmed down. Annualized inflation is now about 2.5%. That’s a reasonable rate. This does not mean working families are necessarily seeing or feeling that things are improving. We won’t actually see prices going down; that almost never happens. But prices are now rising at a pretty normal rate.
SH: One set of arguments that we are up against going into the election is that rising inflation was caused by increased public spending combined with a stronger labor market. How do we counter these arguments?
EV: I think a key thing to understand is that with lower unemployment and an economy that is running hotter, there are two effects. First, it’s going to be good for workers. It’s going to lead to rising wages. They’re going to have greater bargaining power. It’s easier to leave a job if your employer doesn’t treat you well. That’s generally a good thing for workers.
At the same time, it’s true that when an economy is running hot, it can tend to generate inflationary pressures. Increases in public spending stimulate the economy. In addition to reducing unemployment, increased public spending in addition to reducing unemployment, creates some inflationary pressures. So, there is a trade-off.
The key thing that people need to worry about is: How are wages doing relative to prices? What’s happening with real wages?
A little bit of inflation is not necessarily a bad thing for workers as long as unemployment is low, and wages are rising. The people who really don’t like inflation are the people who make money by lending it to other people: the financial sector. Their interest rates are often not indexed to inflation. If you’re getting paid back 5% for a loan that you made, inflation will tend to eat away at your profits.
SH: Which brings us to the role of the Federal Reserve. How would you explain their approach to bringing down inflation, and could they play a better role?
EV: There is a key conflict of interest around macroeconomic policy that we need to highlight for people. The Federal Reserve has two targets: an inflation target and an employment target. The Fed wants the inflation rate not to be too high and it also wants unemployment not to be too high. Lower unemployment is especially good for workers. Lower inflation is especially good for the financial sector. Hence, the conflicting interests.
It’s a complex situation, but for the most part, working-class people will do better when the Fed is favoring its low unemployment target rather than focusing so much on the inflation target.
We could bring this into a broader narrative: If the economy runs hot, unemployment will go down, workers’ bargaining power will go up, and wages will go up. This will tend to raise costs which may get passed onto working people in the form of higher prices. But as long as wages are keeping up with rising prices, moderate inflation isn’t such a bad thing.
Focusing exclusively on prices reinforces a narrative that inflation is the root of all evil, and we should do whatever we can to bring it down. This tends to benefit Wall Street at the expense of working families. We need a more balanced approach where we recognize that we need unemployment to be low. Generally, workers will be better off under full (or almost full) employment, even if prices go up.
Progressives definitely need to keep pushing for low unemployment and remind the Fed that keeping unemployment low is a key mandate.
Focusing exclusively on prices reinforces a narrative that inflation is the root of all evil, and we should do whatever we can to bring it down. This tends to benefit Wall Street at the expense of working families.
SH: Let’s talk about other interventions that would help workers and communities during an economic crisis. For example, a number of relief programs that helped us during the pandemic have expired. If they had been extended, working-class communities, frontline workers, students, renters, seniors and others would have been better able to deal with rising costs.
What combinations of relief programs and pro-labor policies should we focus on, both to motivate people to vote for labor-friendly candidates and to stay engaged post-election for the policy fights ahead?
EV: Let’s start with interventions that increase workers’ wages, like raising the minimum wage. This is often called pre distribution, in contrast to using taxes to redistribute money through social programs. Large majorities of people are in favor of raising the minimum wage. It is also a clear line of demarcation between the Democrats and Republicans, and it should be a winning issue for Democrats.
Another issue, which may be a little bit more specialized, is about removing barriers to competition in the labor market. Recently, people have become more aware of the non-compete clauses that are rife in the economy, where companies try to prevent workers from leaving and joining competing companies. The classic cases are for tech workers and animators. But even fast-food restaurants may have people sign a contract when they start the job saying they won’t go to work for another fast-food restaurant in the same town.
These non-competes reduce the ability of workers to move and to bargain for higher wages and better conditions. As a form of market power, it’s the flip side of monopoly power. Economists call it monopsony power. It’s an obvious area of intervention, now that there is recognition of how widespread it has become. There is wide agreement among left-leaning or center-left economists that we must do something about non-compete clauses.
Raising the minimum wages and reining in monopsony power will have the effect of making real wages better for workers. Going after monopoly power whenever possible is a good policy aim, as well.
Redistribution is also absolutely necessary. For a couple of generations, the safety net has been getting weaker and weaker: aid for needy families, food security, Medicaid, etc. We should recognize that there’s an ongoing threat to these programs.
The Republicans, if they can, would be very happy to cut those things further than they’ve already been cut. There’s a lot at stake for the safety net in this election.