The timestamp finally says November—a month that many of us thought would never arrive. The most consequential US presidential election in modern history is now at hand. The pollsters have all but surrendered with a nearly unanimous shrug of “too close to call.” It is, of course, quite possible that the verdict will not be known with clarity late on November 5—nor even settled for weeks thereafter. How can we even begin to make sense of what is about to transpire?
As the nation waits with bated breath, two thoughts come to mind—one backward looking and the other more forward looking. Consider the following:
Let’s start with the economic perspective. Economists are inherently backward-looking creatures—we build statistical models based on historical time series and we draw behavioral inferences from earlier shifts in economic systems. True to my DNA as an economist, I have repeatedly stressed the political significance of the inflation shock of 2021-23. Polling data seem to agree. While the latest polls are inconclusive on the outcome of the election, they leave little doubt of the key impact of inflation in driving the economic angst of the American public.
This is a source of immense frustration for the economics profession, writ large. Not only are most gauges of inflation closing in on their pre-Covid norms, but the broad collection of statistical evidence on the performance of the US economy is almost uniformly outstanding. I make this statement as someone who has long been described as a congenital pessimist on the economic prospects for saving-short America. Yet even I must concede that number after number—from underlying trends in GDP growth, the stock market, the labor market, as well the inflation results, themselves — say otherwise. The October 19 cover of The Economist, an extraordinary publication that has also been notable for its critical views on the US economy, pretty much says it all.
Yet envy, as highlighted on the cover, is a relative construct. The US economy may well be envied by others, but the American voting public seems to care less about expert views of those on the outside and more about actual perceptions from the inside. Voters apparently draw little comfort from abstract statistics and testimonials of Nobel Prize winning economists. For example, for the average American family, GDP growth — even the impressive 2.8% annualized rise just reported for 3Q24 — is a government-calculated number that hardly matters in coping with real-life issues. That disconnect is what led me to draw attention to the critical distinction between the inflation rate and the price level in a piece I wrote last June, “The Defining Issue of the US Election.”
Four and a half months later, as updated in Figure 1 below, the basic message remains the same. The year-over-year CPI inflation rate has receded sharply further—2.4% for the headline CPI in September 2024 versus the 3.3% reading that was in hand when I first wrote about this problem last June. But the price level as measured by the total CPI Index remains 20.6% above that of January 2021 when the Biden-Harris Administration was sworn into office; by contrast, back in June, the price level increment was slightly smaller at 20.1%. And that’s the whole point of this distinction—a reduced rate of inflation only flattens out the upward trajectory of the price level but does not alleviate the pressures from the elevated prices still squeezing American families.
To her credit, Vice President Harris seems to get this point. Her economic plan, “A New Way Forward for the Middle Class,” features an initiative aimed at eliminating “price gouging,” especially for food and groceries. Mindful of the tainted legacy of the wage and price controls of the early 1970s, we can certainly argue over the merits of the Harris approach. Impatient voters, however, are not in a mood to argue about conceptual plans. They apparently care more about the enduring 20.6% elevation in the price level than policy schemes aimed at rolling back prices. Yes, estimates of the cumulative magnitude of the still-inflated level of the CPI index can be cut to slightly less than 15% if you take into account pre-Covid inflation trends of about 1.5% per annum. But that hardly moves the needle for hard-pressed Americans. Like it or not, this issue remains a potential Achilles’ heel for Kamala Harris.
Which takes me to my second point — more of a forward-looking observation on whether the American political system is even capable of tackling the thorny problem of an enduring price shock. My conclusion is hardly uplifting: The odds are exceedingly low that a polarized, largely dysfunctional US Congress will put aside highly partisan party politics to deal with basic pocketbook issues. This is not just a hunch or a casual impression. Figure 2 below is an empirical measure of political polarization of the US Congress. It is taken from an October 2023 update of a metric originally developed in 2009 by academic political scientists (that can be found on Voteview.com). The polarization barometer is based on a detailed classification of the ideological voting patterns of individual members of Congress, in essence, tracking liberal-conservative divergences of Democratic and Republican legislators in both chambers of the US Congress.
As can be seen, the latest reading of political polarization (through 2023) in both houses of the US Congress is at an all-time high. And by “all time,” I mean a period that goes back to the US Civil War reconstruction period of 1879. This raises serious doubts about both the will and the ability of today’s US legislators to reach across the aisle, making it exceedingly difficult to be optimistic about bipartisan solutions to America’s considerable challenges. That not only applies to anti-price gouging legislation but also to the broad thrust of the legislative agenda of the next administration, whichever party takes control of the White House and the Congress.
This is not a particularly uplifting conclusion on the eve of America’s most consequential election in modern history. I don’t doubt the message of The Economist that the US economy is the envy of the world. Unfortunately, that envy is framed through the lens of official statistics that are largely divorced from the tough pocketbook issues that a polarized, largely dysfunctional, US Congress is incapable of resolving. That underscores an important distinction between the underlying strength of the US economy and America’s painfully imperfect system of governance. As Winston Churchill once put it, “… democracy is the worst form of Government except for all those other forms that have been tried from time to time …” Still clinging to dreams of American exceptionalism, I am proud to say that I voted early this year — a first for me.