Now here’s a thing. American unemployment is at a 50-year low. Confidence is growing that the US may have dodged a bullet – there is not going to be the much-touted recession next year. The American stock market is breaking all-time highs after seven weeks of near continuous gains. It is an economy in rude health – with nearly every dial on the economic dashboard flashing green.
Yet at the same time US consumers are suffused with gloom. The president’s low approval ratings do not budge. He is so disliked he is advised never to use the word “Bidenomics” to describe the policies responsible for this economic success. Donald Trump has close to an unassailable lead in the Republican primaries, and is ahead of Biden in the opinion polls for the presidency. What works economically is not working politically.
All this matters to the Labour party. Its “new business model for Britain”, unveiled by the shadow chancellor, Rachel Reeves, on her visit to Washington in May and at the core of her policy approach, is unashamedly rooted in Bidenomics. There will be a British version of Biden-style industrial strategy and Biden-style public investment focusing on the new – tech to green technologies – all aimed at provoking an even bigger jump in private investment. Does it make the economic sense it seemed only six months ago – and will it get the same thumbs down from voters here?
Few expected the US economy to be doing so well, given that interest rates had never been raised so much and so fast – over 18 months from the spring of 2022 – without recessions ensuing. The circumstances were unique – Americans had accumulated an extra $2tn of savings over the pandemic, which were ready to be spent as Covid eased and just as the Ukraine war caused inflation to rise dangerously close to 10%. The threat of more hikes in inflation had to be countered. As a rule of thumb, every 1% rise in interest rates causes US GDP growth to fall by 1% in the following 18 months – so the jump in rates from nearly 0% to over 5% had a merciless implication. Recession.
There were two offsetting economic impulses. The first was the stimulus of massive public investment spending, turning out to be brilliantly timed, which gave consumers the unexpected confidence to spend just when it was needed despite their gloom. The second was the way the Federal Reserve, the US’s central bank, reinforced that impetus by releasing banks from obligations to carry capital and big reserves of liquidity: money might be more expensive but there was more of it, which helped the financial system support the economy. It was smart central banking. Inflation has begun to tumble in response to the rate hikes while the economy has picked up speed. Last week Fed chair Jerome Powell confirmed interest rate rises were over and predicted at least three cuts would take place in 2024. Hence Wall Street’s delight even as consumers, and voters, continue to express their dismay.
There is a general sense of bafflement. One explanation for the mismatch is that, while there may be more work, too much of it is insecure. Food and petrol prices may have stopped rising so fast, and are even falling, but they are still much higher than two years ago. It is only now that wages are rising faster than prices.
Main Street USA moves more slowly than Wall Street: as interest rate cuts feed through in 2024 and the buoyant share prices show up in more valuable pension savings accounts, Americans will start to be more generous to their president.
That will happen, but there are darker underlying forces at work that promise to blunt that sentiment. Too many expensive, unwon foreign wars, with Ukraine and Gaza adding to the list, have blunted US self-confidence. It’s a country that feels itself on the wane. Millions of unwanted, illicit immigrants crossing its southern border speak of its attractiveness, but that is a problem too. The inflows need to be stopped, or at least managed better, and a broken immigration system fixed. So when Trump, for all his narcissism, lies, sexism and criminality, talks about mass deportation and halting all support for foreign wars, he gets a hearing, however polarising.
That polarisation reflects itself even in consumer confidence surveys. For example, the University of Michigan’s survey, one of the most followed, shows huge differences in attitude between Democrat and Republican consumers. On whether now is a good time to make a big purchase, on the prospects for business and the outlook for their family finances, Republicans are more pessimistic than Democrats by huge margins. It’s a pessimism that saturates social media, where bad news drives out good, and does so at lightning speed. Trumpism has become toxic not just politically but economically.
But the underlying truths will out. The US economy is dynamic: it will outpace an ailing China. It remains the indispensable power even if less hegemonic: today’s world is just much more complex. Americans, at the last, will not vote for a felon hoping to use the presidency to escape vast fines and even prison. Labour should keep faith with its variant of Bidenomics: it will work – as long as the party takes care, as the Fed did, to ensure a reshaped British financial system delivers the vital support for higher private business investment.
The wider lesson is to get the politics and messaging right. There is too much talk about iron fiscal discipline, tough choices and a grim outlook – not enough on hope. Without a step change in public investment on a Biden scale, growth will stay trapped at under 2%, but will quickly respond to the policy framework that is proven to work – in this Keir Starmer is a lucky general and should talk up the possibilities. The threat from the right is less over economic policy, where it is bankrupt, but more over whipping up intense fears over immigration. Here again Starmer promises to be a lucky general; today’s alarming numbers are forecast to tumble – he just needs better to sell his policies so he can proclaim the victory that eludes Rishi Sunak.
What is lacking is an inspiring political framing. It is forgotten now, but Tony Blair in the run-up to the 1997 election talked about the enduring value of the ethic of socialism, how a third way would combine that ethic with individual responsibility and so honour the socialist tradition in a new guise. The proposition is even enthroned in Labour’s new clause IV. In office he tacked too far right, but that framing had a decade-long momentum. Starmer might remind his party and country his framing is the same, only he aims to make it live. It will help him both win and avoid the plague of doubts that now so threaten Biden. Time to venture beyond the stockade of grimness.
