Checks and Balance: Growth states

Hello and welcome to Checks and Balance. You're listening to a free episode. To listen every week you'll need to be a subscriber. To sign up to Economist Podcasts plus please click the link in the show notes or just search Economist Podcasts. The Economist Made of metal, normally aluminium or steel and shaped like a bucket with a close fitting lid and a handle, dinner pails were slightly cumbersome things, but they were insulated so American workers lunches would still be hot when it came time to eat. They were common around the turn of the century when President William McKinley was seeking re election in 1900. The economy was booming and McKinley wanted to make the most of this. To shore up the Labour vote, he turned to the humble pale to illustrate how good Americans and their stomachs had it. Four more years of the full dinner, pail adorned posters, buttons and cartoons. He won the election easily. Joe Biden is hoping that a surprisingly strong economy will carry him to four more years in office. So far, voters don't seem to be buying it with 235 days to go until the 2024 election. Hi, I'm John Prideaux and this is Checks and Balance from the Economist. Each week we take one big theme shaping American politics and explore it in depth. Today. Why aren't voters happier with Joe Biden's economy? It's not long since America was widely thought to be on the brink of recession. Instead, the economy expanded by 3% in 2023 and continues to defy expectations. It's the only major country that's back to its pre pandemic growth trend. What's behind America's buoyant and resilient economy? With me this week to talk about America's extraordinarily strong economy and why Joe Biden doesn't seem to get any credit for it, are Charlotte Howard in New York and Idris Calhoun in Washington D.C. charlotte, how are you doing and what's up in New York?

I'm well, I'm captivated by the debate about TikTok in Washington and I think our colleagues do a really good job of breaking down that issue and what it means for both social media and Sino American relations. So I just think it's a fascinating fight.

Yeah, it really is. Idris, how are you? What's going on?

I am doing very well. The weather is very lovely here. I don't know if it is in New York, but we are in one of the good seasons that D.C. has, which is spring and cherry blossoms are I think three weeks away, which will be very Nice. So, yeah, looking forward to that.

On a more cliche ridden podcast, we'd say something here about cherry blossom and how America's economy is coming into bloom, but actually that wouldn't be accurate because America's economy has been really strong for a while now, extraordinarily strong. And so we're going to be talking about that on this week's podcast and how it relates to voting intentions and to American politics generally. So let's start with our colleague Simon Rabinovitch. Simon is the Economist's U.S. economics editor and a frequent guest on the podcast. He's written a briefing this week, which is the COVID story about America's sparkling economy.

Well, I think before delving into the numbers, it's just worthwhile to say, you know, this seems like a story that we've been talking about before, but kind of what's so striking about it right now is that we keep passing these moments where quite smart people think that, you know, America is destined for a slowdown, and yet the economy just keeps on steaming on. So going into this year, the general estimate of most economists was that growth would slow to about 1%. But what's happened is that you've had them scrambling to upgrade their forecasts. The national association of Business Economists, for example, they had expected 1.3%. That's a broad consensus forecast of about 50 or so economists. That was recently revised up to 2.2%. First quarter GDP is tracking to be even stronger than that, about two and a half percent. The unemployment rate is still below 4%. The economy is still adding more than 200,000 jobs per month, which is very, very strong by historic standards. And of course, investors are optimistic about how this is all going. If you look at the stock market, you know, on a nearly daily basis, it's posting record highs. So you add it all up and it's just this incred, sustained performance. It's not just impressive looking at America alone. It's also impressive when you look at America relative to other countries, you know, around the developed world. A lot of countries right now are flirting with recession, are seeing the kinds of slowdowns that had been expected, but they just have not happened yet for America. So its relative outperformance is also extremely striking.

Simon I think everyone likes it when economists are wrong, and particularly when they're wrong because they're too gloomy and things end up going much better than the doomsayers feared. Why is this? As you say, America is an outlier internationally. Its economic strength is remarkable. Why is it Going so well?

