It’s the (money), stupid
The punishment meted out last night to the Democratic Party represents a simple fact: pandemic profligacy has bitten Western government's backside. Inflation, rather than employment, now decides elections. For those on the centre-right, there should be some relief that it is Hayek after all, who is winning the debate over Keynes.
The election result, and US economy, is a quandary for foreign observers, and wonks in particular. The US dollar is strong, productivity is at all-time highs, wages have continued to grow, and unemployment is at historic lows. In 1957, Anthony Downs published ‘An Economic Theory of Democracy’, which stipulated that voters will vote in their personal best interests, and even refuse to turnout if things are going well. If Downs’ rational voter theory was right, voters should not be turning out in swathes, especially not to replace the incumbent. So what has caused this great upset?
Inflation - the invisible tax, has buffeted Downs’ predictions.
Inflation is solely a matter of how much money is in circulation and the capacity of the economy to absorb it. Unlike 2008’s Quantitative Easing, which found its way into bank vaults, the $13 trillion printed for the pandemic is still filtering through America’s checkout. From gasoline to household basics, the surge in prices has outpaced pursestrings. US workers might be 26% better off than in 2020 (in real terms!) - but the pain is still there. And that pain was expressed last night.
Americans, regardless of their political alignment, have felt the pinch of the profligacy of unaccountable central banks. But it is in the poorer, Rust Belt areas where that pinch has felt more like a punch. There, inflation has superseded, or just kept up with, pay rises - a heterogenous outcome from the trillions poured into the Midwest with the Inflation Reduction Act. Again, this is despite higher productivity, a strong dollar, and low unemployment.
There are lessons for Brits here, perhaps not yet learned from the General Election. As our Patron Nadhim Zahawi wrote back in July “voters registering their anger about high interest rates and inflation by turning against incumbents is a feature of politics across Western nations…[e]ven in the US, where their economy is greatly outperforming ours.”
£450bn of pandemic printing from the Bank of England, combined with dreadful economic growth, can only end in tears. In a statement to the Lords Economic Affairs Committee last June, former permanent secretary to the Treasury Nic Macpherson said that Bank of England QE let ‘inflation take root.’ He compared it to heroin: ‘The economy gets addicted to it and needs bigger fixes for it to have an impact.’ There must be more accountability for the Bank of England, and greater acknowledgement of its role in Britain’s political economy. If the UK doesn’t register this, there may be further upsets at the ballot box- this time here in Britain.
