The US President unveiled a plan on Monday to counteract the main cause of voter discontent: inflation. He has no room for error.
In the United States, like here, prices are rising at a rate not seen in forty years. Yesterday, the Bank of Canada raised interest rates by half a point, following a similar move by the US Federal Reserve, the Fed.
The Biden administration is doing what it can to control inflation, but the issue will hurt Democrats’ chances in November and beyond.
Part of the problem stems from the remarkable performance of the North American economies. The US economy is recovering better than almost any other economy in the world compared to its pre-pandemic levels, thanks in part to stimulus packages. Unemployment is below 4% again.
Good news for those who have found a livelihood, but while demand is accelerating, supply is not keeping pace. The global rise in energy and food prices that has already begun has been exacerbated by the war in Ukraine. At the same time, the pandemic continued to disrupt supply chains and production levels in China.
Biden has nothing to do with it, but he is suffering politically, while the vast majority of households that would normally have benefited from rapid growth see their spending power and future prospects crumble.
On Monday, Biden exhibited in the Wall Street Journal his plan to fight inflation. First, he intends to restore the Fed’s credibility, but that won’t stop him from being vulnerable to the potential impact of overly tightening.
Second, he wants to boost supply. After extracting a record amount of oil from the strategic reserve, he proposes measures to facilitate the energy transition and the diversification of energy sources. She also proposes modernizing the infrastructure and regulation of distribution networks, and enacting legislation to reduce housing and drug costs.
Third, he promises to reduce the federal budget deficit, which should be done by tightening the generosity afforded to the wealthiest by the 2017 tax reform.
Two missing ingredients
This plan is promising, but it depends on two elements President Biden sorely lacks: time and congressional support.
One of the pillars of this plan has been in place since an infrastructure plan was adopted by all parties last year, but the impact on distribution networks will take time. The same goes for all of Biden’s other proposals, the impact of which on inflation will certainly not materialize before the November 2022 general election and probably not before 2024.
Even if miracle laws could wipe out inflation instantly, they would be blocked in Congress by Republican filibusters and some Democrats unwilling to take chances when a president languishes in the polls.
If anti-inflationary measures don’t go far enough, Biden will be vulnerable in 2024, despite all his likely adversary’s baggage. If these measures go too far, the United States (and Canada) risk a prolonged recession that would more likely result in their loss. He has no room for error.