Well, in the long story that I wrote for this week's issue, I started off by looking at the demand side of the economy. And I think there's kind of three broad categories of factors that feed into it. So number one is America had a lot of buffers heading into the monetary tightening episode of the past couple of years. So, you know, typically if the Fed or any central bank jacks up interest rates, you'll expect it to slow the economy. Interest rates in America went from, you know, basically 0% to more than 5% in 2022, 2023. That's incredibly aggressive monetary tightening. And yet there hasn't been a big slowdown. So number one, the economy had a lot of buffers. What do I mean by that? Both. If you look at households as well as companies, a lot of entities in America locked in low interest rates before the Fed began to raise aggressively. So there's a lot of kind of buffers that were built into the system. Households had a lot of excess savings as well. Thanks to the big fiscal stimulus in 2020, 2021, they're still drawing down those excess savings. So that means that you've had a lot of pent up spending power that has supported the economy. A second big factor has been the fiscal side. If you look at the federal deficit, it has remained very high as a share of GDP. Last year it was back up at around 7 and a half percent of GDP. That obviously is a big support for the economy. It's not just the size of the deficit though, it's also the way that the federal government is spending its money. If you look at all of the investment packages launched by the Biden administration, they've done a really good job of, of effectively catalyzing investment. So manufacturing investment is basically reaching record highs. Infrastructure investment was slower to take off. It's beginning to increase now as well. All these things are kind of federal spending that work to basically crowd in spending by state and local governments and by the private sector as well. The last thing to point out is that the US Economy is quite diversified. And I think one area where this has really been important in the last two years has been the energy sector. So rising energy prices have been a big headwind for many economies around the world, especially for Europe, where heating prices, gas prices have been very high. America, though, since 2020 has been a net petroleum exporter. Last year it became the world's biggest LNG exporter. Although the US still in aggregate has a trade deficit. In fact, because the deficit has been smaller than you might expect. Trade actually added about 0.6 percentage points to US growth last year, largely thanks to the strength of the energy sector. So all of these things together mean that on the demand side, you've had a very, very big push from the U.S. economy.

And how about on the supply side? Because ordinarily you'd expect when the demand side is so strong and inflation has been so high that inflation would carry on, and yet we have this wonderful Goldilocks situation where growth is strong, unemployment's incredibly low, wages have been rising fast, and yet inflation is coming down. So what's changed in the US Economy to allow that to be possible?

In most simple terms, when you look at an economy's capacity, you're looking at two things, which is one, the number of people that are working and two, how productive those people actually are. And in both metrics, America has done quite well over the last couple of years. So number of people working, if you look at the prime age labor force participation rate, it's gone well above the pre pandemic level, partly because the labor market has been so tight. That's brought a lot of people into the labor force. That has been important. But even more important has been the surge of immigration into America, both documented and and undocumented. The one other factor to bring into this is labor productivity. It's difficult to measure that in real time. Last year, though, there was a big increase in labor productivity metrics. So, for example, if you just look at the fourth quarter alone, a year on year growth in the fourth quarter last year was about 3.1%. Total hours worked only increased by about 0.5, 0.6%. So the remainder, about 2.5%, was explained by an increase in productivity.

So, last question, Simon, when was the last time the U.S. economy was this good?

Well, that's a loaded question, John, because of course, as you know, if you look at, you know, consumer sentiment surveys, most Americans don't think that the economy is as great as the data seem to indicate. And there's reasons for that. Whether you look at the blowback from inflation, how real wage growth is okay, but clearly not as good as kind of overall GDP growth. So there are explanations for that. But I do think if you look at a really fundamental measure of how good is the economy, which is the job market, arguably the American economy right now is as good as it has been any point in the last half century. So recently I've been sort of trying to crunch the data for jobs added in different presidential terms and, you know, going Back to the late 1970s to, you know, Jimmy Carter up to the present. And, you know, there's different factors that feed into the economy doing well. You clearly can't just chalk it up to the president alone. But if you just look at the median month of, of jobs added by president going back to the late 1970s, America is at an all time high under Joe Biden.

So, Charlotte, the economy is doing weirdly well at the moment. What strikes you as particularly interesting about what's happening in America?

