Let’s get this out of the way: I support Biden and his economic policies generally. That the government should make up for the shortfall in consumer spending during a recession with public spending is straight from the Keynesian playbook. And the results of those expansionary policies, according to some economic measures, are impressive.

But despite a massive annual GDP growth of 4.9 percent in the last few months, Biden’s approval ratings are still in the tank: 37 percent of all adults and just 75 percent of Democrats say he’s doing a good job. What gives? 

One answer is that the pain that households are suffering from higher interest rates, spurred by Fed tightening beginning in 2022, is not picked up in the GDP numbers. Households are still spending — and spending is captured in the national income accounts — but they’re spending on things that they don’t want, like high rents rather than home mortgages, or on student loan debt (which resumed in October) and credit card debt. 

The average credit card rate was nearly 21 percent in October 2023, up from around 16 percent in March 2022. Undergraduate students who took out new loans after July 1, 2023 will pay 5.50 percent, compared to 4.99 percent for loans taken out in the prior year and compared to less than three percent for loans taken out three years ago.

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For the first time in decades, the rent-to-income ratio reached 40 percent, which means that people spend 40 percent of their take-home pay on housing. And part of the reason that rents are surging is that would-be homeowners are being priced out of the ownership market because of higher interest rates. Mortgage rates are at a two-decade high; the average rate on a 30-year mortgage was 7.8 percent as of last week, up from 6.7 percent for an identical loan in October 2022.

Higher interest rates have affected the economy from top to bottom. Homeowners on variable-rate mortgages are paying higher interest. High rates discourage home construction, depriving future buyers of choices and putting upward pressure on home prices. And higher rates also harm entrepreneurs, who depend heavily on financing to support startups. 

How is any of this suffering Biden’s fault? Because Biden’s economic team left inflation-fighting almost entirely up to the Federal Reserve. The caveat was the Inflation Reduction Act (IRA), which affects supply chain decisions concerning clean-energy technologies of the future, but can’t possibly address inflation in the present. Even the IRA’s price regulation of select prescription drugs won’t take effect until 2026. 

Had Team Biden taken on inflation more aggressively, the Federal Reserve, which controls the nation’s monetary policy, could have pursued a less aggressive rate-hiking schedule. With its narrow mandate to tackle inflation and unemployment, the Fed doesn’t internalize the social costs from higher rates. 

I’ve written at length about the policies available to curb inflation in the short run here. To briefly summarize, Biden could have used the bully pulpit to shame and cajole firms that were exploiting the pandemic to impose massive price hikes. 

Congress could have held hearings to call executives to account for price gouging. The Federal Trade Commission (FTC) could have investigated firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” 

States or local governments could have imposed limits on concentrated holdings of rental properties in the same neighborhoods. Congress could have imposed price controls (sparingly) in mature industries, as Germany did (at the advice of heterodox economist Isabella Weber) to contain soaring gas and heating bills. 

Congress and states could have offered to supply alternative products in industries particularly hit by rising prices, as California did with insulin. (Alas, Gov. Gavin Newsom (D) later vetoed an insulin price cap.) Finally, Congress could have amended the Sherman Act, the country’s main antitrust law, to give the Department of Justice, state attorneys general, and private enforcers a better shot at policing collusion between companies

To their credit, I was invited to the White House to explore some of these heterodox policy ideas. But economist Larry Summers has a direct dial to Biden, and his corporatist spin — that consumer demand and greedy workers were to blame for inflation — won the day. Indeed, some economists in the White House even mocked the early idea that firms (and profit-taking) were responsible in any way for inflation, as reported by Matt Stoller. 

Not only was the notion that corporations exploited a mild bout of inflation as a pretext to raise prices beyond costs a widely held view among voters, it also happened to be true: Corporate profit margins began soaring in the second quarter of 2020, and in 2022 hit their highest levels since 1950. Firms in concentrated industries were using the concept of general inflation as a pretext to hike prices well beyond any cost increases, for staples like eggs and fast food. The Kansas City Fed found that nearly 60 percent of inflation in 2021 was because of corporate profits. 

It turns out Summers’ ideas were not only bad economics, they were bad politics, too. According to a Data for Progress poll last year, 80 percent of voters said that lawmakers should crack down on large corporations that raise prices unfairly by promoting competition and lowering prices.

An alternative universe in which Biden takes a more muscular stance against inflation is hard for us to imagine. But let’s imagine a world in which some combination of Biden, Congress, and the FTC enforcement action reduces inflation by one percentage point. Recognizing that it was no longer fighting inflation on its own, the Fed may have ended its rate hikes in December 2022 (instead of raising rates four more times in 2023), or even earlier. 

With lower interest rates, many households could have afforded to buy their first home and start building equity, rather than set their money on fire in rents. Financing expenses from student loans or credit card debt would have been lower, freeing up resources to buy a fancy meal, a postponed vacation, or advanced Christmas gifts. And that’s a political strategy: spending on things that you actually want makes you happier than spending on things that you don’t want.

Now it may be the case that higher interest rates are not affecting people as much because debt burdens of households are low relative to the last decade. But as noted above, the wage gains achieved by many households got eaten up by higher rent bills. Inaction from policymakers could be explained by the outsized influence of landlords — all the more reason to attack concentration of economic power. 

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Yet Team Biden has been silent on the issue of rising rents, another missed opportunity to win over a natural voting constituency. For example, Biden could have called out the largest rental property owners and encouraged localities to experiment with limited rent controls. 

In sum, Biden steered the economy back to health with massive spending, and that’s good. Judging by his poll numbers, however, spending alone doesn’t buy the support of voters. The Fed eventually tamed inflation (for the most part) through an insanely aggressive set of rate hikes. What was missed was the opportunity to tame inflation through some combination of (smaller) rate hikes plus government intervention. 

Had we done so, interest rates would be lower, voters would be happier, and Biden’s poll numbers likely would be higher heading into the November 2024 election.