By Prasanna Karthik
In 1992, American political strategist James Carville coined the phrase, “It’s the economy stupid.” The phrase dominated the then political discourse in the US elections and saw the surprise election of Bill Clinton as the 42nd President of the United States. At the end of the Gulf War in March 1991, George Bush’s performance approval was at a whopping 90%. But Bill Clinton, an improbable presidential nominee, campaigned on an economic message that deeply resonated with the American public. The importance of economics in the US elections, can never be overstated. Obama’s victory in 2008 was entirely due to the economic meltdown caused by the global financial crisis, which was attributed to George W Bush.
According to a Gallup opinion poll, on the 11September 2008, Senator McCain held a 4% national lead over the then Senator Obama and the gap was widening. However, four days later, when Lehman Brothers filed for bankruptcy, Obama took an unsurmountable lead over McCain who struggled to distance himself from President Bush’s economic policies. Trump’s victory in 2016 was on back of the angst of many white Americans who felt economically displaced due to globalization. So, it’s always been and will always be the economy.
Notwithstanding other developments within his administration, US’ economic performance till about two months back made Trump’s re-election chances highly probable. As late as in January 2020, the US grew at an annualized rate of 2.1%, and added 225,000 jobs that month. According to the US Bureau of Labor Statistics, the unemployment rate in US had been steadily declining and had reached a 60 year low of 3.5% in February 2020.
This level of unemployment was equal to the US economy’s minimum Natural Rate of Unemployment, the level of unemployment required for the healthy upkeep of the economy and to avoid inflation. But, within a matter of two months, the ground beneath has tectonically shifted and the timing has gone horribly wrong for Trump’s re-election chances. With the US registering the maximum number of cases and causalities due to the pandemic, notwithstanding the massive economic stimulus approved by the Congress, the nation is starring at a long economic winter.
The quarantine and lockdowns across the US are ravaging the economy in ways never seen before. Over the past six weeks, 30.3 million Americans, about 18.6% of the US labour force, have filed for unemployment. This rate of unemployment growth is higher than what was witnessed during the 2008 recession, and reflects the enormity of the economic challenge. There is a 30% collapse in vacancy postings in the US. Data from the ‘Real Time Population Survey’, shows that between mid-March and mid-April, there has been a 23% decline in the employment rate for people between 18-64 years of age. Employment among college educated graduates has fallen by 18%, while employment among people without college degrees has fallen by 30%, furthering the inequality in US.
Unemployment is a harbinger of deeper economic problems, more so in the US context because consumption constitutes 68% of the nation’s GDP. When unemployment increases, disposable income decreases and consumption suffers. According to a release by the Council of Economic Advisors, US consumer spending declined sharply, contributing to a first quarter contraction of 5.3%, thereby bringing to an end the longest economic expansion in US history. Under these circumstances, many US business entities will shut shops, and the ones that don’t will refrain from employing people or from making investments – investments accounts for 20% of US’ GDP.
For businesses, certainty is as important as credit and market. The problem with the current economic crisis is that its cause lies in a global health issue about which no meaningful prediction could be made currently. Under such uncertainty, most businesses will seek contraction (unlike in an economic crisis caused by economic factors where businesses will seek expansion), leading to an overall macro-economic contraction. The Bureau of Economic analysis has estimated that in the first quarter of 2020, the real GDP contracted by 4.8% at an annualized rate. This is the first quarter wise economic contraction in the last six years, and is the seventh largest contraction since the second quarter of 1947.
According to Mike Osterholm of University of Minnesota’s Centre for Infectious Disease Research and Policy, Corona virus will keep spreading for the next 18 – 24 months, till 60 – 70% of the Americans are affected and the society as a whole develops herd immunity. Such an eventuality will not only further the contraction, but would also make businesses and even many industries go extinct.
Anticipating an economic catastrophe of epic proportions, politicians in Washington overcame their partisan differences and sanctioned a massive stimulus payout – $2 trillion under the CARES Act, $134 billion under the Families First Act, and a $484 billion relief package. While this provides immediate relief to the millions who have lost their jobs or have been furloughed, it has adverse economic implications.
Due to the stimulus, America’s fiscal deficit has jumped to a whopping $4.3 trillion which is 20% of its GDP, and its debt equals 100% of its GDP. The stimulus has been provided with the intention to increase the aggregate demand in the market. But if households and firms expect that this will result in higher taxes later, then the intended impact on demand will not happen. Loss of disposable income would make private-sector debt levels unsustainable, leading to large scale defaults and bankruptcies. Clubbed with the burgeoning public debt, such debts and bankruptcies will make economic recovery painfully protracted.
So whichever way we look at it, the US economy is heading towards a very long winter, the likes of which no living American would have ever experienced or prepared for. These unprecedented economic dynamics would also impact the political dynamics in ways that no one can be certain about at this stage.
Between now and November, the dynamics between and within America’s polarized media, divided public and partisan law-making establishment can turn the election tide in any direction. But no matter which direction it takes, the economy would underpin that movement. Closer to the presidential elections in November, economy would weigh more in people’s minds than health, and Americans will exercise their choice largely based on whom they think is best poised to pull the economy back from a catastrophic precipice. As always, it will boil down to economy.