There's a lot of what Simon said that I think is fascinating and worth getting into in more depth. But the two things that I, I think are weirdest about what's happening now is the very obvious thing, that there isn't a recession. And if you think about a traditional economic cycle to pause for a moment, you know, the traditional cycle is that the economy's growing, people are buying stuff and investing. And then inflation rises. So central bankers raise interest rates, people stop buying as many new homes or cars, spending slows, some factories might close, a down downturn occurs, and then bankers cut rates. So that's a very simplified version of what the traditional economic cycle is. And in the past 60 years, as Simon points out in his piece this week, there have been 11 times that the Fed has raised rates to cool inflation. And most of the time you get a recession. And right now, instead you have this soft landing and it's here and it's like a cloud. Rainbows are everywhere. And the weird thing which takes me to my second very strange thing about the current economic climate is that Americans don't feel like there are rainbows everywhere. It's a very, very dark consumer outlook. And so both the strength of the economy is point one, that's remarkable. And then the second point is the weakness in consumer confidence about that economy. So that just makes it a really extraordinary time for the economy itself and also for the politicians who are trying to win the White House.

The other interesting thing about the economy is that inequality has probably gone down. So for the past few years, labor markets have been very tight. That's been good for those at the bottom of the income distribution. That includes during the Trump administration, also at a time when states were raising their minimum wages. And that's continued throughout the pandemic and even afterwards. And tight labor markets probably mean that income inequality has gone down over this time. So that's another thing that Americans probably ought to be happier about. But they aren't, as Charlotte said. And part of that is going to obviously be very politically Influential. But it might just be that Americans are so unused to bouts of high inflation. This was kind of the first real experience of inflation for the last 40 years. And it seems to be sort of unusually powerful in people's psyches in a way that means that they are still punishing Joe Biden for their memory of inflation and they're not giving him incredible amounts of credit for the state of the economy as it is now. And they also aren't that upset about the spending levels, which are, as Simon mentioned, just extraordinary. You know, last year the estimates range, but America spent maybe 6% of its GDP, 6 or 7% of its GDP as a deficit, which is extraordinary for a country that's not in a recession or in a war. And obviously America's going to pay for that at some point. But Republicans have gone from caring a lot about deficits when they didn't matter all that much to not caring at all when they probably are now.

Binding and Charlotte, as to why the US economy is doing so much better than other rich world countries at the moment, there are a few factors there that seem unique to America. One of them is the country's role as a huge energy producer and exporter. By energy I mean hydrocarbons. And also, as Idris just referenced, the enormous size of the government stimulus that carried on well after the economy was running hot.

That's right. I think I'd also point to the size of America's internal market. And then what Simon referenced about labor productivity is pretty interesting. There's been both an increase in the productivity of the workforce and an increase in the overall size of the workforce. So a 16% increase in the foreign born labor force since the end of 2019. Some of that increase is blue collar work, but there's also been a pretty big increase in white collar jobs. And I was really struck by something that I think made it into Simon's piece. I'm not sure, but that the share of black adults who are now in the workforce is larger than the share of white adults who are in the workforce for the first time ever, which is a sign of just how healthy the broader labor market has become.

Yeah, one other interesting point. Over time, male labor force participation has gone down. This is over the past few decades. And typically what happens is that in a recession, the male labor force participation rate drops a lot and then it never really recovers. And one thing about this kind of COVID induced recession, if you want to call it that, is you didn't see that pattern. Actually more men have returned to the workforce than before the pandemic, which makes it exceptional. And also the fact that people are leaving their jobs and moving to different firms probably is helping with the productivity boost as well. So people are surprised. We were certainly surprised back in 2022 when we did our cover, the Fed that failed. We said correctly that the Fed had been too slow in dealing with inflation. It was buying mortgage backed security bonds as late as 2021 when it was pretty clear that the economy was overheating. It was slow, but we thought at the time that an increase that was necessary to tame inflation would result in a recession. And just the astonishing thing is that it hasn't. And that I think has surprised everyone.

