Economic Anxiety

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Last month, I discussed the Median Voter Theorem and how voter concerns with the economy pointed to a Trump win. This presented a puzzle, as economic indicators leading up to the election were strong. Economic growth was a healthy 3%, the unemployment rate was below 4% and inflation was 2.4%, which was above the Federal Reserve’s 2% target but falling. Why did the economy dominate voters’ concerns, which spelled trouble for the incumbent Democratic Party?

The answer is: inflation. Consider the “Rule of 70,” which says that 70 divided by the rate of inflation is approximately how long it takes for prices in the economy to double. Under 2% inflation, which is what inflation averaged prior to COVID, prices doubled every 35 years. This is not great, but if it is widely anticipated and wages keep up (which they were), not terrible. Under 10% inflation, which is approximately what inflation peaked at in the spring of 2022, prices double every seven years. Another way to see this: under 2% inflation, $1 today will have $0.61 of purchasing power in 25 years. Under 10% inflation, $1 today will have $0.61 of purchasing power in just five years. Thus, 10% inflation packs 25 years of 2% inflation into a five-year window.

Inflation is defined as the average increase in prices in the economy. Some prices rise more rapidly than average, some less than average. In general, consumer prices are 23% higher now compared to pre-COVID. However, housing prices are 53% higher, rent and grocery prices are 27% higher, gasoline prices are 24% higher, utility prices are 30% higher, new car prices are 22% higher, and used car prices are 25% higher.

Suppose the burst of inflation we experienced did not occur and prices remained on their pre-COVID trend. In general, consumer prices would be 10% higher, housing prices would be 23% higher, rent would be 16% higher, groceries 10% higher, and utility prices 5% higher. The price of gasoline would be unchanged, as the price of gasoline was flat in the 2010s due to new sources of crude oil being accessible by fracking. The price of used cars would be 2% lower, as used car prices were falling pre-pandemic.

Milton Friedman said that inflation is “taxation without representation” as no voter voted for these higher prices. Inflation is imposed on voters through irresponsible fiscal and monetary policy. Worse, inflation is a regressive tax, as lower income voters are less able to pay these higher prices. If you are upper-income, you get annoyed at these higher prices but just pay them. If you are lower-income, higher prices, especially those for necessities such as housing and utilities, might cause you to miss meals.

The typical voter is a 50-something working class voter and this voter got hammered by inflation. It is a near certainty that whenever there is a burst of inflation, voters will toss the incumbent party out of office.

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