The economy is always top of mind for voters even though presidents don't have much direct control over it, according to Olin economist John Horn. (Photo: Shutterstock)
Newswise — When global stocks tumbled and fears of a slowing U.S. economy surged at the beginning of the month, former President Donald Trump wasted no time in placing the blame directly on his opponent, Vice President Kamala Harris. It’s a familiar tune for Trump, who has lamented the state of the economy under President Joe Biden’s administration for months.
Democrats, however, have painted a very different picture of the economy, often calling it the envy of the world. Who is right? And how much of the credit — or blame — does the Biden administration deserve?
Below, John Horn, a professor of practice in economics at Olin Business School at Washington University in St. Louis, answers these questions and compares the 2024 candidates’ economic plans.
The economy through red or blue lenses
The economy is always top of mind for voters, and this year will be no different. But objectively grading the economy is harder than it may seem, according to Horn.
“It’s hard to not view the economy through a political lens. Presidents tend to get more credit for a good economy than they deserve from their supporters. Likewise, they get blamed for things outside of their control by their opponents,” Horn said.
“The reality is that presidents don’t have a lot of direct effect on the economy because they don’t control monetary policy. They can’t control the amount of money in the system, which affects inflation primarily. They also cannot control interest rates, which affects economic activity, consumption, business investment, etc. At most, presidents can try to persuade the Federal Reserve with public statements, but the U.S. has intentionally tried to keep the central bank independent from political forces.”
Presidents also cannot control spending and taxes — that is up to Congress to manage through legislation. When it comes to the economy, presidents are limited to executive action and indirect ways of influencing Congress to pass legislation supporting their economic agenda, Horn explained.
“When we look back on Biden’s handling of the economy, I think he will be praised for his consistency and focus and how that benefited the economy,” Horn said. “Rather than enacting dozens of policies, his administration primarily focused on passing the American Rescue Plan and the Inflation Reduction Act, which was essentially the Build Back Better Plan with a new name to get it passed.
“There’s something to be said for introducing a game-changer plan — including where we’re providing subsidies or imposing taxes — and then stepping back and letting the economy learn how to deal with it without constantly tinkering with it. Businesses do not like ambiguity and uncertainty. Consistency is good for businesses because they know where to invest their money and efforts.”
How the U.S. economy measures up
The U.S. economy has had its ups and downs since the early days of the COVID-19 pandemic — as the past week has demonstrated — but there’s plenty of reason to be optimistic, Horn said.
“I think if you look at the economy objectively and forget who the president is, you will see that the U.S. economy is doing really well. For the last two years, the economy has consistently grown by 2.5-3%. We have inflation, but it’s back down to 3%. And unemployment is around 4%. Objectively, I think most economists would say, that’s fantastic, especially in comparison to the rest of the world.”
The Chinese economy, for example, has been slowing down. The European Union economy also has been muddling along with little to no growth, Horn said. Germany, the biggest economy in the EU, has been bouncing in and out of the recession zone in recent years, he said.
However, that’s not to say that all Americans are experiencing the same economic opportunity.
“On average, the American economy is doing great. But when you start looking at different sectors, regions and income levels, you’ll see that there are winners and there are losers,” Horn said. “In particular, lower-income workers’ wages have gone up, but they still haven’t recovered from the inflation spike in 2022. So these workers are still behind the curve in terms of being able to afford what they had four to five years ago.”
Shifting focus to long-term plans
We need to get away from focusing on monthly gains and losses and focus more on where we’re going and what we need to do to be successful in the future, Horn said. That’s not to say we can control where the economy will be in five, 10 or 15 years, but we should focus on changes that we see coming on the horizon, he added.
“For starters, we are an aging population. Not only are we are going to have to pay more in health care to take care of older Americans, but we’re going to need more workers to fill their jobs — or all the rosiest predictions for GenAI and automation need to materialize. Otherwise, it’s going to get harder and harder to make the numbers work.”
Decades of slowing birth rate trends means there will not be enough workers to replace those who are retiring. Immigration could help, but that’s a challenging and deeply political issue at the moment.
Another challenge on the not-so-distant horizon is climate change.
“Whether you believe climate change is man-made or not, the climate is changing, and the rest of the world seems to be jumping on the alternative energy sources bandwagon,” Horn said. “One of the frustrating things about American politics right now is we keep focusing on the ‘right now’ rather than what’s coming next. If we fail to invest in these new energy sources now, we’re going to be importing energy from the rest of the world in the future.”
“Whether you want to give President Biden credit or not, that was the intent of the Inflation Reduction Act — investing in the future of energy production, as well as the future of manufacturing and technology.”
Lastly, neither party is doing enough to address the rapidly expanding national debt, Horn said. That’s not a problem right now because people still want to borrow U.S. debt, but it could be a problem down the road.
“Both parties contribute to the national debt differently. For the most part, Republicans contribute to the debt mainly by cutting taxes, and Democrats contribute to the debt by increasing spending,” Horn said. “Neither one is really fixing the debt — they’re both just pointing fingers at each other. Unfortunately, as with most political things, it’s going to take a combination of raising taxes and cutting spending to fix the debt problem. But no one wants to make that political choice.”
Comparing candidates’ economic plans
Harris’ campaign — which is just a few weeks old — has not released her formal economic plans yet, but one can expect her administration to continue most of Biden’s economic agenda, Horn said. That would include continued investment in infrastructure, alternative energy sources, manufacturing and technology.
Trump’s campaign has not shared a lot of details about his economic plans. But what is known — in particular, calls to impose harsh tariffs and deport millions of immigrants — would hurt the economy, Horn said.
“Trump has called for a 10% tariff on all imported goods and 40% on goods coming in from China. We import a lot. We can’t instantaneously start producing everything in the United States. That’s not to say we wouldn’t eventually adjust, but there’s no way around it in the short term.
“And if you take millions of workers out of the economy, many industries including food production and manufacturing assembly services will suffer. If you don’t have labor, prices go up and the economy slows down,” Horn said. “I’m not saying we should just let anyone in — we need to address immigration — but if you don’t have labor, prices go up and the economy slows down. That’s basic economics.”
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