Yes, Jerome Powell has done a great job and deserves a lot of credit, I think. I mean, you both touched on some of the striking statistics at the moment, but there's just so much good news, particularly in the employment and labour market data. I mean, Charlotte, as you say, the narrowing, almost the point of disappearance of the black white employment gap in America is just so stunning because that's been such a persistent feature of American history going back decades. And I sometimes think, you know, we as journalists perhaps definitely politicians, neglect to mark the good times. And these are very much the good times in America economically. Now there are questions about how long it'll last, the headwinds and so on, and we'll get into that later. But just now I think it's important to underline quite how well things are going. And just one further point that occurred to me talking to Simon, you know, we very often discuss immigration in America in the context of undocumented or illegal immigration, what's happening at the southern border and so on. But about a million people every year become lawful permanent residents of America. So, you know, a million legal migrants a year, that's, that's a lot of people. And it's positive for the U.S. economy. And we're seeing that in the numbers as well. Okay. We'll explore the role of the Federal Reserve in President's economic fortunes in a moment. But before we do that, Charlotte, you already mentioned that you've enjoyed our TikTok coverage. What else have you liked? And Idris, what have you introduced, enjoyed from the Economist's coverage over the past week or so?

I really liked a piece in last week's issue by Leo Morani, our correspondent in India and a good friend, about why Indian food is too good. And the basic problem of Indian cuisine is that it has too much butter and not enough chicken, which hit home. I read it while I was at home eating Nihari, which, if any of you know what it is, you'll understand that it's not exactly a. A health food.

I really liked our colleague Vijay Vaithyswaran's special report on oil, which takes a sweeping look at this commodity which has shaped not just energy markets, but geopolitics and the world's balance of power for decades. So I'd recommend anyone who wants to understand some of these shifts go read Vijay's report.

I'm going to add Simon's briefing, which we're discussing this week. He's just such a clear writer and a clear thinker. It really helped me to think through what's happening in the US Economy at the moment. You can read all of those things if you have an Economist subscription.

Chairman of the Federal Reserve taking drastic action to counter inflation. Today, the Fed raised interest rates by 3/4 of a point in an effort to slow down surging prices.

In the summer of 2022, Jerome Powell's federal reserv embarked on a period of aggressive rate rises in a bid to bring spiraling inflation under control. It reminded people of something.

It is the steepest hike since 1994.

There'd been a brief recession in 1991, and by early 1994, the economy was on a surer footing. Unemployment was falling and growth was up. But Federal Reserve Chair Alan Greenspan feared that this could trigger high inflation.

How these forces balance out in the coming months could be critical in determining whether inflation will remain in check. For the amount of slack in the economy, while difficult to judge, appears to become relatively small. An increase of inflation would come at considerable cost.

Greenspan thought the Fed needed to take.

Action with appropriate monetary policies. The board members and the Reserve bank presidents see the economy settling into more moderate rates of growth over the next six quarters and inflation remaining relatively subdued.

Between February 1994 and January 1995, the Fed raised the federal funds rate, its benchmark rate, seven times. It doubled to up to 6%. This did not go down well at 1600 Pennsylvania Avenue.

Everything's going really swimmingly by February 1994. And one day Bill Clinton gets to him blindsided. In fact, this was well telegraphed by Greenspan.

Later that year, Alan Blinder would become the Fed's vice chair. But in early 1994, he was on President Clinton's board of Economic advisers. Clinton wanted interest rates to remain low, and Blinder remembers the President being furious with his central bank.

He couldn't understand it. He was totally enraged. And then that got repeated with the next interest rate. Every time Creed spent raised interest rates. But to his everlasting credit, he was smart enough to take the advice he was getting from all of us that a president that picks a fight with the Fed is likely to lose. There's very little upside and a lot of downside to that. I was the one that told him back in Little Rock that in terms of economic, he didn't like this. In terms of economic policy, he had just been elected to the second most powerful position in America.

By early 1995, Alan Greenspan, the man in the most powerful position, had it under control. Through a mixture of skill and luck, price expansion was coming down.

The data that have been published in the first weeks of 1995 have offered some indications that the expansion may finally be slowing from its torrid and unsustainable pace of late 1994.

As inflationary fears subsided, the Fed cut rates three times over the course of a year. Often when a central bank embarks on a period of monetary tightening, as it did in 1994, the economy will slow a so called hard landing. But following the Fed's mid-90s rate rising bonanza, inflation remained steady, unemployment fell and the economy continued to grow. It's been described as the perfect soft landing. Alan Greenspan later called it one of the proudest achievements during my tenure. Remember, recession, jobs, lost the doll. This helped Bill Clinton when he ran for president in 1992. He'd promised to turn the economy around. By the time of the 1996 campaign it had happened and he sailed to re election.

