It’s the economy, stupid – of course the Democrats lost

US voters are making their voice heard after having been exposed to the ravages of inflation

You can tell the story of this election in two numbers. Under President Joe Biden, the net worth of the bottom 50pc of American households grew by 8.5pc in real terms. Under Donald Trump, from January 2017 to January 2021, it grew by 127pc. People remembered that, and now Trump has again been elected president.
While polls were tight throughout the race, heading into election day the issue voters said they cared about most was the economy, and the candidate they said was best able to handle it was Trump.
Under Biden, consumer sentiment sank lower than its lowest point in the pandemic, and the exit polls bore this story out. Voters worried that the economy was doing badly, they were more likely to feel that their families were worse off than they were four years ago, they were overwhelmingly likely to say that inflation had caused them hardships. And they were voting Republican.
Democrats can argue that voters were wrong until they’re blue in the face. They can say that the macroeconomic top line was good, that GDP growth, even adjusted for inflation, has been robust overall and in per capita terms, or that unemployment is on par with its rate in 2018, or that inflation is back on target.
Absolutely none of that will change the fact that voters were able to compare their experience under Biden with their experience under Trump, and make up their own minds. Ignore January 2021’s stimulus spending, and Americans saw their average disposable incomes grow almost 12pc under Trump. The equivalent figure for President Biden is 4pc.
As the Federal Reserve Bank of St Louis has pointed out, income growth since 2020 has been “quite significantly” beneath its long term average. And then, of course, there’s the cost of living. When Trump left office, inflation was around 1.4pc. Roughly a year and a half into Biden’s tenure, and it had crossed 9pc, with energy prices rising almost 42pc year-on-year.
As much as they might like to, politicians can’t take full credit for every economic success in their tenure. Trump can argue that his “blue-collar boom” was partly down to his policies. His Tax Cuts and Jobs Act — which slashed the headline rate of corporation tax from 35pc to 21pc and cut personal tax rates — appears to have been an effective stimulus, with business investment and labour force participation both outperforming expectations.
But it’s also true that Trump benefited from the continued rebound following the great recession, while wealth growth for poorer households was boosted by direct payments that improved their cash holdings.
Unfortunately for President Biden and Kamala Harris, however, it’s equally true that politicians can’t always duck the blame when things go wrong. And the suspicion on the part of many voters will have been that the highest inflation rate since the 1980s didn’t come out of blue air, but blue policies.
Having inherited a rate of inflation well under 2pc, one of President Biden’s first acts was to sign off on $1.9 trillion (£1.5 trillion) in stimulus spending in the American Rescue Plan. The resulting rush of money into a capacity-constrained economy has been blamed for 3-4 percentage points of the resulting rise in inflation.
When combined with other spending measures, that same cash infusion has translated to an annual federal deficit equivalent to 7pc of GDP, or over $1.8 trillion (£1.4 trillion) — the largest in cash terms outside of 2020 and 2021. Trump himself, though, is not particularly averse to higher deficits.
From this perspective, it makes sense that perceptions of economic performance seemed to have diverged from the measured data. Team Harris was able to tell a positive economic story because the macroeconomic data looked OK; Team Trump was able to point out that this didn’t reflect what people felt in their pockets, and that things had been better when he was in charge.
Once again, it’s the economy, stupid. Other things matter, too – abortion, the wars in Gaza and Ukraine, lies about Joe Biden’s health, the inflow of illegal migrants across the southern border – but with concern over economic issues at its highest since the great recession, it’s not surprising that the incumbent party lost.
When push comes to shove, people care about their wallets more than they do identity politics, and Trump outperformed expectations with minority voters because money talks.
Now we’ll get to see if Trump can repeat his performance in a second term. There are reasons to be very positive, and the verdict of the market is high among them: US shares have hit record highs, and the dollar strengthened.
The plan, as it stands, appears to be for more tax cuts, and higher tariffs. This is a mixed bag economically, with the latter part likely to reduce growth and raise prices, and still leaving questions over the financing of the deficit.
There are questions, too, about regulation. Trump’s first administration made a concerted effort to deregulate the American economy, and while it didn’t always succeed in repealing laws wholesale it often managed to lighten their burden.
The wildcard this time around appears to be the presence of Elon Musk in Trump’s inner circle. It’s entirely possible the two large personalities clash, and Musk finds himself rapidly ejected.
It’s also possible that he gets his wish to oversee a department of government efficiency, and sets about reshaping the state far more drastically than anyone expected. Here, the Democratic strategy of pursuing lawfare against both Musk and Trump could backfire spectacularly if the response is to simply gut the departments used to target them.
Perhaps the biggest upside of Musk’s involvement, however, is the opportunity to iterate on the “operation warp speed” that delivered the Covid vaccines. Trump has already noted the energy demanded by the growth in AI products, and during his first presidency declared American leadership in the field “of paramount importance” to the “economic and national security of the United States”. If we end up with Musk overseeing the development of a regulatory regime that doesn’t block nuclear-powered data centres to save a few bees, then that would be a significant benefit.
It’s too early to declare with any confidence that Trump will definitely succeed. But the American people have looked at his plans, and decided it’s worth taking a leap of faith. The wider West should wish him luck.