The Price Level Doesn't Fall

Pundits say Joe Biden needs to bring back lower prices. That never happens. But he could show more that he cares about inflation.

Dear readers,

Peter Coy writes that when ordinary people complain about inflation, they mean that prices are too high, not that they are rising too fast. This relates to the latest thing I keep hearing about the politics of inflation: that voters won’t give Joe Biden credit for fighting inflation unless the price level actually falls. Because prices have soared over the last two years, even inflation of zero would leave prices unsatisfactorily high in 2024; inflation of 3%, obviously, would be even less impressive than that. What would impress voters is bringing back the price level we used to have — that is, significantly negative inflation.

If this is true, then that’s very rough news for Biden, because the price level simply does not fall.

Prices for individual products and services can fall — and the price of gasoline, one of the most salient prices, has fallen substantially over the last year — but even during the famous Volcker-Reagan disinflation of the early 1980s, America saw only the briefest and slightest periods of negative overall inflation. This is by design: deflation is recessionary, and so the Federal Reserve targets a low but positive rate of inflation. If inflation were threatening to go negative, the Fed would respond with stimulative interest rate cuts to stop that from happening. This is the Fed’s job.

(Of course, when most people think about the idea of falling price levels, I don’t think they imagine that their nominal wages would fall along with prices, even though that would need to happen if the US had a significantly negative inflation rate.)

It’s kind of pointless to argue about how people should feel about the economy. If people are unhappy about the price level, they’re unhappy about the price level and that’s a political reality. But when we look in the past and we look around the world, we see that there have been times when voters have been angry about inflation, and those times have eventually ended with voters developing more positive views about the economy; very rarely has the price level actually fallen en route toward that improved public sentiment. My expectation is that will happen again: the price level will not fall, and public sentiment about the economy will improve anyway — not necessarily during Biden’s presidency, but at some point.

I also think there’s a simpler story to tell about why people remain dissatisfied with the economy despite low unemployment and robust growth, one that doesn’t involve voters expecting a drop in the price level that they’re never going to get. It’s that inflation was very elevated until quite recently, and real wages fell for a period and are now only rising modestly. That is, it has actually gotten harder for people to afford the things they want.

The gyrations in the inflation rate also create a feeling of chaos: People don’t know what to expect things to cost in the future, and that cuts against the idea that Biden was supposed to be a steady hand returning the country to normal.

U.S. President Joe Biden speaks during an event at the South Court Auditorium in the Eisenhower Executive Office Building at the White House on October 23, 2023 in Washington, DC. During the event Biden spoke on how his administration's "Bidenomics" agenda would invest in technology for people in the United States. (Photo by Anna Moneymaker/Getty Images)

Finally, voters have correctly perceived that fighting inflation has not been a top priority for the administration. New research released this month from Blueprint shows that 64% of voters name lower prices as their top economic priority — choosing it over job creation, higher wages, and lower interest rates. And 49% of them believe that’s Donald Trump’s top economic priority, but only 23% say that of Biden. Voters are most likely to say Biden’s top economic focus is creating jobs, but only 7% of voters say job creation is their top economic priority — after all, almost all voters who want jobs have them.

Why would voters think Biden isn’t focused on constraining prices? Well, he spent the first two years of his term trying to spend as much money as possible, pushing Democrats’ narrow congressional majority to approve as much expansion of government as was politically possible. He did this even going into 2022, when inflation was on the rise and higher government spending was becoming more and more inappropriate for the macroeconomic conditions. Even now, Biden continues to tout the stimulative effect of government spending even though the economy is overstimulated — for example, last month, when announcing more student loan forgiveness, he said it would improve the economy by helping borrowers go out and spend on things like homes — which is the same thing as saying that loan forgiveness creates inflationary pressure.

I don’t think most voters have a fine-grained understanding of how fiscal policy affects inflation rates. But I think they do draw an inference that, when the government goes out and spends a lot of money, that tends to raise inflation — an inference that is, in current economic conditions, correct.

I think the most valid frustration that Democrats have about the politics of inflation right now is that voters seem to believe Trump would produce lower inflation than Biden would in a second term, even though Trump has not produced a policy agenda that gives a good reason to believe this. Will Trump run lower budget deficits than Biden would? He’ll probably spend less money, but he’ll also try to cut taxes, and tax cuts are inflationary in this environment just like spending increases and debt forgiveness are. Trump has also been making noise about pushing the Federal Reserve to cut interest rates, which would tend to push inflation up.

One thing that worries me about a second Trump term is that we could see a worse inflation spike than we experienced in 2022 — that Trump will re-run his first term playbook of tax cuts, deficit spending, and advocacy for easy money, but under macroeconomic conditions where those policies could push inflation into the double digits. All that said, I’m not sure Biden can have this argument in a campaign and win it. After all, Trump has already been president, and when he was president, inflation was low and economic growth was robust. Voters are more likely to credit him for that track record than follow my analysis about why his policy instincts should produce different results next time.

So what should Biden do about all of this? Well, above all, he should try to make next year’s election a referendum on abortion rights. But in terms of reducing the political drag he faces from the inflation issue, there are a few steps that he could take.

He should continue to promote his existing policy initiatives that are aimed at lowering prices — drug price regulation, antitrust enforcement, “junk fee” rules — but with the expectation that most voters will not be sold on the idea that we will regulate our way out of inflation. He should embrace calls for a bipartisan fiscal commission to explore deficit reduction; he’s likely to get such a commission as part of an upcoming government spending deal whether he wants it or not, and he can use discussions of it to point out that Republicans want to cut taxes for high earners and corporations, which would grow the deficit and push inflation up. He should talk about government spending as being constrained by inflation — noting that, like households, the government must tighten its belt in this cost environment. He should take credit for the expansion of American energy production on his watch — US oil and gas production are at record levels, a fact he seems embarrassed to brag about — and he should commit to further expanding production even over the objection of the environmental wing of his party, telling voters that he is singularly focused on keeping gasoline prices reasonable.

The thing about convincing people that something is your top priority is that you have to show that you’re placing it over your other priorities. If Biden made clear that real aspects of his agenda — on social spending, on climate, even on job creation — are taking a backseat to the inflation fight, that would put him more in line with the priority set voters are expressing. And while I don’t think that will make voters happy about prices, it might at least make them a bit less bitter toward him about them.

Very seriously,

Josh