Record.

Construction jobs, mortgage rates down. 10 million new jobs.

More women owned companies than ever.

The President's plan, Education, job training, economic growth for a better future. Between March 2022 and July 2023, Jerome Powell raised the Federal Reserve's interest rate by more than 5 percentage points. That's brought inflation down. And the stimulus that contributed to the inflation in the first place has sustained GDP growth and the labour market. Alan Blinder, Bill Clinton's former economic adviser, has declared it another soft landing. He thinks that because the economy in 2022 was gripped by high inflation rather than just the fear of it as in 1994, it's a much more impressive achievement. The Federal Reserve is meant to be an apolitical body, but its actions can have a big effect on the political fortunes of the sitting president. Democrats are hoping that as in 1996, the Fed's monetary policy will help their party keep the presidency. Idris I really enjoy hearing old campaign ads from the 1990s because the music is so upbeat and jingly compared with what you get nowadays. It just seems like the soundtrack to a more innocent era. We heard a little bit there about the tensions that remained behind the scenes between Bill Clinton and Alan Greenspan when he was chair of the Fed. How far back did those sorts of tensions between President and Fed chair? How far back do they go?

Tensions between presidents and the Federal Reserve kind of increased in the 70s when there was a big bout of inflation. And there are two chairmen who are important in setting out the history of the modern Fed. One is Arthur Burns, who is treated as the anti villain of monetary economics for not doing enough to deal with inflation and for probably going along to Richard Nixon's pressure to lower rates before the election. He also kind of endorsed Nixon's price controls and other things that were probably not good for the economy. And then you had Paul Volcker, who came a little bit after him, who did increase rates pretty dramatically to try to get inflation under control. And people have argued about whether or not Arthur Burns really is the villain and Volcker is the hero. But nonetheless, Volcker kind of set up the primacy of the Federal Reserve chairman, which Alan Greenspan, who then took over and stayed in that role for 19 years, really cemented. He was seen as incredibly authoritative and someone who Congress and even the President couldn't really question on some of these economic matters. And so that brought us to the present day when Barack Obama and Ben Bernanke had to deal with the Great Recession.

And Charlotte, to bring things up to present day, Jerome Powell, the Fed's current chair, his term is up in 2026, so whoever wins the presidency in November will have the job of either replacing him or confirming him in a new term.

Yes, Trump has already said that he wouldn't reappoint Powell. They have this. I would say they have a very strange relationship. But it's really more that Trump treats Powell quite strangely. He appointed Powell to the Federal Reserve in 2017, but almost immediately began badgering him publicly, which, as Adris pointed out, is not entirely unprecedented but is still remarkable. And he, before the pandemic, wanted Powell to cut rates and he viewed the central bank as giving America an economic handicap. He would tweet about Powell again and again. He'd say Powell was a terrible communicator and he failed, et cetera. Now you have him saying one, that he wouldn't reappoint Powell, but also adding this element of politicization, even without him in the White House. He thinks that Powell's plan to lower rates is something that he's doing probably to help the Democrats, he said. And he thinks that Powell's acting in a political manner. So it's just a reminder of the way in which that partnership, or at least alignment that you had between Bernanke and Bush during the financial crisis, or Bernanke and Obama as they continue to deal with the fallout from the Great Recession. There's this element to Trump that's always about chaos, but particularly in this relationship, that there's an element of uncertainty. So back even when the Fed was responding to the pandemic in the early days of the coronavirus and really thinking aggressively about ways to support the economy, there was this question in the markets about whether Trump might actually demote Powell. So it's just a different way of the presidency, interacting with what is an independent body.

