The American economy poses a serious problem for economics textbooks. Indeed, in all these works, the Phillips curve is exposed, which states that macroeconomic policy essentially consists of arbitrating between growth and inflation. Concretely, when inflation exceeds a reasonable level, for example 4% or 5%, the Central Bank increases its interest rates, the government reduces its spending and/or increases taxes a little, which reduces inflation. but also growth, even activity. Thus, when the United States was confronted, at the end of the 1970s, with inflation born from oil shocks, the governor of the Fed, Paul Volcker, raised the key rates from 9% to 19% between 1979 and 1981. The inflation rate fell to 3% in twenty-four months, the United States entered into recession in 1982 and unemployment soared to more than 10% of the working population. Everything went as planned, inflation was defeated by monetary policy, this battle killing economic activity at the same time.
The same causes could have produced the same effects. Post-Covid inflation was fought by an aggressive US Central Bank, which raised its key rates from 0.25% to 5.5% in less than two years. US ten-year rates, which are formed on the bond markets, rose from 0.5% in spring 2020 to more than 4%. Now, what do we see today? Inflation has fallen back towards the very acceptable waters of 2% – half what the Fed forecast a year ago – but growth has accelerated. It reached 2.5% in 2023, compared to 1.9% in 2022 – much higher, this time, than the Fed expected. The second half of 2023 was particularly dynamic, with growth of 4.9% in the third quarter and 3.3% in the fourth, at annualized rates. In addition, the unemployment rate remains below 4%.
Another crucial point worth mentioning: productivity is increasing, undoubtedly due to investments in infrastructure and the greater use by American companies of digital tools, robots and artificial intelligence. This growth was largely driven by government support and, in particular, by the effects of the Inflation Reduction Act, this gigantic tax credit system intended to reindustrialize and decarbonize the American economy. The US budget deficit is approximately 8% of GDP. It’s colossal. But it is remarkable, on the one hand, that this budgetary impulse did not accentuate inflation which, on the contrary, fell sharply. And on the other hand, that the markets do not seem to be moved by this situation since, although long-term rates have risen significantly over the past twenty-four months, this increase now seems to have been interrupted. In view of these excellent macroeconomic performances, and despite this public deficit, the markets love to lend funds to the American state.
We can only be struck by the gap between the resounding success of the American economy and the unpopularity of Joe Biden, systematically ahead of Donald Trump in the polls relating to the presidential election next November. There are two complementary ways of analyzing this paradox.
The first is to note that, everywhere in the world, the notion of universal truth is fading in favor of feelings. The Nobel Prize winner in economics Paul Krugman noted that 71% of Republican voters consider that the American economy is deteriorating. And their concern is unlikely to relate to the level of public debt, to the extent that, historically, Republican presidents have been less rigorous in the financial exercise of their functions than Democrats.
The second is to emphasize that the economy counts less than before in voters’ choices, in favor of the fight against immigration for example. We can also think that, during the upcoming campaign, Biden, with his long experience, will be able to capitalize on the economic successes of his mandate. And prove that an octogenarian president can also lead a country with the flamboyance of youth.
Nicolas Bouzou, economist and essayist, is director of the consulting firm Astères