Yeah. Idris, you and I have both spoken to people on the right in Donald Trump's circle or his orbit who think that the Fed, having so much power, is fundamentally undemocratic and would like to see that change. Now. I think one of the very many good things about Jerome Powell's tenure and how well he's done recently in bringing down inflation without crashing the economy is that those arguments become harder to make. So hopefully, even if Donald Trump were elected in November and got to appoint somebody to the Federal Reserve, as long as inflation is low, when that happens, then we wouldn't have to worry too much about the relationship between the presidency and the Fed. The concerning thing, as you guys have both hinted to, is that if inflation is high, Donald Trump is president and he gets to appoint a Fed chairman. You just worry about whether that chairman would have the independence and have the power to raise interest rates in a way that Donald Trump no doubt wouldn't like. And so that's why there's a degree of sort of institutional anxiety around this at the moment. Looking forward to the election in November. Okay, we'll be back in a moment to consider why the strong economy isn't translating into better poll numbers for Joe Biden. But first, this episode of Checks and Balance is free to listen to, but normally, to join us, you'll need a subscription. We currently have a sale on. You can join Economist Podcasts plus for half price, which is less than $2.50 or £2.50amonth. That's to listen to Chex plus all our other weekly shows like Money Talks and special series like the Prince about Xi Jinping. To sign up, go to economist.com podcast+ or just search Economists Podcasts. Neil Mahoney is Professor of Economics at Stanford University. He previously served in the Biden White House. One of his areas of research is looking at the gap between how the economy is doing and, and how people feel about it. He says that gap is currently incredibly wide.

So it's incredibly unusual. I think if we go back to December of this year, there was the largest gap on record between consumer sentiment. So how what consumers tell pollsters about their views of the economy and what you would predict based on very simple models that take the hard economic facts and try and predict consumer sentiments. This gap was the largest in recorded history as of just a few months ago.

So it's very unusual what's going on. And you come across various explanations for this. One is a simple, straightforward one, which is just that people really dislike inflation. And even though inflation has come down recently, prices are still quite a bit higher than they were a few years ago, and particularly prices for things that people buy regularly, prices that are memorable. And then there are a series of more complicated explanations that have to do with changes in how people respond to polling and various other things. Which camp are you in or how do you go about thinking about this question?

So I think there's multiple factors at play whenever there's a really large gap between the economy and consumer sentiment, that multiple stories are explaining what's going on. We looked into this phenomenon together with a colleague, Ryan Cummings, and we came to the view that it takes time for consumers to digest the impact of inflation. That even though our standard measures of inflation, which are price increases over the last year, show that inflation has come down, if you look over the last two years, the last three years in particular, prices are up almost 20%. And so when a consumer goes into the grocery store, they may get some sticker shock. So we looked at sort of historical inflation episodes and how long it takes consumer sentiment to recover. We found it took closer to two or three years. That suggests that, that over time, consumers will go into a grocery store or a mall and be more acclimated to the price level, and so they will start feeling better about the economy. This was mostly luck, not analysis. But in the two months after we released our piece, consumer sentiment increased substantially. I think Those were the two largest monthly increases since the early 1990s.

So, Neil, this is of academic interest, but it's also of huge political significance, right? Because people who'd like to see Joe Biden reelected are worried about the gap between the President's approval rating and economic sentiment. So if you're right about the amount of time it takes consumers and voters to process information. When do you think we might see views of the US Economy turning around?

So in our piece, just sort of using the historical relationship, we predicted that most of the impact of inflation would have sort of been digested by the time we reach November 2024, which is the election. If you remember, inflation in the United States peaked in summer of 2022. That's when gas prices hit basically $5 a gallon. And so the election would be more than two years after that point.

Okay. So hopefully from Joe Biden's point of view, economic sentiment has turned around by November 2024. But there's another question here, which is whether there's been some break in the link between presidential approval rating on the one hand and economic sentiment on the other. Historically, those two things have been really tightly correlated and they don't seem to be now. How do you think about that question?

Number of thoughts? I think the first one is it sort of reminds me of the debates about the transmission from sort of hard economic facts to consumer sentiment, that when this gap emerged, lots of people said, oh, you know, let's throw out the historical relationships because of social media, because of partisan polarization, everything we've seen in the past no longer holds. And I thought that reaction, while it made for fun hypothesizing, was a little bit too strong. And I think what we're starting to see in the data is, yes, today is different in some ways, but the historical relationships still have a lot of value. It strikes me that we're moving into a similar moment for the link between consumer sentiment and and voters views on either the president or his challenger and on presidential approval ratings, that if consumer sentiment continues to improve over the coming months, that people will point to this gap and say the relationship between consumer sentiment and presidential approval. This strong historical relationship doesn't hold for a variety of reasons. Some of those reasons may have some validity, but I think my starting point is it will probably just take time for the improvement in sentiment to translate into presidential approval ratings. So two other things which I think support that argument. If you look at the messaging of the Trump campaign and the gop, you have seen them move away from highlighting the economy to immigration. And so I think that's evidence that they see this as less of a winning issue. You also see Trump pushing these very creative arguments, like the improvement of the stock market is due to anticipation of his presidency, which again suggests that he thinks that work needs to be done to try and Dull any benefits that Biden will get on the economy.

Idris, you were involved in building the Economist's election forecast model last time around, and you'll be checking the code and thinking about the model this time around before we launch it. Historically, if you just knew two things about the president, if you knew whether there was an incumbent president or not, and you knew whether the economy was strong or not, that was kind of enough to give you a pretty accurate presidential forecast. So if there's a presidential incumbent and the economy is good, 9 times out of 10 the President gets reelected. Yet what we're seeing in America at the moment is the economy is really strong and Biden's approval rating is low and he's not polling particularly well in swing states. So there are two camps here. One camp, as I said to Neil, says, well, this will all turn around by November. And there's another camp that says that something has just changed in the way that Americans think about politics, think about the economy, and you can't expect that historical pattern to hold. Which of those camps are you in?

So you're right. There are two kinds of approaches you can take when you're modeling presidential elections. One is this fundamentals approach that you outlined where you take incumbency, you take views on the economy, the unemployment rate, the inflation rate, and the President's approval rating, and you look at the historical average. And that, as you said, is a pretty good predictor historically. And the second approach is the polls based model, where you examine polls all over the country and you combine them in a complicated way and try to generate probability estimates. The fundamentals model is simpler and easier to understand. But the argument that people are making now is that maybe the fundamentals model, which, given Biden's low approval rating, doesn't look great for him, that that might be incorrect and that economic indicators are not as meaningful as they once were. I think that the critiques people level at the economic indicators, the fact that they are contaminated by partisanship in a way that they haven't been before, that there is this huge spread between Democratic and Republican views on the economy depending on who's president. That's a real point to be made. But I think you can still learn some things from the trend. I'll be interested to see whether Professor Mahoney's prediction is right, that there is basically just a lag in people's sentiment about the economy and that it'll improve. Obviously, that would be a great boon for Joe Biden, particularly since both he and Donald Trump are going to be running and talking a lot about Bidenomics on Biden nomics.

I think that you're right address, of course they're going to talk about it a lot on the campaign trail. And you've seen the way that members of the administration now or former members of the administration are trying to really highlight the way that these big investments, whether it's through the Inflation Reduction act, which was largely a clean energy bill, or through the Infrastructure act or the CHIPS act, how these bills are having an effect now. You heard President Biden talk about it in the State of the Union and reference the Republicans whose districts are enjoying the benefits of these bills. Brian Deese, who was top economic advisor to the president, who is now at mit, had a paper he put out with Brookings that showed that distressed communities, so communities that hadn't received much investment previously, got 16% of the investments in clean energy chips, biomanufacturing and other high tech Industries since 2021, which was, which was a much bigger increase than they'd received in years prior. So you hear them trying to sell this today. It hasn't been particularly effective. I think Biden has his work cut out and his surrogates have their work cut out as they go out and try to sell this to the American people. Trump's message is always simpler. It's always just simpler to say that Biden is strangling America's power as an energy producer, that Biden's push for electric cars will kill America's auto industry as it now exists. It's just, it's easier to talk about the failures of Biden nomics than it is to point to the 16% of investments that are going to distressed communities. That wonkiness is just harder to pitch. But that's what the Biden administration will need to do.

We've talked before on the podcast and there's lots of survey data showing that how Americans feel about the economy switches after a presidential election. So Republicans started feeling much perkier about the economy in 2016, just after Donald Trump won and Democrats became more gloomy about the economy. And then the inverse happens in, in 2020. But I wonder if that is not quite symmetrical in the sense that there is quite a large faction within the Democratic Party that just always seems to think that the economy is worse than it is because even when things are good, they worry about inequality more and they think that the economy is too captured by big American companies and so on. The sort of Elizabeth Warren tendency within the Democratic Party that I think struggles to Say, actually, things are great at the moment. And I wonder how much the inaccurate views we've been discussing among Americans about how the economy is doing that has to do with some partisanship on the Republican side and this phenomenon on the Democratic side.

I think it's hard to feel too upbeat about the economy when you have each party framing the future in somewhat apocalyptic terms. I mean, Trump is so severe, right, in the way that he talks about America's future under a Biden presidency. Katie Britt, the senator from Alabama who made a statement on behalf of Republicans after the president's State of the Union, if you haven't watched it, I really recommend that you do. It's a incredible piece of political theater, and I mean theater. Literally. She essentially, in addition to blaming Biden for all the fentanyl deaths, she really painted this dark picture of America's economy, and it was literally in a kitchen. So she was talking about kitchen table issues, and she pointed again and again to the idea that the president doesn't get it and the effect that inflation's having on Americans now. So there was an economic message, but it was in this broader, completely nihilistic, extreme framework of the world that President Biden is leading and the dark path that he is bringing America down. So when you have that kind of nihilism from one party and then you have Democrats who are deeply fearful of another Trump presidency, it's just not that surprising to me, I guess, that you have consumer sentiment that's not particularly sunny because, yes, you might be getting a wage increase at work, but it's within this broader context in which you feel like your country is on the precipice of something extreme. And that has to factor in here.

The other point is that Joe Biden's approval rating is not just a reflection of how people feel about the economy. It's also how people feel about his age, about his handling of foreign policy, about all sorts of things. So even if Americans economic views brighten up and you might not see that much of a rise in. In approval ratings, which have been fairly flat, I think, for all presidents over the past few decades. So that might mean that even if the White House does get the credit that they want, that their political fortunes don't improve as much as they might think.

Yeah, I agree with that. Okay, it's quiz time. We were talking earlier about 1994, the year Alan Greenspan raised interest rates. And something else notable in American history happened in 94, which I was born. Idris was born. Yes, exactly.

Do you get a point.

You do get a point for.

Sorry, which year is this? 19. When?

1994. So to celebrate these two events, we've got some questions about 1994. Question one. Which former president died in April 1994?

Ford was later. Right? I was about to say Ford. I can say Ford.

I think Reagan died later.

You're close. You're in the right ballpark.

Nixon.

It was Nixon. He died at age 81 in April 1994. Question two, which Supreme Court justice was sworn in in August 1994?

Ginsburg.

Yeah, Ginsburg.

It was Stephen Breyer. In fact. Number three, which company, now one of the world's biggest, was founded in July 1994? Google.

Yeah, it has to be Google.

It has to be Google. But it was Amazon.

Oh, darn it. I should know that. I know their origins.

Google was even later, wasn't it?

Wasn't it like, I think Google's a bit later. Question four, the final one. What was the best selling album of 1994 in the US? It was a movie soundtrack.

So Bodyguard?

No, it smells like Teen Spirit. What else? Were people listening to it?

Bodyguard album is my prediction. I would like the answer to be something related to Boys to Men, but I think it's Bodyguard.

Never heard of Bodyguard.

It was the Lion King SoundTrack, which sold 4.9 million copies.

I used to watch the Lion King all the time when I was a child.

It's a great soundtrack. It's really good.

The Lion King and the Clinton impeachment hearings made you the man you are today.

Yeah. Yeah, they were really something.

Well, that's it for this episode. Thank you, Charlotte. Thank you. Idris series.

Thank you.

Thank you.

This episode was produced by Harriet Noble. David Crackles is our sound engineer. Thank you to Simon Rabinovich for all of his help with this episode. You can get in touch with us via email if you want to do that. The address is podcastseconomist.com. if you like the podcast, then please let people know and leave us a rating and review. That means that more people can find and listen to Checks and Balance on the weekend Intelligence this week why Giorgio Meloni and the brothers of Italy are obsessed with the works of J.R.R. tolkien. In the meantime, thanks very much for listening. Stay safe and stay sane. We'll have more Checks and Balance next.